Resources

What Are Options?

(investopedia.com)

Learn what options are and how they are used

Option Collar Explained

(optionseducation.org)

Learn about the option collar, used in the PHI strategy

Using Options Decreases Portfolio Volatility

(Chicago Board of Options Exchange - cboe.com)

Discover a study showing how the use of options decreases portfolio volatility

Terminology

Option Contract

A contract that gives the holder the right to purchase or sell the underlying asset at a stated price by a certain date.

Premium

The amount collected for selling the spread on the open market. The purchaser pays a premium to gain the right to execute the contract at a later date.

Strike Price

A component of an option contract; the stated price of the underlying asset where the option contract may be exercised causing the underlying asset to change ownership.

Call

An option contract that gives the buyer the right to purchase the underlying asset at the strike price. The seller of the contract would then be obligated to sell the asset.

Put

An option contract that gives the buyer the right to sell the underlying asset at the strike price. The seller of the contract would then be obligated to purchase the asset.

Short

An option position is said to be short when selling the contract. Also known as writing a contract.

Long

An option position is said to be long when buying the contract.

Spread

A position consisting of an equal number of short and long options which expire on the same date and are of the same underlying asset. The short put option has a higher strike than the long put option.

Volatility

A measure of the movement of the underlying asset over a given period of time. Higher volatility is generally regarded as more risky. This measure is related to statistical variance and/or standard deviation and is a historical measurement.

Implied Volatility

An estimate of an underlying asset's future volatility which is derived from current option price movement on that same underlying asset.

In-the-Money

When exercising an option contract would produce a favorable result (gain), based on the underlying asset value. A call option contract is in-the-money when the underlying asset value is greater than the option strike price.

Out-of-the-Money

When exercising an option contract would produce an unfavorable result (loss), based on the underlying asset value. A call option contract is out-of-the-money when the underlying asset value is less than the option strike price.

Investopedia Dictionary

(investopedia.com)

More investment terms are defined at the Investopedia Dictionary.

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