Key terms in the options world

Anup Menon

Stock price: The price of the underlying security in the POST market.

This is one of the important variables that has an impact on the option-pricing model.

Exercise price: The price at which the option can be exercised. For instance, in the above example, the exercise price for the Infosys call option is Rs 8,300. This means that on the expiry date, the holder of the call option can buy the stock at Rs 8,300, irrespective of the stock's prevailing spot price.

Option premium: The price the buyer of an option has to pay. The premium is paid to the writer/seller of the option in return for guaranteed delivery in case the buyer decides to exercise his right. The premium is computed using various pricing formulae.

American/European options: The fundamental difference is that the former can be exercised any time before the stated maturity date while the latter can be exercised only on the specified maturity date.

Volatility: One of the key factors involved in pricing of options is the volatility of the underlying security. Option trading is synonymous with trading on volatility.

Time to maturity: The value of an option varies depending on the time remaining on maturity.