Part 4 Learn Institutional Trading

Key Terminology in Option Trading

To understand options, one must be familiar with some basic terms:

Underlying Asset: The instrument on which the option is based (e.g., stock, index, or commodity).

Strike Price: The price at which the option holder can buy (call) or sell (put) the asset.

Premium: The cost paid by the option buyer to acquire the contract.

Expiration Date: The date when the option contract becomes void.

In-the-Money (ITM): A call option is ITM when the underlying price is above the strike; a put is ITM when the price is below the strike.

Out-of-the-Money (OTM): The opposite of ITM. The call option has no intrinsic value when the price is below the strike; a put option has none when the price is above the strike.

At-the-Money (ATM): When the underlying price and strike price are nearly equal.

Intrinsic Value: The actual profit if the option were exercised immediately.

Time Value: The portion of the premium that reflects the probability of the option gaining value before expiry.