Option Trading World

An option that can be exercised any time before or at the expiry date. A European option on the other hand can only be exercised on the expiry date. Has nothing to do with where the option is traded.

An option which' strike price is the same as the price of the underlying. See also in-the-money and out-of-the-money.

An option strategy that is profitable if the price of the underlying goes down and produces a loss if the price goes up. Both the profit and loss are limited. Achieved by combining either two puts or two calls. The option with the higher strike price is bought and the one with the lower strike price written. Similar to the bull spread option trading strategy but for the opposite direction.

The most widely used formula for pricing options. It takes into account among other factors time to maturity, strike price and the price and volatility of the underlying.

An option strategy that is profitable if the price of the underlying goes up and produces a loss if the price goes down. Both the profit and loss are limited. Achieved by combining either two puts or two calls. The option with the higher strike price is written and the one with the lower strike price bought. Similar to bear spread but for the opposite direction.

Combination of long positions in one call and one put plus a short position in one call and one put. The strikes of the long positions are the same. The strike of the short put is lower than those of the long contracts and the strike of the short call is higher than those of the long contracts. The position is used when a major price move is expected but the direction is unclear. However, as the profit is limited a butterfly is also cheaper than the straddle option trading strategy.

A call option gives the right, but not the obligation, to buy something (the underlying) at a predetermined price and time.

An option that when exercised is settled in cash instead of physical delivery of the underlying. This is especially of importance in with commodity options as you might not actually want the commodity itself. Example: If you exercise a call option on GM stock with a strike price 10$ when the price of the stock is 13$, you receive 3$ from the writer of the call instead of receiving the actual stock.

A measure of how sensitive the price of the option is to the price of the underlying. That is How much the price of the option changes for a 1$ change in the price of the underlying. When the option is deeply in-the-money, delta is almost 1. When the option is very deeply out-of-the-money the delta is close to zero. The delta of a call option is always positive and the delta of a put option is always negative. The delta can be calculated with the Black&Scholes formula and is sometimes written with the Greek letter "delta".

A position or trader that has a total delta of zero. If you for example buy one call and one put with equally large deltas of different signs, your total delta will be zero and you will be delta neutral.

A financial instrument which value depends on the price of a specified underlying. That is, "derives" it's value from the price of the underlying. Examples are options, futures and forwards.

An option that can only be exercised on the expiry date. An American option on the other hand can be exercised any time before or at the expiry date. Has nothing to do with where the option is traded.

The act of using the right to buy or sell that the option gives.

The predetermined price at which the underlying can be bought or sold.

This page on leverage has a good explanation of option trading.