What are shares?
In the traditional sense, a stock is, financially, the smallest share one could own in the company and represents the lowest unit value that the company can be divided into.
What is the value of a single share?
The question has a very complex and a simple answer: The simple answer, is the value is the current average of the collectively agreed upon values that the current buyer and seller have agreed upon in the active stock market.
What is an option?
It’s a contract on the price of 100 shares of the underlying with a given expiration date.
What is a ‘Strike’?
It’s the reference to the expected price of underlying on the expiration date on the contract (option). Strike price has no direct relation with the actual value of the underlying on expiration. It’s only based on the outlook of buyer and seller. It may or may not be different from the current market price of the underlying on expiration.
What is a Expiry?
It’s the date until which a contract is valid for.
What is an outlook?
Outlook is your opinion (prediction/expectation) on the price of the underlying. It could be optimistic (share value goes up) or pessimistic (share value goes down). If optimistic then it’s a bullish outlook else if pessimistic then a bearish outlook.
What are the main components of an option?
Underlying, Strike and Expiry. A contract is always made for a given Strike on a particular Expiry for a given underlying.
What are Calls?
An option that represents bullish mindset on the underlying for a strike price and expiry.
What are Puts?
An option that represents a bearish mindset on the underlying for a strike price and expiry.
Who are involved in an options trade transaction?
A Buyer or trader who a is paying for the contract and a Seller or a trader who is signing the contract. A contract being an option for a given Strike and Expiry on the underlying.
What is In The Money?
In the money means that a call option’s strike price is below the market price of the underlying asset or that the strike price of a put option is above the market price of the underlying asset. Being in the money does not mean you will profit, it just means the option is worth exercising.
What is Out of the Money?
Out of the money (OTM) is term used to describe a call option with a strike price that is higher than the market price of the underlying asset, or a put option with a strike price that is lower than the market price of the underlying asset. An out of the money option has no intrinsic value, but only possesses extrinsic or time value.
What is Intrinsic Value?
Intrinsic Value of Options Examples. Intrinsic value in options is the in-the-money portion of the option’s premium. For example, if a call options strike price is $15 and the underlying stock’s market price is at $25, then the intrinsic value of the call option is $10, or $25 - $15.
What is Extrinsic Value?
Extrinsic value measures the difference between market price of an option and its intrinsic value. Extrinsic value is also the portion of the worth that has been assigned to an item by external factors. The opposite of an extrinsic value is an intrinsic value, which is the inherent worth of an item. For example, an option that has a premium price of $10 and an intrinsic value of $6 would have an extrinsic value of $4.
What are Naked Options?
A naked call occurs when a speculator writes (sells) a call option on a security without ownership of that security. It is one of the riskiest options strategies because it carries unlimited risk as opposed to a naked put, where the maximum loss occurs if the stock falls to zero.
What are Spreads?
A spread position is entered by buying and selling equal or different number of options of the same class on the same underlying security but with different strike prices or expiration dates.
What are the GREEKS?
The Greeks are the quantities representing the sensitivity of the price of derivatives such as options to a change in underlying parameters on which the value of an instrument or portfolio of financial instruments is dependent. The name is used because the most common of these sensitivities are denoted by Greek letters (as are some other finance measures). Collectively these have also been called the risk sensitivities, risk measures or hedge parameters.
What are the most common GREEKS used day-to-day by retail traders?
DELTA and THETA