The following terms and definitions may be useful in understanding the information on other pages of this site about covered call and put option writing:
ASSIGNED - The requirement by the writer of an option to perform according to the terms of the contract by making delivery of the underlying stock to the holder (buyer) of the option. This is done by the option writer's broker.
CALL - An option permitting the holder (buyer) to purchase a stock at a predetermined price until a certain date. For example, an investor may purchase a call option on General Electric stock giving the investor the right to buy 100 shares (for each option contract) at $35 per share until June 15.
COVERED - Implies that the investor who writes a call option owns the underlying stock, so that if the stock is assigned the writer has the stock to deliver to the call holder (buyer).
COVERED CALL OPTION WRITING - An investment program for stock owners who are generally seeking a conservative way to increase income from their shares by selling (writing) calls on the stock they own. There is also the opportunity for a defined amount of capital appreciation in the stock, and the stock owner receives any dividends. The option writer receives premium income in exchange for assuring that the buyer of the option can purchase the shares at the agreed strike price during the operative period of the option contract.
EXCHANGE TRADED FUND (ETF) - ETFs represent shares of ownership in portfolios of common stocks that are designed to generally correspond to the price and yield performance of their underlying portfolios of securities, whether broad market, industry sectors, regions, investment styles or international. ETFs give investors the opportunity to buy or sell an entire portfolio of stocks in a single security, as easily as buying or selling a share of stock. They offer a wide range of investment opportunities.
EXERCISE - In the case of covered call options, to require delivery of the underlying stock by the seller (writer) of the options to the holder (buyer).
EXPIRATION DATE - The last day an option holder (buyer) can exercise the rights in an option contract.
FUNGIBLE - Relates to assets that are identical and are interchangeable. For example, shares of General Motors common stock or the April $50 General Electric calls are both fungible. All General Motors common stock shares are the same and are interchangeable and all of the General Electric April $50 call contracts are the same and are interchangeable.
IN-THE-MONEY (CALLS) - The strike price of a call option is below the market price of the underlying shares. For example, the call option for a stock with a price of $50 when the stock is trading at $52 would be $2 in-the-money.
IN-THE-MONEY (PUTS) - The strike price of a put option is above the market price of the underlying shares. For example, the put option for a stock with a strike price of $50 when the stock is trading at $48 would be $2 in-the-money.
LEAPS - An acronym for Long-Term Equity Anticipation Securities. These are options with expiration dates extending up to three years, which is well beyond the term of regular options.
OPTION - A contract permitting the holder (buyer) to purchase (call) or sell (put) a stock at a fixed price (strike) until a specific date (expiration).
OPTION CONTRACT - An agreement by an option writer to sell a given stock at a predetermined price (strike) until a certain date (expiration). The holder (buyer) of the option is not obligated to exercise (act on) the option, but the seller (writer) of the option must perform the obligation if the buyer exercises rights under the option contract.
OUT-OF-THE-MONEY (CALLS) - The strike price of a call option is above the market price of the underlying shares. For example, the call option for a stock with a strike price of $55 when the stock is trading at $52 would be $3 out-of-the-money.
OUT-OF-THE-MONEY (PUTS) - The strike price of a put option is below the market price of the underlying shares. For example, the put option for a security with a strike price of $55 when the shares are trading at $58 would be $3 out-of-the-money.
PREMIUM - The current price at which an option contract trades and the amount a buyer would pay and a seller would receive.
PUT - An option permitting the holder (buyer) to sell a stock or ETF at a predetermined price until a certain date. For example, an investor may purchase a put option on General Electric shares giving the investor the right to sell 100 shares (for each option contract) at $25 per share until June 15.
PUT OPTION WRITING - An investment program for investors who are generally seeking a conservative way to increase income by selling (writing) puts on individual stocks or ETFs. The option writer receives premium income in exchange for assuring that the buyer of the option can sell the shares at the agreed price duing the operative time period of the option contract.
STRIKE PRICE - The price at which the holder (buyer) of a call option can purchase the underlying stock. Also sometimes referred to as the "exercise price."
TIME VALUE - That part of an option's market price which is solely attributable to the remaining time before the expiration of the option. If the option is out-of-the-money, the entire premium is attributable to time value. If the option is in-the-money, the amount attributable to time value is calculated by subtracting the amount by which the option is in-the-money from the current option premium. For example, if the current market price of an option is $3 1/2 and the option is in-the-money by $2, the time value is $1 1/2.
UNCOVERED - An option transaction that is opened whereby the investor does not own the underlying security. An investor writing a put option on 100 shares of General Electric, for example, does not own the shares.
UNDERLYING (STOCK, SHARES, SECURITY) - The shares owned by the option writer that the option holder (buyer) has the right, but not the obligation, to purchase according to the terms of the option contract.
WRITING CALLS - Another term for selling covered call contracts on stock an investor owns.
WRITING PUTS - Another term for selling put contracts on a stock or ETF an investor contracts to own at a chosen strike price.
