Option Lingo

Now that we understand that we are going to buy a Call when we think the price is going to increase and buy Put if we think that the price is going to drop, let’s explain some mumbo jumbo so we can understand the lingo.

Premium- This is the amount an option buyer pays the seller in advance. This is a onetime payment and it is non-refundable.

Underlying Stock- This is the stock for which you buying the option.

Stock Price/Strike- This is a predetermined price that you agree to pay for the stock at a later date.

Expiration Date – Just remember: when buying or selling an option, you are not taking on a lifetime contract; every option has an expiration date. For example, you might decide to buy a 3 month option on Microsoft, meaning that in 3 months the option will expire and then will become worthless.

Exercising Option- This term is used when the two parties hold up their sides of the deal. For example, if you decide to exercise your Call Option, it means that you are actually buying 100 shares from the seller of the option.
Contract- Most of the time, instead of saying “1 Option Contract” traders will refer to the contract as an option. For example one might say “I want to buy 1 Call option”.

In-The-Money 

Call Option- An option is classed to be In-The-Money if the value of the underlying stock is higher than the Strike. (Remember you want the stock to go higher)

Put Option- An option is classed to be In-The-Money if the value of the underlying stock is lower than the Strike. (Remember you want the stock to go down)   
   
At-The-Money - An option is classed to be At-The-Money if the value of the underlying stock is equal to the Strike.

Out-The-Money-

Call Option- An option is classed to be Out-The-Money if the value of the underlying stock is lower the Strike.
Put Option- An option is classed to be Out-The-Money if the value of the underlying stock is lower the Strike.