Covered Call Writing

 

   Trading Terminology FAQs

 

 

 

Trading Terminology FAQBelow are some common options trading terms that are important to understand. 

 

Option Price 

The current market price of the option contract. 

 

Call Option

A call option (or just a “call”) gives the buyer the right, but not the obligation, to buy 100 shares of stock at a predetermined price within a limited period of time. You are basically selling someone the right to buy your stock. 

 

Put Option

A put option (or just a “put”) gives the buyer the right, but not the obligation, to sell 100 shares of stock at a predetermined price within a limited period of time. You are buying the right to buy someone’s stock. 

 

Option Premium

The dollar amount paid by the buyer of the option to the seller.

 

Strike Price

The predetermined price at which a given contract can be bought or sold. Also called the exercise price, it’s the price that will be paid or received when the option is exercised. 

 

Underlying Stock 

The stock to which the call or put option applies. 

 

Holder

The buyer of the option. 

 

Writer

The option seller. 

 

At-the-money

An option is at-the-money when the underlying stock price equals, or nearly equals, the strike price. For example, if a certain stock is trading at $35, a $35 call or put would be considered at-the-money.

 

In-the-money 

A call option is in-the-money when the underlying stock price is greater than the strike price. For example, if a stock is trading at $35, a $30 strike would be $5.00 in-the-money. A put option is in-the-money when the strike price of the option is greater than the price of the underlying stock. A put option at $35 and an underlying stock price of $30 is in-the-money. 

 

Out-of-the-money

A call option is out-of-the-money when the underlying stock price is less than the strike price. For example, if a stock is trading at $35, a $40 strike would be $5.00 out-of-the-money. A put option is out-of-the-money when the strike price of the option is less than the price of the underlying stock. A put option at $35 and an underlying stock price of $40 is out-of-the-money. 

 

Deep (in or out)-of-the-money

An option with a strike price is much higher (or lower) than the current stock price of the underlying stock. 

 

Intrinsic Value 

The difference between the current price per share of the underlying stock and the option strike price. 

 

Time Premium 

The difference between the option price and the intrinsic value of the option. 

 

Exercise 

The act of “exercising” your right granted by the option to actually buy or sell the stock at the strike price. 

 

Expiration Date 

The date when the option contract expires, the third Friday of every month in the United States. 

 

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