Options traders deploy plenty of jargon, so it pays to get your terminology straight. Here are some of the more common terms you'll run into in the options world.
Calls and Puts
There are only two different varieties of standard options: call options and put options. Understanding the difference between the two is crucial to investing in options.
For each call contract you buy, you have the right (but not the obligation) to purchase 100 shares of a specific security at a specific price within a specific time frame. A good way to remember this is: You have the right to call stock away from somebody.
For each put contract you buy, you have the right (but not the obligation) to sell 100 shares of a specific security at a specific price within a specific time frame. A good way to remember this is: You have the right to put stock to somebody.
Long versus Short
In the financial world, long doesn't refer to things like distance or the amount of time you hang onto a security. It implies ownership of something. If you bought a stock, a put, or a call, you are considered long in your account.
You can also be short in your account, meaning you've sold an option or a stock without actually owning it. With options, you can sell something you don't own. If you do, you may have additional obligations later.
This is the pre-agreed price per share at which stock may be bought or sold under the terms of an option contract. Some traders call this the exercise price.
In-the-money (ITM) and At-the-money (ATM)
A call option is in-the-money if the stock price is above the strike price. Put options are in-the-money if the stock price is below the strike price. An option is at-the-money when the stock price is equal to the strike price.
This refers to the relationship between the strike price and the current stock price. An option is considered to be out-of-the-money if exercising the rights associated with the option contract has no obvious benefit for the contract owner. For call options, the market price is below the strike price. For put options, the market price is above the strike price.
Intrinsic value versus time value
Intrinsic value refers to the amount an option is in-the-money. The price of nearly all option contracts includes time value. This part of an option's price is based on its time to expiration. If you subtract the intrinsic value from an option's price, you're left with time value. Because out-of-the-money options have no intrinsic value, their price is entirely made up of time value.
When the owner of an option invokes the right embedded in the option contract, it's called exercising the option. The owner buys or sells the underlying stock at the strike price, and requires the option seller to take the other side of the trade.
When an option owner exercises the option, an option seller (writer) is assigned and must make good on their obligation. The seller is required to buy or sell the underlying stock at the strike price.