RANGE OF MARKETS

OPTIONS - KEY TERMS

Strike: Is the price at which the product can be bought or sold on expiry.

Put Options: give the buyer the right to sell an asset at a certain price (called the strike) on expiry.

Call Options: give the buyer the right to buy at a certain price (called the strike) on expiry.

Expiry: Is the date on which the product can be exercised (for European style options).

At-the-money Option: An ‘at-the-money’ option is one where the strike is at the current level of the underlying asset.

In-the-money Option: An ‘in-the-money’ option that has a strike which is currently in a beneficial position with respect to the underlying. E.g. a $1300 call for gold when the underlying is at $1500 or a $120 put for light crude when the underlying is at $100.

Out-of-the-money Option: An ‘out-of the money’ option is one where the strike is currently in a position which would not be beneficial to exercise eg a 6500 call on the UK 100 when the underlying is trading at 6000 or 900 put on SPX 500 when the underlying is trading at 1200.

European Style Option: The most common type of option used. This type of option can only be exercised on the expiry date (however, you can trade in and out of the premium up until expiry).

American Style Option: A type of option which allows the buyer to enact it at any point up to and including the expiry date.

Exotic Style Option: Options which allow for the expiry times to be tailed as the customer sees fit. Examples include Bermudan.

Delta Coefficient: The derivate of the option with respect to a change in the price of the underlying asset. In other words how much the premium of the option moves when the underlying moves one point, it could be anything from 0 to 1 for calls and 0 to -1 for puts, with most landing somewhere in between. Delta is always at its highest for deep in-the-money options, smallest at the extreme out-of-the-money option, and at 0.5 for the at-the-money option. Some traders use the delta as a measure of the likelihood of the option expiring "in the money".

Gamma Coefficient: The second derivative of Delta, i.e. the rate of change of Delta.

Vega Coefficient: The option’s sensitivity to the underlying volatility.

Theta Coefficient: The option’s sensitivity to a change in time.