SoFi Learn, a respected name in finance, encourages people to understand what they are trading. According to the experts at SoFi, “To effectively deal in options, an investor might also want to familiarize themselves with certain lingo.” To that end, here is an essential glossary of options trading terminology.
Call Option
A call option is an equity option that gives you the right to purchase 100 shares of a stock at a set strike price per share whenever you want before the option expires. There is also the call seller. They can also be referred to as the writer. They are under obligation to sell you the 100 shares at the strike price if you request that they do so.
Commission
This is what a brokerage firm will charge to execute a stock option or a securities exchange.
Cost to Carry
This term describes the total amount of money used to maintain and establish an option or stock position. Included in this is interest paid for a margined long stock position and the dividends that are owed if there is a short stock position.
Exercise
This is where the rights of an equity option contract is employed. It conveys to the buyer the right to either buy, when it is a call option, or to sell, when it is a put option, 100 shares of the underlying security at the predetermined price per share whenever they want before the contract expires.
Expiration Date
This is the date when the contract expires and no longer exists. With equity options, this is typically the Saturday that follows the third Friday of the expiration month. The final day to exercise an expiring equity options trade is one business day before the expiration date. It is generally the third Friday of the month.
Premium
This is the money that is either paid or received for an option in the marketplace. Premiums are offered on a price-per-share basis. Any premium paid by the buyer to the seller in an option transaction is the equivalent of the price quoted multiplied by 100, which is the number of underlying shares.
Put Option
A put option is an equity option that allows the buyer to sell 100 shares of a stock at the strike price per share whenever they want before the option expires. The seller, also referred to as the writer, is obligated to purchase the 100 shares at the strike price if requested by the buyer.
Strike Price
This is the term of an equity options contract. This is the price that has been determined at which the shares of stock will change hands if the option is exercised or assigned. You may also hear it referred to as the strike or the exercise price.
Options trading is appealing to investors who believe that the price of assets will rise or fall. It is also suitable for those who want to offset risk from certain assets they own. As with all investing, knowledge is power. Take the time to learn the proper terminology to get the most out of your investing.
Also Read: 8 Reasons to Invest in Stocks
