Covered Calls Dictionary – Know The Lingo

Have you ever been behind someone in line at a coffee shop and you can tell this is their first time ordering anything other than a black cup of Joe? They’re standing there trying to figure out which one is a large and which one is a small. Everyone else in line knows this guy is out of his element.

 

Maybe you have even been that guy.

 

Nothing makes you feel more like an outsider than when you’re not familiar with the lingo. It’s like trying to watch a foreign subtitled movie…without the subtitles. You may get the gist of it but you won’t be as comfortable following along as you would like.

 

Embarking on any one of the many option trading strategies is no different. When writing covered calls for example, knowing the terminology is a necessity if you are to be profitable. Make these terms part of your permanent vocabulary.

 

Options contract.

Options contracts are bought and sold in increments of 100 options. One contract equals 100 options. An options contract also controls 100 shares of stock. If you want to sell one contract you would need at least 100 shares of stock.

 

Call option.

A call option gives the buyer the right to purchase shares of stock at a set price.

 

Put option.

A put option gives its owner the right to sell shares of stock at a predetermined price.

 

Underlying stock.

An option contract gives you the right to buy or sell shares of stock. The underlying stock is the stock that will be bought or sold.

 

Option premium.

The amount of money that a buyer pays (and that the owner of the stock receives) for a call or put option.

 

Bid.

The price at which a put or call option is sold for.

 

Ask.

Price for which a call or put is sold at. When writing covered calls the ask would be the dollar amount you would receive (multiplied by 100). If the ask is .85 then you would get $85 for that call option contract.

 

Expiration.

The date at which an option expires. Monthly options expire the third Friday of each Month. For weekly options, their expiration would be the following Friday they become available for trading. Weekly options are issued every Thursday except the week before the monthly options expire.

 

Strike price.

Each option is sold by date and by strike price. The strike price is the dollar amount for which the underlying stock is guaranteed to be sold or bought for.

 

Intrinsic value.

This is value an option has based on how far the strike price is away from the actual price of the stock. Call options have more intrinsic when the stock is above the particular strike price. Put options have more intrinsic value when the stock is lower than the put strike price.

                                                                   

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