In this article, we will cover basic terminology an options trader needs to understand before looking at the options chain to place a trade.
The expiration date refers to the time your option trade will be over for better or for worse. Choosing an expiration will be one of the first decisions you’ll need to make when placing an options trade. Whether you’re up or down on your trade, this will be the time that you’ll be either celebrating a winning trade or lamenting a not so good trade if you choose to hold your position up until the very end. You can choose to sell out of your option contract at any point prior to the expiration date or do nothing and allow the exercise/assignment process to happen.
Entering and Exiting An Options Trade
Knowing how to quickly enter and exit an options trade is vital to becoming an efficient options trader. After choosing what your strategy will be, you’ll need to navigate to the options chain, pick a strike price and expiration date, select the corresponding row on the chain and place your order. Once your trade gets executed, the fun begins. Exiting your trade is as easy as entering it. Just find your position in your holdings, click the sell button and get out of the trade.
In the Money
In the money simply means your option will hold value should it expire. This is called intrinsic value. For example, if you buy an Apple call at the 145 strike price and Apple stock is currently trading at $150, your call is in the money with an intrinsic value of $5. Keep in mind, the price of the underlying stock may fluctuate up and down while you’re holding the option so it may not stay in the money throughout the trade.
Out of the Money
Out of the money means your option is at a strike price that is currently above the price of the underlying stock if you’re long a call or below the price of the underlying stock if you’re long a put. It’s important to know that out of the money options will expire worthless at expiration.
Time decay begins the moment you buy an option. The closer your long option contract gets to its expiration, the more value it loses over time especially if the underlying stock goes against you.