Option trading- basic terms explained
Must read for beginners > basics-of-option-trading
Call Option,Put Option > read basics
In the money, ATM, OTM > read basics
Option premium - It is the amount of money paid by the option buyer to the option seller in order to make the contract.Options are traded in the exchange based on its premium amount ( like share prices). Example if nifty 5000 call option is trading at 50 Rs, you need to pay 2500 Rs to buy that option ie 50 * 50 =2500. ( lot size of nifty is 50).
Expiry Date - The date on which the option need to be exercised. The option contract doesn't exist after this date.
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Strike Price - The price at which the option can be exercised on expiry day.
Spot Price - The current value of the underlying asset is called as the Spot price.
Underlying Asset -It is the financial instrument, on which the options are based. It can be a index,stock etc. and their options are called index options, stock options respectively.
Option Writing - Short selling of an option is called Option writing/ option selling.
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Intrinsic and Extrinsic value - Intrinsic value of an option is the actual value of the option at the time of transaction. An options value doesn't consist of its intrinsic value alone, there is another part ie extrinsic value or the time value.
Time Decay - As expiry date becomes nearer, the value of option decreases (because of decrease in time value), this is called as the time decay.
European and American options - These are the two types of options based on the nature of their expiry dates. Read more European and American options
Squaring off /Exercising of an option > Read more options-exercising-and-squaring-off
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Implied Volatility > read more about Implied Volatility
Options Spreads - These are the option positions, consisting of combination of different options. Different types of strategies can be adapted based on the market outlook. Read more about option strategies
Option greeks - As you becomes more familiar with options, you will come to know about delta,gamma,vega and theta. |
Over priced/ Under priced options - Fair value of an option can be calculated using many option pricing models. If current trading value of an option is less than it's fair value then it is called as under priced and vice versa. Read more about different option pricing models
List is incomplete and will update soon.
