What delta means
Delta, the best known of the option Greeks, is a measure of directional exposure of an option. It is the first derivative of option’s market price with respect to the underlying’s price. Simply said, an option’s delta represents the dollar value by which the market price of the option changes when the underlying [...]
Terminology of option positions may be confusing
Sometimes people have a long put position (they own puts) and they say they are short. They mean their exposure to the underlying stock’s price movement is similar to a short position in the stock (they expect to make a profit when the stock falls).
But in fact the security [...]
What defines every option
Let’s summarize the basic characteristics (or parameters) which define every option. They are:
Underlying asset
Call vs. put
Strike price
Expiration date
American vs. European
Underlying asset
Option is a derivative security, a contract giving the owner (buyer) of the option the right (but not the obligation) to buy or sell a defined quantity of a defined asset. This [...]
Three different prices
In order to fully understand the basic principles of options, you must be sure to know the differences between the three frequently used terms and key parameters for every option. All three are prices, but their meanings are very different. These three kinds of prices are:
Strike price of the option
Market price of the [...]
Moneyness of an option
Moneyness is a strange sounding term, but it is sometimes used for describing the amount of intrinsic value an option has. All options belong to one of the three basic groups (and they can move between these groups as the market price of the underlying changes, as you will see below). The [...]
Strike price and intrinsic value
On the examples with Microsoft stock, we have explored the strike price and intrinsic value of call options and put options. To sum up and make it look a bit more scientific, let’s look at the formulas for calculating intrinsic value for calls and puts.
Calculating intrinsic value of call options
Call intrinsic [...]
Intrinsic value
In the article about strike price and intrinsic value of call options we learned that intrinsic value is the difference between the market price of the underlying stock and the option’s strike price. It moves together with the stock price, but can’t be negative. However, we only talked about calls.
Put options are different
With put [...]
Option’s strike price
Options represent a right, but not an obligation. There are two types of options, calls and puts. Call gives you the right to buy a stock, while put gives you the right to sell a stock. One question may come to your mind now. At what price can I buy or sell the [...]
This is an introductory article to options. It explains why they exist, the way they work, and some basic terms like call, put, or underlying.
Options around us
Let’s ask the very basic question that is frequently asked by people who don’t know much (or anything) about options. So, what is an option?
You’ve heard that word many [...]
