Options terminology


Here are some helpful definitions to terms used in option strategies.

Term Description

Assign

When a buyer exercises their option to purchase shares that you own, assign means you give them the shares and they become the new owner.

At-the-money

When the current trading price of a stock matches the strike price of an option, the strike price is considered at-the-money.

Bearish

Bearish describes a trader who believes that a stock price will drop. The term applies to both buyers and sellers, and is the opposite of bullish.

Buyers who buy puts are bearish when they want the stock price to drop. Sellers who sell calls are bearish when they want the stock price to drop so they don’t have to sell their shares.

Bullish

Bullish describes a trader who believes that a stock price will rise. The term applies to both buyers and sellers, and is the opposite of bearish.

Buyers who buy calls are bullish when they want the stock price to rise. Sellers who sell puts are bullish when they want the stock price to rise.

Buyer

The person (trader) who buys and holds the option contract.

Call option

When a buyer believes a stock price will rise, they buy a call option. The seller (writer) of the stock sets a price (strike price) and an expiry date. If the stock price rises above the strike price by the expiry date, the buyer has the option of buying the stock at the lower price.

Expiration

Expiration is the expiry date of an option contract.

In-the-money

An option contract is considered to be in-the-money when the stock price rises above the strike price in a call option or drops below the stirke price in a put option.

Option premium

The premium is the fee you pay to a seller when you buy an option contract.You pay the premium whether or not you exercise the option. The premium is calculated on the number of shares in the option contract.

Out-of-the-money

An option contract has no value when the stock price is below the strike price in a call option or above the strike price in a put option.

Put option

When a buyer believes the stock price will drop, they buy a put option. The seller (writer) of the stock sets a price (strike price) and an expiry date. If the stock price drops below the strike price by the expiry date, the buyer has the option of selling the stock at the higher price.

Writer

The person who creates and sells the option contract.