Options Trading System

Glossary

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One Cancels the Other Order

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See Also:

Call: There are three meaning of the "Call" term. It could be:
1) An option contract giving the buyer the right but not the obligation to purchase a commodity or other asset or to enter into a long futures position;
2) a period at the opening and the close of some futures markets in which the price for each futures contract is established by auction;
3) the requirement that a financial instrument be returned to the issuer prior to maturity, with principal and accrued interest paid off upon return.

CIF: CIF is the cost, insurance, and freight paid to a point of destination and included in the price quoted.

Expiration Date: Expiration Date is the last date on which an option may be exercised. This is the date on which an option contract automatically expires; the last day an option may be exercised. It is not uncommon for an option to expire on a specified date during the month prior to the delivery month for the underlying futures contracts.

On an option exchange, every 3rd Friday of the month is expiration day for monthly options. A number of option series expire on this day.

At expiration all call options with a higher strike price than the expiration price of the underlying stock/currency or index will be worthless. All series with a lower strike price will have value and will be exercised. In the case of put options the opposite applies.

For all holders of call options it will be optimal when the value of the positions at expiration is as low as possible.

Options expiration date is the most important factor in calculating an options price:

• The Black Scholes formula is used to price a European style option by factoring in current stock price, strike price, time until expiration, level of interest rates, any dividends and the volatility of the underlying security. The binomial model is used to price American style options.
• The binomial model calculates a tree of stock prices for given time intervals within the expiration period of the option using the volatility of a stock and time to expiration to find out how much a stock will increase or decrease in value. This calculation gives all possible prices of a stock. Then, the option prices of the stock are calculated backwards, from expiration to present. These prices are obtained by using risk neutral valuation. Ultimately, we get one price for the option.

Fill: Fill is the execution of an order.

Limit Order: Limit Order is an order in which the customer specifies a minimum sale price or maximum purchase price, as contrasted with a market order, which implies that the order should be filled as soon as possible at the market price.

Strike Price: Strike Price (Exercise Price) is the price, specified in the option contract, at which the underlying futures contract, security, or commodity will move from seller to buyer. Strike Price is the price at which the buyer of a call (put) option may choose to exercise his right to purchase (sell) the underlying futures contract.

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