Stock Options Vocabulary 1
American Style Option: a style of option in which the option contract can be exercised any time before the expiration period. Most options that are traded in stock exchanges are American styled.
Assignment: this happens when an option seller, called a writer, has received an exercise notice in which the writer is obligated either to sell the stocks (in case of calls) or to buy the stocks (in case of puts).
At-the-money: an option is said to be at-the-money if the option’s strike price is the same amount as that of the underlying stock’s current fair market price.
Call: a type of stock option that gives its holder the right to buy 100 shares of stock for a specified option price which can be exercised for a specified period.
Capped Style Option: is a style of option in which the option contract can be exercised only at a certain period before the option’s expiration except if the stock price is equal to the cap price or profit cap. A cap price in a call option is computed by adding the strike price and the cap interval whereas for put options it is computed by subtracting the strike price and the cap interval. For a capped call option, the option is automatically exercised if the cap price is the same as or above the stock price whereas it is automatically exercised for a capped put option if the cap price is the same as or below the stock price.
Class of Options: they are stock options that are of the same style, either American, European of Capped, and the same type, which can be the either put or call, and covers the same underlying stock.
Closing Purchase: this is a transaction in which the buyer uses to eradicate or lessen his short position in a series of options.
Covered Call Option Writing: this is a strategy by which the writer of the call option sells the call option while owning the equivalent position of the underlying stock.
Covered Put Option Writing: this is a strategy by which the writer of the put option sells put option while short of the equivalent position in the underlying stock.
Derivative Security: is a kind of business security where the value is derived from the value of the underlying security.
Equity Options: are stock options using individual common stock.
Employee Stock Option: is a kind of stock option that is offered by employers to their employees as part of the compensation
Employee Stock Purchase Plan: also known as section 423 stock purchase plan which is a kind of employee stock option that receives favorable tax treatment under the Internal Revenue Code.
European Style Option: a style of option in which the option contract can be exercised only at a certain period before the option’s expiration.
Exercise: an action by which the holder of the option chooses to implement his right to buy the underlying stock, in case of call options, or to sell the underlying stock, in case of put options.