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
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
A futures market where further dated delivery months
trade at a premium to the near month.
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
The day on which a dividend paying stock trades without
the right to receive the dividend.
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
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 value.
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
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
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
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
The fair value premium of an option based on recognised
The rate of change of option premium for a given change
in the number of days to expiry.
The smallest permitted price movement in a particular
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
The seller of an option contract who is obliged to deliver
or take delivery of the underlying instrument upon notification by the buyer (holder).