Option Trading World

A diagram that shows the profit and loss of an options position for a range of prices of the underlying. A good way of visualizing you position.

See payoff diagram

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

To re-establish a position that is about to expire with contracts with a longer time to maturity.

The opposite of long. To owe a financial instrument. In the case of options, to have written an option to someone else. In the case of stocks, to have borrowed a share from someone and then sold it in the market. Mathematically a negative position.

Combination of long positions in one call and one put. The strike price of the put is lower than the strike price of the call. The position is used when a major price move is expected but there is uncertainty about the direction of the move.

The predetermined price to which the owner of a call option has the right to buy and a holder of a put option has the right to sell.

The asset a call option gives the right to buy and a put option gives the right to sell. The underlying of a stock option is a share (See stock option trading) in a particular company. The underlying of a commodity option can be for example cotton, copper or pork bellies. The underlying of a currency option is a particular exchange rate.

The sensitivity of the value of an option to changes in the expected future volatility.

A measure of how much a price moves. A high volatility means that the price moves a lot whereas a low volatility means the price moves very little.

The act of issuing (creating and selling) an option to someone else. This results in a short position with unlimited loss. Selling an option which you have bought from someone else is not writing.