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Option Terminology
Let’s learn more about the option terminology.
Call: An option contract giving the buyer the right, but not the obligation, to purchase a commodity or other asset or to enter into a long futures position.
Put: An option contract that gives the holder the right, but not the obligation, to sell a specified quantity of a particular commodity or other interest at a given, prior to or on a future date.
Premium: Premium is the price of an option. The premium the purchaser of the option pays is the maximum loss that it can incur. The writer charges a premium that reflects a calculation of the value of the underlying and of the risk incurred in selling the option. Please see the value of premium for further discussion.
Volatility: Volatility is the market term for standard deviation as statistical measure of risk . Where risk is the potential for deviation from expectations around a trend and that expectation is expressed as a statistical mean the value of the risk can be calculated as the square root of the variance of the underlying.
Delta: The ratio by which the price of the option moves in relation to the underlying. See delta.
At The Money (ATM): When the exercise price of the option equals the price of the underlying.
Out of The Money (OTM): An option with no intrinsic value. The strike of a call is above the prevailing market rate, of a put below the prevailing market rate. This option should still have time value until it moves “deep” Out of The Money.
In The Money (ITM): An option with intrinsic value. The strike of a call is below the prevailing market rate, of a put above the prevailing market rate. This option will also have time value.
Gamma: The sensitivity of the delta to a change in the price of the underlying.
Theta: A measure of time decay on the value of the option as it moves closer to maturity. The rate of change in the option price for a unit change in time.
Intrinsic Value: The amount an option is in-the-money. Obviously, only in-the-money options have intrinsic value.
