TERMINOLOGY OF OPTIONS

The terminology used in options are as follows,

CALL OPTION: A right but no obligation to BUY the underlying asset at predetermined price within specified interval of time is called a CALL option.

PUT OPTION: A right but no obligation to SELL the underlying asset at a predetermined price within a specified interval of time is called a PUT option.

BUYER or HOLDER: The person who has the right but no obligation to buy or sell is called the owner or holder of the option. The holder of an option has to pay a premium to obtain the right.

WRITER or SELLER: One who confers the right and undertakes the obligation to the holder is called a seller or writer of an option.

PREMIUM: While conferring a right to the holder, the writer is entitled to charge a fee upfront. This upfront amount called the premium/price is paid by the holder to the writer.

STRIKE PRICE/EXERCISE PRICE: The predetermined price at which the option can be exercised is called the strike price. It is the price at which the holder of an option buys/sells the asset.

STRIKE DATE/MATURITY DATE: The right to exercise the option is valid for limited time. The latest time by when the option can be exercised is called the time to maturity or expiry.