Part 6 Learn Institutional Trading

Key Terminology in Option Trading

Before diving deeper, let’s understand some crucial terms used in options:
Underlying Asset: The financial instrument (like a stock, index, or commodity) on which the option is based.
Strike Price (Exercise Price): The price at which the underlying asset can be bought (for a call) or sold (for a put).
Expiration Date: The date when the option contract ends. After this date, the option becomes worthless if not exercised.
Option Premium: The price paid by the buyer to the seller for acquiring the option.
Intrinsic Value: The amount by which an option is in profit if exercised immediately.
Time Value: The extra value in the option premium due to time left before expiration.
In-the-Money (ITM): When the option already has intrinsic value (profitable if exercised now).
Out-of-the-Money (OTM): When the option has no intrinsic value.
At-the-Money (ATM): When the strike price equals the current market price of the underlying.

Example:
If a stock is trading at ₹1000 and you buy a call option with a strike price of ₹950, your option is in the money.
If you buy a call with a strike price of ₹1050, it’s out of the money.