Means, allowing an option to expire unexercised.
American-Style of Exercise
An option, which may be exercised on any Trading Day prior to expiry.
Notice sent by the Clearing House to the option writer informing him that his option
has been exercised.
An option whose strike price is the same as, or closest to, the current market price
of the underlying share. For example, if the share price is Rs.260, an option with
a strike price of Rs.260 would be precisely at-the-money.
A futures market where further dated delivery months trade at a discount to the
near month. Also, where a bid is higher than an offer.
The difference between quoted bid and offer prices.
A recognized option strategy, which involves, in one single transaction, the simultaneous
purchase (sale) of a call (put) at one exercise price, the sale (purchase) of two
calls (puts) at a higher exercise price and the purchase (sale) of a call (put)
at an equally higher exercise price.
Buyer of an option
The party who, through purchase, acquires the right conveyed by the option. Also
commonly referred to as the option holder, where the purchase is to open a position.
Purchase of stock and simultaneous writing of call options against stock position.
The sale /purchase of a near month call option /put option and the simultaneous
purchase /sale of a longer dated call option /put option of the same exercise price..
An option that conveys to the option buyer the right but not the obligation to purchase
shares at a fixed strike price per share at any time during the life of the option.
The simultaneous purchase (sale) of a call at one exercise price and sale (purchase)
of another call at a higher exercise price.
The market in the underlying instrument.
In the case of index options contracts where it is impossible or impractical to
effect physical delivery, open positions are closed out on the day of exercise or
the last day of trading at a price determined by the underlying index level.
All listed options of a particular type (i.e., call or put) on a particular underlying
instrument, e.g., all Reliance, Tisco call options.
The organisation which guarantees the performance and settlement of exchange traded
contracts to its members - NSCCL
A transaction whereby an option writer buys an option identical to one previously
sold, thus ending his obligations as an option writer.
A transaction whereby an option holder sells an option identical to one previously
purchased, effectively terminating his rights as an option holder.
A futures market where further dated delivery months trade at a premium to the near
The number of shares of the underlying security.
The rate of change in option premium for a given change in the price of the underlying.
A position where the sum of the deltas of the component legs adds up to 0.
An option, which may be exercised only on its expiry day.
The day on which a dividend paying stock trades without the right to receive the
The use of the right by the option holder to purchase the underlying shares at the
exercise price if the option is a call, or to sell the underlying shares at the
exercise price if the option is a put. Equity options traded on LIFFE are 'American-style'
options; they can be exercised by the option holder at any time prior to expiry.
When a call is exercised, the writer is obliged to make delivery of i.e. sell the
underlying shares at the exercise price of the option and the buyer is obliged to
take delivery i.e. buy. When a put is exercised, the writer is obliged to take delivery
of i.e. purchase the underlying shares at the exercise price of the option and the
buyer is obliged to make delivery i.e. sell.
A formal notification to the Clearing House that the holder of a call (put) option
wishes to buy (sell) the underlying at the exercise price.
The fixed price per share at which a call option conveys the right to purchase the
underlying shares and at which a put option conveys the right to sell the underlying
shares. Also referred to as the option strike price. Example: A call option with
an exercise price of Rs.260 conveys the right to purchase 1,000 shares at a price
of Rs.260per share
The last date on which an option holder can exercise the right conveyed by the option.
After that date, the option ceases to exist.
Time value. That part of the option premium, which is not accounted for by its intrinsic
The rate of change of an option's delta relative to a given change in the underlying.
A recognized option strategy, which involves the simultaneous purchase (sale) of
an in-the-money call at one exercise price and the purchase (sale) of an in-the-money
put at a higher exercise price in one single transaction.
The volatility of the underlying instrument implied by the market price of options.
An option that has intrinsic value. In the case of a call, an option whose exercise
price is below the current underlying share price, or in the case of a put, an option
whose exercise price is above the current underlying price.
