Key terms and definitions in stock futures and options trading

What is an option?

A stock option is a contract which gives the buyer the right,
but not the obligation, to buy or sell shares of the underlying
security or index at a specific price for a specified time.
Stock option contracts generally are for 100 shares of the underlying
stock.
There are two types of options, calls and puts.


What is a call option?

A call option gives the buyer the right, but not the obligation,
to buy the underlying security at a specific price for a specified
time.
The seller of a call option has the obligation to sell the underlying
security should the buyer exercise his option to buy.


What is a put option?

A put option gives the buyer the right, but not the obligation,
to sell an underlying security at a specific price for a specified
time.
The seller of a put option has the obligation to buy the underlying
security should the buyer choose to exercise his option to sell.


What is the option premium?

The premium is the price at which the contract trades.
The premium is the price of the option and is paid by the
buyer to the writer, or seller, of the option.
In return, the writer of the call option is obligated to
deliver the underlying security to an option buyer if the call
is exercised or buy the underlying security if the put is exercised.
The writer keeps the premium whether or not the option is exercised.


What is a strike price?

The strike, or exercise, price of an option is the specified share
price at which the shares of stock can be bought or sold by the buyer
if he exercises the right to buy (in the case of a call)
or sell (in the case of a put).


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 is equal to the strike
price,
an option is at-the-money. A call option is in-the-money if the
strike
price is less than the market price of the underlying security.
A put option is in-the-money if the strike price is greater than
the market price of the underlying security. A call option is
out-of-the-money if the strike price is greater than the market
price of the underlying security. A put option is out-of-the money
if the strike price is less than the market price of the underlying
security.


What is a contract size of an equity option?

The amount of the underlying asset covered by the options contract.
This is 100 shares for one option unless adjusted for a special
event,
such as a stock split or a stock dividend.


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.


What does it mean to be exercised or assigned on an option
transaction?

When you buy an option you have the right to either purchase or
sell stock at a predetermined price. When and if you choose to
purchase or sell stock at that predetermined price you are
said to be "exercising your right".

When you sell an option you now have the obligation to sell or
purchase stock.
You have or may not have to fulfill that obligation.
You are considered to be "assigned" if you are being required to
fulfill that obligation. Typically this occurs when the option is in-
the-money.


What happens to my option if I do nothing?

If you bought a call or put you would lose the premium you paid
for the option plus whatever commissions and fees incurred on that
transaction.
If you sold a call or a put and your option is in-the-money you will
most
likely be assigned and you will have to sell or buy stock.


When can I anticipate being assigned?

You can anticipate being assigned any time your option becomes
in the money. Individual investors may be automatically assigned
or exercised at expiration by The Options Clearing Corporation if
the option is 0.75 or more in the money.
Also, most brokerage firms have rules under which options will
be automatically exercised; check with your broker to determine
which automatic exercise rule may apply.


What is a European-style and American-style option?

American-style is an option contract that can be exercised
at any time between the date of purchase and the expiration date.
Most exchange-traded options are American-style.
All stock options are American-style.
European-style option contracts may be exercised
only on the day before the expiration date.


What is the expiration date?

The last day (in the case of American-style) or the only day
(in the case of European-style) on which an option may be exercised.
For stock options, this date is the Saturday immediately following
the third Friday of the expiration month; however,
brokerage firms may set an earlier deadline for notification of
an option buyer's intention to exercise. If Friday is a holiday,
the last trading day will be the preceding Thursday.


What is the last full day of trading in the Equities, OEX and SPX?
How do they settle?

The last full day of trading for Equities and OEX is the 3rd Friday
of the month. They settle on the close. The last full day of trading
for SPX is the Thursday before the 3rd Friday of the month.
SPX settles on the opening of the 500 stocks that make up the index
on Friday morning. Friday holidays push all of these dates ahead one
day.


What is a strike price and how is it determined?

A strike price is the actual numeric value of the option.
For example, a May option may have strike prices of 45, 50 and 55.
Strike prices are determined when the underlying reaches a certain
numeric value and trades consistently at or above that value.
If, for example, XYZ stock was trading at 49, hit a price of 50
and traded consistently at this level, the next highest strike may be
added.