Basic Options Terminology

What is an options contract?

A stock option contract is an arrangement between a buyer and a seller that grants the right to buy or sell a stock at a predetermined price within a specified time period.

Calls and Puts. What are they?

There are two main types of option contracts: calls and puts. A call option grants the buyer the right to purchase the underlying security at a specified price, and it obligates the seller of the call to sell the security at that price. Conversely, a put option gives the buyer the right to sell the underlying security at a specified price, and it requires the seller of the put to buy the security at that price.

What is options premium?

The premium is the price paid to purchase an option contract. Buyers pay a premium, sellers receive a premium.

What is the strike price?

The strike price, also known as the exercise price, is the predetermined price at which the holder of an option can buy (for a call option) or sell (for a put option) the underlying asset.

What does it mean when an option is out, at, or in the money?

In the Money (ITM)

An option contract is considered "in the money" when it is advantageous to exercise it. A call option is in the money when the underlying stock price is above the strike price. Conversely, a put option is in the money when the underlying stock price is below the strike price.

At the Money (ATM)

An option is considered "at the money" when the market price of the underlying asset is equal to the strike price

Out of the Money (OTM)

When an option is "out of the money," it means that exercising the option would not be profitable.

What is the expiration date?

Options have an expiration date that marks the final day the option contract remains valid. For American options, buyers can exercise their rights at any time up to and including the expiration date. Contracts that are at least $0.01 in the money at expiration will be automatically exercised. Conversely, contracts that are at or out of the money at expiration will expire worthless.

What is the breakeven point?

The breakeven point is the point at which the investor neither makes nor loses money. For call options, the breakeven point is determined by adding the strike price to the premium. For put options, the breakeven point is calculated by subtracting the premium from the strike price.