Financial Spread Betting Words: Options
At-the-money option - Call and put option strikes that are nearest to the current price of the underlying. If the FTSE 100 is trading at 4,205 then the 4,200 calls and the 4,200 puts are deemed to be at-the-money. For the Traded Options guide click here
Call Option - An option contract that grants the buyer the right, but not the obligation, to buy a fixed amount of shares (in the case of stock options) at a set price (strike price) at or before a predetermined date (expiry). If the share fails to meet the strike price before the expiration date, the option expires worthless. You buy a call option if you think the share price of the underlying security will rise, or sell a call option if you think it will fall. However the definition of a spread bet option differs, please see below.
Call Option Spread Bet Style - The pricing mechanism of a spread bet call option is exactly the same as for an exchange based call option but with a spread bet option you are only betting on the actual price, and this is important information to understand.
Cash settlement - A fair amount of Exchange based options are physically settled, i.e. a Vodafone option on LIFFE is settled in Vodafone shares. But ALL spread bet options are settled in cash without question.
Delta - The change in price of an option for every one-point move in the price of the underlying security. A call option with a delta of 0.5 will increase by 50 points for every 100 points that the underlying rises and lose 50 points for every 100 that the underlying falls. Be aware that Delta's change as the option moves up and down in value.
Historical Volatility - A statistical calculation of price movement over a period of time such as 20 or 90 days.
Implied Volatility - The volatility level that is implied by an option's price takes into account historical volatility but also a view as to future volatility. It is therefore very possible for the levels of historical and implied volatility to differ dramatically. Implied volatility is more important than historical volatility and it is strongly advised that people do not trade options unless they understand the basics of how volatility affects the price or premium of an option. A more detailed guide on option volatility available here
In-the-money - Relates to options, all call strikes that are below the current price of the underlying are in-the-money. All put option strikes that are above the underlying are also in the money. If the Nasdaq 100 was trading at 1,200 then all call options with strikes of 1,150 and below and all put strikes of 1,250 and above are deemed to be in-the-money.
Intrinsic Value - If a call option strike is below the current price of the underlying then the difference is known as the intrinsic value. Therefore all in-the-money options have an intrinsic value and out-of-the-money options will have none, instead their price will consist solely of time value.
Naked - Options that are sold short when the seller does not have an offsetting position in the underlying.
Out-of-the money - All call option strikes that are above the current underlying price are said to be out-of-the-money, and vice-versa for puts. If the FTSE 100 is trading at 4,200 then all call option strikes above 4,225 are deemed to be out-of-the-money while put option strikes below 4,175 are likewise.
Premium - The price of an option is often referred to as the premium. Some traders prefer to state that they are either simply long or short premium.
Put Option - A put option is a contract that gives the buyer the right, but not the obligation, to sell a stock (in the case of a stock option) at a predetermined price (strike price) at or before a predetermined date (expiry). Basically you would buy a put option if you think the stock will fall and sell short a put option short if you think a stock will rise. However the definition of a spread bet put option differs, please see below.
Put Option Spread Bet Style - The pricing mechanism of a spread bet put option is exactly the same as for an exchange based put option but with a spread bet option you are only betting on the actual price movement of the option, and this is important information to understand.
Strike Price - All option contracts have a strike price which is one of the factors in how it is priced. £1.30 is the strike price of a Vodafone March £1.30 call or put.
Time Decay - Options are wasting assets, time decay measures the amount of points that will be lost or have been lost over a certain period of time.
Time Value - The amount by which an option's premium exceeds its intrinsic value
Traded Option - Many people from the London stockmarket world call options 'traded options', but there is no difference, they are one and the same.
Volatility - See historical and implied volatility.
Write - Another word for selling short an option.
