3. Important terms for option trading
Contract - It is an agreement between two parties to facilitate a potential transaction on an underlying asset. For a stock option, a single contract usually covers 100 shares of the underlying stock.
Delta - It is a ratio that compares price change of the option with the change in the price of an underlying asset. It is a measure to analyse the risk.
Expiration Date - It is also known as the exercise date. It is a date when an option contract will be automatically exercised if it is the money or expire worthless if it is at or out of the money.
Intrinsic Value - The in the money value of an option value based on the difference between a stock's current market price and the options strike price.
In the Money - This is a favourable situation for the options contract owner when the underlying share price is above the strike price for a call option and below the strike price for a put option.
Out of the Money - This is the opposite of in the money. It means the option has no intrinsic value. It makes buying and selling stocks at the strike price less profitable compared to buying and selling on the market.
Open Interest - It is the total number of outstanding option contracts that have not been settled for an asset.
Strike Price - Also referred to as the exercise price is the price at which the option contract can be exercised to buy or sell the underlying asset.
Settlement Type - Stock options are generally physically settled, while Index options are generally cash-settled.