FIS 237 - Options Basics Handout
Equity investment – An investment in the form of part ownership, such as the
purchase of shares of stock in a corporation.
Debt investment – an investment in the form of loan made to earn interest, such
as the purchase of a bond.
Option – the right to buy or sell 100 shares of stock at a specified, fixed price and
by a specified date in the future.
Call – an option acquired by a buyer or granted by a seller, to buy 100 shares of
stock at a fixed price.
Put – an option acquired by a buyer or granted by a seller, to sell 100 shares of
stock at a fixed price.
Market Value – the value of an investment at any given time or date; the amount
a buyer is willing to pay to acquire an investment, and that a seller is also willing
to receive to transfer the same investment.
Contract – a single option, the agreement providing a buyer with the rights the
option grants (Those rights include identification of the stock, the cost of the
option, the date the option will expire, and the fixed price per share of the stock to
be bought of sold under the right of the option.)
Buyer – an investor who purchases a call or a put option; the buyer realizes a
profit if the value of the option rises above the purchase price.
Seller – an investor who grants the rights in an option to someone else; the seller
realizes a profit if the value of the option falls below the sale price.
Expiration date – the date on which an option becomes worthless, which is
specified in the option contract.
Underlying stock – the stock that the option grants the right to buy or sell, which
is specified in every option contract.
Exercise – the act of buying stock under the terms of the call option or selling
stock under the terms of the put option, at the specified price per share in the
option contract.
Striking price – the fixed price to be paid for 100 shares of stock specified in the
option contact, which will be paid or received by the owner of the option contract
upon exercise, regardless of the current market value of the stock.
Wasting asset – any asset that declines in value over time. An option is an
example of a wasting asset because it only exists until expiration, after which it
becomes worthless.
