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    Options Terminology

    Lesson 3 of 6

    Article
    12 min read
    Beginner

    Learning Objective

    Master the essential vocabulary that every options trader needs to know. Understanding these terms is crucial for communicating effectively about options and making informed trading decisions.

    Essential Options Terms

    These terms form the foundation of options trading language

    Strike Price

    The predetermined price at which an option can be exercised

    Example: A call option with a $50 strike price allows you to buy the stock at $50

    Expiration Date

    The last day an option can be exercised before it becomes worthless

    Example: Monthly options typically expire on the third Friday of the month

    Premium

    The price paid to purchase an option contract

    Example: If you pay $2.50 for an option, that's the premium you paid

    In-the-Money (ITM)

    When an option has intrinsic value

    Example: A call option with a $45 strike is ITM when the stock trades above $45

    Out-of-the-Money (OTM)

    When an option has no intrinsic value

    Example: A call option with a $55 strike is OTM when the stock trades below $55

    At-the-Money (ATM)

    When the stock price equals the option's strike price

    Example: A $50 strike option is ATM when the stock trades at exactly $50

    Intrinsic Value

    The immediate exercise value of an option

    Example: A $45 call on a $50 stock has $5 of intrinsic value

    Time Value

    The portion of an option's premium beyond its intrinsic value

    Example: If a $45 call on a $50 stock costs $7, the time value is $2

    Volatility

    A measure of how much a stock's price fluctuates

    Example: High volatility stocks have more expensive options due to greater price movement potential

    Open Interest

    The total number of outstanding option contracts

    Example: High open interest indicates more liquidity and tighter bid-ask spreads

    Volume

    The number of option contracts traded in a given period

    Example: High volume shows active trading and better price discovery

    Bid-Ask Spread

    The difference between the highest bid and lowest ask prices

    Example: A $2.00 bid and $2.10 ask creates a $0.10 spread

    Quick Reference Guide

    Key relationships to remember

    Moneyness

    • • ITM = Has intrinsic value
    • • ATM = Strike equals stock price
    • • OTM = No intrinsic value

    Option Value

    • • Premium = Intrinsic + Time Value
    • • Higher volatility = Higher premiums
    • • Time decay reduces option value