Options Glossary

Definition of Underlying Security

The underlying security, or underlier, is a specific security, commodity, or other financial instrument that is represented by an options or derivative contract. The owner of the derivative has the right to buy or sell the underlying security at a predetermined strike price before options expiration.

Index options, index futures contracts, and even exchanged traded funds (ETFs) are exempt from this definition since the underlying security cannot be delivered; therefore, they are automatically settled in cash at expiration.

The price of the underlying is the most significant factor in determining the price of an option contract.

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What is Intrinsic Value?

Intrinsic value is the portion of the option premium that is in the money.

What are LEAPS?

A long term equity anticipation security, aka. LEAPS, is a fancy term for a long dated option with expiration of at least 9 months in the future.  LEAPS are currently offered on about 450 equities (including equity indexes such as the Dow Jones - DJX and the S&P500 - SPY) and can be traded with calls and puts just as normal equity options. 

How to Use LEAPS?

What is a Strike Price?

The strike price of an option is simply a contractual price per share at which an option holder can exercise their right to buy or sell the underlying security that the option contract is based upon.  For this reason, strike price is also referred to as the "exercise price" of an option.  At options expiration, the holder of a call option that is in the money will by the underlying security at the strike price of the options contract.  Conversely, the purchaser of a put option will have the right to force the seller of the put to purchase the stock at the strike price.

What is Options Expiration Week?

The week beginning on Monday prior to the Saturday of options expiration is referred to as options expiration week. This week can be slightly more volatile as options holders begin to exercise their options contracts and roll forward their options to ones with later expiration dates. Since the markets are closed on Saturday, the third Friday of each month represents options expiration. If the third Friday of the month is a holiday, all trading dates are moved forward; meaning that Thursday will be the last trading day to exercise options.

What is a Option Moneyness?

You will hear the following terms when dealing with options: in the money, at the money, and out of the money.

What is a Put Option?

A put option is a contractual agreement between the buyer and the seller of the option that gives the right, but not the obligation, for the put holder to force the seller of the put to purchase the underlying security at the strike price on the options expiration date .  The buyer of a put option believes that the stock may move lower and therefore, decides to purchase the insurance to protect the downside risk and thereby locks in a sales price if the stock moves lower.  See the option risk profile of a put to understand the risks and rewards.

What is a Call Option?

A call option is a contractual agreement between the buyer and the seller of the option that gives the right, but not the obligation, for an options holder to buy a specified number of shares of a security at a predefined price(strike price) within a predefined amount of time.  Options traders purchase call options with the belief that the security will be above the strike price by the time the option expires.  The call option allows buyers to lock in a much lower purchase price if the stock has moved higher.