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American-Style Option
- Where an option can be exercised anytime before or at the expiry date, offering holders of this type of option a degree of flexibility.
At the Money
- Options are said to be at the money when the underlying asset price is equal to the strike price.
Black-Scholes Model
- A paper by Fischer Black and Myron Scholes in 1973 revolutionised the way we price stock options, and eventually leading up to the standard Black-Scholes option pricing model.
Call Option
- A long position in a call option gives the holder the right to buy the asset underlying at a specified strike price.
Exotic Options
- Considered as 'second generation' options, they offer unique payoffs for holders of these contracts and allow for complex positions
European-Style Option
- Where an option can be exercised only at the expiry date, and not before.
Hedging
- A process in whereby an existing risk or exposure (whether it be foreign exchange, interest rates, stocks, etc.) is reduced by adding another position. For example, if one is exposed to rising interest rates, he or she may by a cap on interest rates to limit the exposure. This would be a basic example of a hedge.
In the Money
- A call option is said to be in of the money if the price of the underlying is above the strike price. An in of the money call option has positive intrinsic value. Conversely, a put option is in of the money if the price of the underlying is below the strike price.
Long Position
- A long position in a call or put is the perspective from an option buyer
Margin
- A margin is essentially a leverage for an investor to undertake positions with only a little investment. Consider an initial margin requirement of 50%; this implies that to take up a position of $1000, the investor needs only to have $500 of equity to secure that position. With a margin position an investor can leverage several times above the equity they have and improve on their return on investment (or alternatively, increase the risk of losses with adverse price movements).
OTC
- Over the counter. Aside from the exchange-driven markets such as the CBOT, options can be traded over the counter. Where the options are traded "over the counter", in which trades happen between 2 parties directly, instead of via an exchange. The main concern with OTC markets is that the counterparties involved are faced with counterparty credit risk, in which one of the parties may face the possibility default.
Options
- An option is a contract between two parties in which one party has the right but not the obligation buy or sell some underlying asset. The underlying asset could be anything from a commodity, to equity or currency.
Out of the Money
- A call option is said to be out of the money if the price of the underlying is below the strike price. An out of the money call option has no intrinsic value. Conversely, a put option is out of the money if the price of the underlying is above the strike price.
Premium
- The amount paid for an option.
Put Option
- A long position in a put option gives the holder the right to sell the asset underlying at a specified strike price.
Short Position
- A short position in a call or put is the perspective from an option writer
Strike Price
- The price at which the option is 'triggered', giving a payoff determined depending on the type of option. (Payoff's of options can be found here)
Volatility
- Essentially the "degree of uncertainty" of future price movements. Increasing volatility implies a greater chance of strong positive price movement, as well as greater chance of strong negative price movement.
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