Options Quick Facts - Terminology

Option Type

The two types of option contracts are calls and puts.

Option Class

All calls and puts on a given underlying security or index represent an "option class." In other words, all calls and puts on XYZ stock are one class of options, while all calls and puts on ZYX index are another class.

Option Series

All options of a given type (calls or puts) with the same strike price and expiration date are classified as an "option series." For example, all XYZ June 110 calls would be an individual series, while all XYZ June 110 puts would be another series.

American vs. European Options?

An American-style option contract is one that may be exercised at any time prior to its expiration date. Currently, all equity options traded on U.S. option exchanges, including LEAPS, are American-style, as are certain index options. A European-style option can be exercised only during a specified period of time just prior to its expiration. Many index options are European-style.

What is an at-the-money option? An in-the-money option? An out-of-the money option?

When the price of the underlying security or index is equal to the strike price, a call or put option is at-the-money.

  • A call option is in-the-money if the strike price is less than the current price of the underlying security or index, and out-of-the-money if the strike price is greater than the price of the underlying security or index.
  • A put option is in-the-money if the strike price is greater than the current price of the underlying security or index, and out-of-the money if the strike price is less than the price of the underlying security or index.


Opening Purchase Transaction

An opening purchase transaction is one that creates or increases a long position in a given option series.



Opening Sale Transaction

An opening sale transaction is one that creates or increases a short position in a given option series. Such a sale is also referred to as "writing" an option contract.



Closing Purchase Transaction

A closing purchase transaction is one that eliminates or reduces a short position in a given option series. Such a purchase is commonly referred to as "covering" a short option position.



Closing Sale Transaction

A closing sale transaction is one that eliminates or decreases a long position in a given option series.



Exercise Settlement Value

Exercise settlement value is the level of an underlying equity index used to calculate the cash settlement amount for a cash-settled index call or put.



Cash Settlement Amount

Cash settlement amount is the difference between the exercise price of a cash-settled index call or put and the exercise settlement value of the index on the day an exercise notice is tendered, multiplied by the index multiplier.



Physical Delivery Options

A physical delivery option gives its owner the right to receive physical delivery (if it is a call), or to make physical delivery (if it is a put), of underlying shares when the option is exercised. Currently, all equity options are physical delivery contracts.



Cash-Settled Options

The process by which the terms of an option contract are fulfilled through the payment or receipt in dollars of the amount by which the option is in-the-money, as opposed to delivering or receiving the underlying instrument. Index options are generally cash-settled.



A.M. Settlement

A settlement style for certain index options in which the index's exercise settlement value is based on the reported level of the index derived from the opening prices of the component securities on the day of exercise.



P.M. Settlement

A settlement style for certain index options in which the index's exercise settlement value is based on the reported level of the index derived from the last reported prices of the component securities of the index at the close of market hours on the day of exercise.



What is a strike price?

The strike (or exercise) price of an equity option is the specified price per share at which underlying stock will change hands after a call or put is exercised by its owner. For a cash-settled index option, the strike price is the base for the determination of the amount of cash, if any, that the option holder is entitled to receive upon exercise (see Cash Settlement Amount and Exercise Settlement Amount).



What is the contract size of an equity option?

The contract size of an option refers to the amount of the underlying asset covered by the options contract. For each unadjusted equity call or put option, 100 shares of stock will change hands when one contract is exercised by its owner. These 100 shares of underlying stock are also referred to as the contract's "unit of trade."



What is the contract size of an index option?

The contract size of a cash-settled index option is determined by its multiplier. The multiplier determines the aggregate value of each point of the difference between the exercise price of the option and the exercise settlement value of the underlying interest. For example, a multiplier of 100 means that for each point by which a cash-settled option is in the money upon exercise, there is a $100 increase in the cash settlement amount.



What is open interest?

Open interest refers to the number of outstanding option contracts in the exchange market, or in a particular class or series.



Is increased open interest bullish?

Open interest reflects only the total number of option contracts for a given option series that have been opened but not yet closed out. Increased open interest might suggest to some an increased liquidity for an option series, not a bullish or bearish sentiment on the underlying stock.



What is liquidity?

Liquidity is a trading environment characterized by high trading volume. Liquid markets commonly have narrow spreads between bid and ask prices, and the ability to accept larger orders without significant price changes.

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