In this, let us understand a few of the jargon that, as an investor, you will hear in the derivatives market. This jargon is also used throughout the course; hence, to understand the concepts clearly, traders and investors must understand these words' meanings.
Call Option: The Options contract gives the Right to Buy. It is defined as the right to buy a fixed quantity of an asset at a predetermined price in the future.
PUT Option: The Options contract gives the right to sell. It is defined as the right to sell a fixed quantity of an asset at a fixed, predetermined price at a time in the future.
Options Writing: Option writing is termed as selling the Options contract. The options buyer will get the right to BUY or SELL(CALL/PUT) but no Obligation. But the Option Contractor/Options Seller is Obliged to trade. Option Writing means Selling the Options Contract.
American Style Options contracts: American Style Options contracts are the type of Contracts that can be exercised at any time before the expiry date.
European Style Options contracts: European Style option contracts are the type of contracts that can be exercised only at the expiry. In Indian stock exchanges, we have and can only trade in European Style Options contracts.
Spot Price: Spot price is defined as the Live current price of the asset under consideration.
Strike price: The price at which the CALL or PUT options contract can be exercised.
At The Money Option contract( ATM): the options contract whose strike price equals the current spot price of the underlying asset.
In the Money Options(ITM): It is the options contract whose strike is above the current spot price for PUT options and is below the spot price in the case of CALL options. For ITM contracts, the Premium is higher.
Out of the Money Options(OTM): It is the Options contract whose strike price is below the Spot price in the case of PUT options, and the strike price is above the Spot price in the case of CALL Options. For OTM options, the premiums are low compared to ITM and ATM options.
Market Lot: This is the minimum number of shares you can trade via the options contract. This is also called the standardized number of shares that can be traded. You can only trade in Multiples of these.
Premium: The price associated with a derivative contract is termed as a premium of that contract.
Long side: Normally, we use the term Buying. But in the stock market, we use the term Long for Buying. When we say we are going long on a financial instrument, we mean that we are on the Buying side of that instrument.
Short side: Similar to the Long side, we use the term shorting instead of selling. When we say we are short on a financial instrument, we mean that we are on the selling side.
Expiry of Contract: the time after the contract expires and has to be exercised or will expire worthless if not exercised.
Long Call: When we say Long call, we mean that we are buying a CALL Options contract. As we know, CALL options give the right to buy an asset; a long call means that we are buying the right to buy an asset but are not obliged to buy. We have to pay a premium to the Seller of the Call option to execute Long Call.
Short Call: When we say Short CALL option, we sell a Call Options contract. This can also be called the Writing a Call Option. We know that the Call option gives the right to Buy assets to the Options buyer. But as we are selling the options contract, we are obliged to sell the shares if the contract is exercised at the expiry. When we go Short Call, we will receive the Premium from the Call option buyer.
Long Put: Long put means that we are buying a PUT options contract. PUT options give the Buyer of the contract the right to sell assets. Then Long PUT means we are buying the right to sell the shares at the expiry. We have to pay Premium to the Seller of the PUT option to execute Long PUT.
Short PUT: Short put is also called Writing a PUT Option. This means we are selling a PUT options contract. Hence at the time of expiry, we are obliged to buy the shares from the Buyer of the contract. When we go short PUT, we will receive a premium from the Buyer of the PUT option contract.
These are the Important Terms that investors and traders will use throughout this course and all in the Derivatives market. The most important thing is understanding the difference between a Call option and a Put options contract. Make sure to distinguish these terms as we will discuss these terms in detail, as we have dedicated lessons with examples.