Option Dictionary
| Fair Value | The value of an option taking all relevant factors into account. Usually calculated by use of the Black&Scholes formula where the most important factors are price of the underlying, strike price, time to maturity and the expected future volatility of the underlying price. |
| Float | See Open interest. |
| Hedge | A position that is taken on not to increase profit but to reduce risk. In the verb form the act of taking on such a position. This might seem counter intuitive if you're thinking about hedge funds. These funds use the word in the meaning "very weakly correlated with the broad market". |
| Holder | The person who as bought an option is the holder of the option. |
| Implied Volatility | The volatility that when used with an option pricing formula (often Black&Scholes) results in the same price for the option as it is traded for in the market. It is thus the expected future volatility implied by the market. |
| In-the-money | An option with a positive intrinsic value. A call is in-the-money when the price of the underlying is above the strike and a put when the price of the underlying is below the strike. See also at-the-money and out-of-the-money. |
| Intrinsic Value | The value of the option if it was exercised. Example: If a call option with a strike price of 10$ were to be exercised when the price of the underlying is 13$, the owner of the option would receive 3$. This is the intrinsic value. Note that the market price of an option is normally higher than the intrinsic value due to the possibility of favorable price moves in the underlying. |
| Leverage | To take a position larger than your capital would allow and thereby increase the profit and loss potential. Options and margin trading offer this opportunity. It is also common that online currency brokers let even small customers take on positions many times larger than the amount of money in their accounts. |
| Long | The opposite of short. To own a financial instrument. In the case of options to have bought an option written by someone else. In the case of stocks to have bought a share issued by a company. Mathematically a positive position. |
| Maturity Date | See Expiry date |
| Open Balance | See Open interest |
| Open Interest | The total number of identical options (same strike and time to maturity) existing in the market. This number increases when an option is written and decreases when one is exercised. The open balance for that reason usually largest in the option closest to expiry. |
| Option | A contract that gives one party the right, but not the obligation, to buy (call option) or sell (put option) something (the underlying). The other party to the contract has no right to choose but has to comply with the first party's decision. |
| OPTION TRADING STRATEGY | A combination of options tailored to the traders view of the market. Examples of option trading strategies are butterfly , bull call spread, condor, bear put spread and the straddle option trading strategy. |
| Out-of-the-money | An option with a no intrinsic value. A call option is out-of-the-money when the price of the underlying is below the strike and a put when the price of the underlying is above the strike. See also at-the-money and in-the-money. |