Stock Options Glossory

American-style option: An option contract that may be exercised at any time between the date of purchase and the expiration date. Most exchange-traded options are American-style.

Assignment: The receipt of an exercise notice by an option writer (seller) that obligates him to sell (in the case of a call) or purchase (in the case of a put) the underlying security at the specified strike price.

At-the-money: An option is at-the-money if the strike price of the option is equal to the market price of the underlying security.

Call: An option contract that gives the holder the right to buy the underlying security at a specified price for a certain, fixed period of time.

Class of options: Contracts of the same type (call or put) and style (American, European or Capped) that cover the same underlying security.

Closing purchase: A transaction in which the purchaser’s intention is to reduce or eliminate a short position in a given series of options.

Closing sale: A transaction in which the seller’s intention is to reduce or eliminate a long position in a given series of options.

Collar: See Combination.

Combination: A trading position involving establishment of long puts and short calls, or short puts and long calls on a one-to-one basis. The puts and calls have different strike prices, but the same expiration and underlying stock. This position is commonly referred to as a Collar.

Covered call option writing: A strategy in which one sells call options while simultaneously owning an equivalent position in the underlying security.

Covered put option writing: A strategy in which a put option is written against a sufficient amount of cash (or T-bills) to pay for the stock purchase if the short option is assigned.

Cut-off time: See Expiration cut-off time.

Decay: See Time Decay.

Early exercise/assignment: A feature of American-style options that allows the owner to exercise an option, and the writer to be assigned, at any time prior to its expiration date.

Equity options: Options on shares of an individual common stock.

European-style option: An option contract that may be exercised only during a specified period of time just prior to its expiration.

Exercise: To implement the right under which the holder of an option is entitled to buy (in the case of a call) or sell (in the case of a put) the underlying security.

Exercise price: See Strike price.

Exercise cut-off time: Other than at expiration, the time of day by which all exercise notices must be received. An individual investor must adhere to his brokerage firm’s predetermined cut-off time.

Expiration date: The day on which an option contract becomes void. All holders of options must indicate their desire to exercise, if they wish to do so, by this date.

Expiration cut-off time:  The time of day by which all exercise notices must be received in order to be processed at expiration. An individual investor must adhere to his brokerage firm’s predetermined cut-off time.

Hedge: A conservative strategy used to limit investment loss by effecting a transaction which offsets an existing position.

Holder: The purchaser of an option.

In-the-money: A call option is in-the-money if the strike price is less than the market price of the underlying security. A put option is in-the-money if the strike price is greater than the market price of the underlying security. Intrinsic value: The amount by which an option is in-themoney
(see above definition).

Long position: A position wherein an investor is a net holder in a particular options series (i.e., the number of contracts bought exceeds the number of contracts sold).

Margin requirement (for options): The amount an option investor is required to deposit and maintain as collateral to cover a position. The margin requirement is calculated daily.

Opening purchase: A transaction in which the purchaser’s intention is to create or increase a long position in a given option series.

Opening sale: A transaction in which the seller’s intention is to create or increase a short position in a given options series.

Out-of-the-money: A call option is out-of-the-money if the strike price is greater than the market price of the underlying security. A put option is out-of-the-money if the strike price is less than the market price of the underlying security.

Premium: The price of an option contract, determined in the competitive marketplace, which the buyer of the option pays to the option writer for the rights conveyed by the option contract.

Put: An option contract that gives the holder the right to sell the underlying security at a specified price for a certain fixed period of time.

Series: All option contracts of the same class that also have the same unit of trade, expiration date and strike price.

Short position: A position wherein the investor is a net writer of a particular options series (i.e., the number of contracts sold exceeds the number of contracts bought).

Spread: A position consisting of two parts, each of which alone would profit from opposite directional price moves.
As orders, these opposite parts are entered and executed simultaneously in the hope of (1) limiting risk, or (2) benefiting from a change of price relationship between the two parts.

Strike price: The stated price per share for which the underlying security may be purchased (in the case of a call) or sold (in the case of a put) by the option holder upon exercise of the option contract.