Options

Options

Contracts, which let the buyer of a call (put) choose whether or not they want to buy (sell) the underlying asset at the strike price once the contract hits its expiry date

Binary options

Options that are based on a binary success or failure outcome. The parties that choose the correct outcome (success of failure) win the entire pot.

Call Options

Gives the buyer the right (but not obligation) to purchase an asset at the particular price and date specified in the contract.

Put Options

Gives the buyer the right (but not obligation) to sell an asset at the particular price and date specified in the contract.

Premium

Is the market price of purchasing an options. By paying the premium you purchase the right to exercise an options. The seller receives this premium as their payoff for selling the options.

See How to calculate Premium with Black Scholes here.

PnL

Profit and Loss. It represents the change in the value of a trader’s position. Whilst a trade is still open PnL is considered "unrealised" and when the trade is close it becomes "realised" PnL.

Exercising an Options

The event in which the buyer of an options choses to execute the options contract they purchased in order to buy or sell the underlying at the strike price.

Settlement

Occurs when an options is exercised. In the case of physical settlement, there is a transfer of assets between the seller and buyer of an options to reflect the contract that was exercised. In the case of cash settlement, the trader exercising the options is paid out in cash (no exchange of assets) based on their PnL.

Naked Option

Shorting an options without holding any (or enough) of the underlying asset to protect from adverse price movements, exposing the trader to high amounts of unhedged risk.

Collateral

An asset accepted as security for a loan or credit risk. In the case of options collateral is required to make sure that the trader can cover their position if they get margin called.