Although there are numerous terms that are used in the financial language,novices need to comprehend initially the most important and frequently used words.
Option – is the right of the buyer to either purchase or sell the hidden property at a fixed price and a fixed date. At the end of the contract,the owner can exercise to either sell the alternative or purchase at the strike price. The owner deserves to pursue the contract however she or he is not obligated to do so.
Call Option – offers the owner the right to purchase the hidden property.
Put Option – offers the owner the right to sell the hidden property.
Exercise – is the action where the owner can select to purchase (if call alternative) or sell (if put alternative) the hidden property or,to ignore the contract. He should send an exercise notification to the seller if the owner chooses to pursue the contract.
Expiration – is the date where the contract ends. After the owner and the expiration does not exercise his or her rights,the contract is terminated.
In-the-money – is an option with an intrinsic worth. The call alternative is in-the-money if the hidden property is higher than the strike price. The put alternative is in-the-money if the hidden property is lower than the strike price.
Out-of-the-money – is an option with no intrinsic worth. The call alternative is out-of-the-money if the trading price is lower than the strike price. The put alternative is out-of-the-money if the trading price is higher than the strike price.
Offsetting – is an act by which the owner of the alternative exercises his right to purchase or sell the hidden property before the end of the contract. This is done if the owner feels that the profitability of the stock has reached its peak within the date of the contract.
(Option seller) Writer – is the seller of the hidden property or the alternative.
Option Seller – is the person who obtains the rights to convey the alternative.
Strike Price – is the price at which the underlying stock should be sold or acquired if the contract is worked out. The strike price is clearly mentioned in the contract. For the buyer of the alternative to earn a profit,the strike price need to be lower than the existing trading price of the stock. If the contract mentions that the strike price of a specific stock is $20 and the existing trading price at the end of the contract is $25,the buyer can exercise his or her rights to pursue the contract,thus making $5 per stock.|For the buyer of the alternative to make an earnings,the strike price need to be lower than the existing trading price of the stock. If the contract mentions that the strike price of a specific stock is $20 and the existing trading price at the end of the contract is $25,the buyer can exercise his or her rights to pursue the contract,thus making $5 per stock.}
Option Premium – is the quantity of the contract which need to be paid by the buyer to the author (the seller). The quantity of the alternative premium is figured out by a number of elements such as the kind of the alternative (call or put),the strike price of the existing alternative,the volatility of the stock,the time remaining until expiration and the price of the hidden property to date. Taking into consideration these elements,the overall quantity of the alternative premium is variety of alternative contracts,increased by contract multiplier. If you are buying 1 alternative contract (equivalent to 100 share lots) at $2.5 per share,you need to pay a total quantity of $250 as the alternative premium (1 alternative contract x 100 shares x $2.5 per share = $250).
The call alternative is out-of-the-money if the trading price is lower than the strike price. For the buyer of the alternative to make an earnings,the strike price need to be lower than the existing trading price of the stock. The quantity of the alternative premium is figured out by a number of elements such as the type of the alternative (call or put),the strike price of the existing alternative,the volatility of the stock,the time remaining until expiration and the price of the hidden property to date. Taking into account these elements,the overall quantity of the alternative premium is number of alternative contracts,increased by contract multiplier. If you are buying 1 alternative contract (equivalent to 100 share lots) at $2.5 per share,you need to pay a total quantity of $250 as the alternative premium (1 alternative contract x 100 shares x $2.5 per share = $250).