The amount, if any, by which an option is currently in the money. An option that
is not in-the-money has no intrinsic value.
Last Trading Day
The final day for dealing in options contracts for a particular expiry month.
An open "bought" position.
One equity options contract. In case of Nifty Index, the lot size is 100 Nifty.
Funds that an option writer must maintain on deposit with his broker to assure his
ability to fulfill his financial obligation to make or take delivery of the underlying
shares. Since the buyers of equity options, pay the entire option premium when the
option is purchased, they have no further financial obligations and are not subject
to a margin requirement. However, if an option buyer exercises his right to acquire
the underlying shares, he would then become subject to the margin requirements applicable
to the shares acquired. Margin is called from the time the option is exercised until
the transaction is settled.
A transaction whereby the buyer becomes the holder of an option.
A transaction whereby the seller becomes the writer of an option.
The net long and short amount of outstanding positions in a particular contract.
An option that has no intrinsic value. That is an option which theoretically, it
would not be worthwhile to exercise immediately e.g. a call option whose exercise
price is above the current underlying share price or a put option whose exercise
price is below the current underlying share price.
The sum of money that an option buyer pays for the right to acquire the option,
and that an option seller receives for incurring the obligation the option entails.
Option premiums are expressed as a cost in Rs.per share. The total cost of an option
contract for 1,00 shares (referred to as a 'lot') would therefore be 1,00times the
premium, e.g. one contract with a premium of Rs.14 would cost Rs.1400 (100x14).
An option that conveys to the option buyer the right but not the obligation to sell
a predefined quantity of the underlying asset, e.g., 1,00shares, at a fixed price
at any time during the life of the option.
The simultaneous purchase (sale) of a put at one exercise price and the sale (purchase)
of a put at a lower exercise price.
The rate of change in option premium for a given change in interest rates.
The transfer of a futures or options position from one delivery/expiry month to
another - involving the purchase (sale) of the nearby month and the simultaneous
and corresponding sale (purchase) of a further delivery or expiry month.
The opening purchase (sale) of an option or future and the subsequent opposite and
closing transaction in the same contract. Transaction costs are often quoted on
a round-trip basis.
All option contracts on the same underlying instrument with the same exercise price
and the same expiry date. Put options and call options with the same strike price
and same expiry date form two different series.
Seller of an option
The party whose market transaction is the sale of an option. Where the party's opening
transaction is a sale, he is referred to as the option writer. Unlike the option
buyer, who acquires a specific right, the writer of an option incurs a specific
liability (the obligation to make or take delivery of the underlying asset if the
holder chooses to exercise the option).
The price used for daily revaluation of open positions.
An open "sold" position.
A market position involving a degree of risk offset in two or more positions. For
options such strategies as ratio, horizontal and vertical spreads are used across
strikes prices and expiry months.
The simultaneous purchase (sale) of a call and put option in the same expiry month
with the same exercise price.
The simultaneous purchase (sale) of a call option at one exercise price and a put
option at a lower exercise price but with the same expiry date.
The fair value premium of an option based on recognised pricing methods.
The rate of change of option premium for a given change in the number of days to
The smallest permitted price movement in a particular contract.
The amount, if any, by which an option's premium exceeds its intrinsic value. If
an option is not in the money, its premium consists entirely of time value.
The process whereby the value of an option premium is eroded as expiry approaches.
A position, which is not covered by an offsetting position in the underlying instrument.
The specific share to which call and put options relate - e.g. 1,000 shares of Ranbaxy.
The rate of change in option premium for a 1% change in the volatility of the underlying.
A statistical measurement of the variability of a share's price, often expressed
by the standard deviation.
A recognized option strategy which involves the simultaneous purchase (sale) of
calls against the sale (purchase) of the underlying or the simultaneous purchase
(sale) of puts against the purchase (sale) of the underlying in one single transaction.
The seller of an option contract who is obliged to deliver or take delivery of the
underlying instrument upon notification by the buyer (holder).