Options Terminology

Underlying: The specific security / asset on which an option contract is based. It is the asset whose price movement determines the value of the option.

Option premium: The price paid by the buyer to the seller to acquire the right to buy or sell.

Strike price: The pre-decided price at which the option may be exercised. It is also known as the exercise price.

The strike price is linked to the price of the underlying asset in the cash market. SEBI has stipulated a minimum of three strike prices – one near the spot price of the asset, one above and one below. But both the Bombay stock Exchange (BSE) and National Stock exchange (NSE) offer options at five strike prices – one close to the spot price, two above and two below.

Strike price intervals: The difference between two strike prices, which is a constant, is called strike price interval. The NSE has set a strike price of 20 points on its Nifty options while the BSE has set strike price intervals of 50 points on its Sensex options. If Nifty, closes at 1,100 on September 26 (the last Thursday of the month), then on September 27, NSE will offer strike price of 1,060, 1,080, 1,100, 1,120, and 1,140 on the Nifty December option series. The stock interval of stocks in case of stock options is linked to stock price and a slab structure has been developed by NSE. For instance, if stock price is below Rs 100, the strike price interval in case of stock options is Rs 5; if stock price is Rs 100 – Rs 200 the strike price interval is Rs 10 and so on.

Expiration date: The date on which the option expires is known as expiration date. On expiration date, either the option is exercised or it expires worthless.

Exercise date: The date on which the option is actually exercised. In case of European options, the exercise date in same as the expiry date while in case of America options, the options contract may be exercised any day between the purchase of the contract and its expiry date.

Open interest: The total number of options contracts outstanding in the market at any given point of time.

Option Holder: One who buys an option which can either be a call or a put option. He enjoys the right to buy or sell the underlying asset at a specified price on or before specified time. His upside potential (profit) is unlimited while losses are limited to the premium paid by him to the option writer.

Option seller / writer: One who is obligated to buy (in case of put option) the underlying asset in case the buyer of the option decides to exercise his option. His profits are limited to the premium received from the buyer while his downside is unlimited.

Option Class: All listed options of a particular type (i.e. call or put) on a particular underlying instrument. For example, all Sensex call options or all Sensex put options.

Option Series: A series that consists of all the options of a given class with the same expiry date and strike price. For example BSXCMY 300 is an option series which includes all Sensex call options that are traded with strike price of 300 and expiry in May [BSX stands for BSE sensex (underlying asset), C for call option , May is expiry date, and strike price is Rs 300].

Assignment: The process in which a randomly selected option seller is assignment the obligation to honor the underlying contract when the holder of an option exercises his right to buy / sell.

Moneyness: An option concept that refers to the potential profit or loss from the exercises of an option. An option may be in the money, out of the money, or at the money.

In the money option: When the underlying asset price (S) is greater than the strike price (X) of the call option, that is, S X. The call holder has the right to buy a Sensex at 4,900 and sell it at 5,100 and make a profit. If the index is much higher than the strike price, the call is said to be deep in the money. In case of a put option, the put is in the money if the index is below the strike price.