| Lesson 3- Basic Option Terminology |
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There are several basic definitions that are necessary to know. We will spend the lesson memorizing these terms. Option TypeAll exchange-listed equity options are one of two types: Call Options or Put Options. Option StyleAll option contracts are either American-style or European-style when referring to exercise and assignment. American-style options can be exercised at any time before expiration while European-style options can only be exercised at expiration. Strike PriceEvery option contract has a strike price. This is the fixed price at which the underlying asset may be purchased or sold at. For example, if you purchase the $35 Strike call option, you have the right, but not the obligation, to purchase the underlying asset at $35. Expiration DateEach option contract has an expiration date. This is the latest date as to when the option contract may be exercised. All expiration dates occur at the close of the third trading Friday in each respective month. For example, if you own a December call option, you may exercise the contract on or before the close of the third Friday in December. PremiumThis is the market value of the option contract. There are two separate factors that make up the value of an option contract: intrinsic value and time value. These will be discussed later on. UnderlyingAn equity option’s underlying is the asset that the contract represents. In our examples, the underlying asset is always a stock. It is important to take time to memorize these terms. They will be applied in throughout the education content. |