Key Options Terms
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Just keep forging ahead, and everything will become more apparent over time. Long — This term can be pretty confusing. After you have purchased an option or a stock, you are considered "long" that security in your account. Short — Short is option definition one of those words you have to be careful about.
But when you do, you may be obligated to do something at a later date. Read on to get a clearer picture of what that something might be for specific strategies.
Strike Price — The pre-agreed price per share at which stock option definition be bought or sold under the terms of an option contract. For put options, it option definition the stock price is below the strike price. This term might also remind you of a great song from the s that you can tap dance to whenever your option strategies go according to plan. For put options, this means the stock option definition is above the strike price. Intrinsic Value — The amount an option is in-the-money.
Obviously, only in-the-money options have intrinsic value. Time Value — The part of an option price that is based on its time to expiration. If an option option definition no intrinsic value i. Exercise — This occurs when the owner of an option invokes the right embedded in the option contract. Interestingly, options are a lot like most people, in that exercise option definition a fairly infrequent event. See Cashing Out Your Options. That means he or she is required to buy option definition sell the underlying stock at the strike price.
Equity Options — There are quite a few differences between options based on an index versus those based on equities, or stocks. Second, the last day to trade most index options is the Thursday before the third Friday option definition the expiration month. It might actually be the second Thursday if the month started on a Friday. But the last day to trade equity options is the third Friday of the expiration month. There are several exceptions to these general guidelines about index options.
See What is an Index Option? Stop-Loss Order - An order to sell a stock or option when it reaches a certain price the stop price. Past this price, you no longer want the cheese; you just want out of the trap.
When option definition position trades at or through your stop price, your stop order will get activated as a market order, seeking the best available market price at that time the order is triggered to close out your position. In those situations, stocks are likely to gap — that is, the option definition trade price after the trading halt might be significantly different from the prices before the halt.
Standard Deviation — This site is about options, not statistics. If we assume stocks have option definition simple normal price distribution, we can calculate what a one-standard-deviation move for the stock will be. This comes in handy when figuring out the potential range of movement for a particular stock. Most pricing models assume a log normal distribution. Options involve risk and are not suitable for all investors.
For more information, please review the Characteristics and Risks of Standardized Options brochure before you begin trading options. Option definition investors may lose the entire amount of their investment in a relatively short period of time. Multiple leg options strategies involve additional risksand may result in complex tax treatments.
Please consult a tax professional prior to implementing these strategies. Implied volatility option definition the consensus of the marketplace as to option definition future level of stock option definition volatility or the option definition of reaching a specific price point.
The Greeks represent the consensus of the marketplace as to how the option will react to changes in certain variables associated with the pricing of an option contract. There is no guarantee that the forecasts of implied volatility or the Greeks will be correct. Ally Invest provides self-directed investors with discount brokerage services, and does not make recommendations or offer investment, financial, legal or tax advice. System response and access times may vary due to market conditions, system option definition, and other factors.
Content, research, tools, and stock or option symbols are for educational and illustrative purposes only and do not imply a recommendation or solicitation to buy or sell a particular security or to engage in any particular investment strategy. The projections or other information regarding the likelihood of various investment outcomes are hypothetical in nature, are not guaranteed for accuracy or completeness, do not reflect actual investment results and are not guarantees of future results.
All investments involve risk, losses may exceed the principal invested, and the past performance of a security, industry, sector, market, or financial product does not guarantee option definition results or returns. The Options Playbook Featuring 40 options strategies for bulls, bears, rookies, all-stars and everyone in between.
Third, index options are cash-settled, but equity options result in stock changing hands. Back to the top. Meet the Greeks What is an Index Option?