Terminology
OPTION TERMINOLOGY
At-the-Money
An option is at-the-money when the underlying futures price equals, or nearly equals, the strike price. For example, a T-bond put or call option is at-the-money if the option strike price is 78 and the price of the Treasury bond futures contract is at, or near, 78-00.
Call Option
Gives the buyer the right, but not the obligation, to buy a specific futures contract at a predetermined price within a limited period of time.
Holder
The buyer of the option.
In-the-Money
A call option is in-the-money when the underlying futures price is greater than the strike price. For example, if Treasury bond futures are at 80-00 and the T-bond call option strike price is 78, the call is in-the-money. The put option is in-the-money when the strike price of the option is greater then the price of the underlying futures contract. For example, if the strike price of the put option is 80 and T-bond futures are trading at 77-00, the put option is in-the-money.
Out-of-the-Money
A call option is out-of-the-money if the strike price is greater than the underlying futures price. For example, if T-bond futures are at 80-00 and the T-bond call option has an 82 strike price, the option is out-of-the-money. The put option is out-of-the-money if the underlying futures price is greater then the strike price. For example, if T-bond futures are at 77-00, and the T-bond put option strike price is 76, the put option is out-of-the-money.
Premium
The dollar amount paid by the buyer of the option to the seller.
Put Option
Gives the buyer the right, but not the obligation, to sell a specific futures contract at a predetermined price within a limited period of time.
Strike Price
The predetermined price at which a given futures contract can be bought or sold. Also called the exercise price, these levels are set at regular intervals. For example, if Treasury bond futures were at 79-00, T-bond option strike prices would be at 74, 76, 78, 80, 82, and 84.
Writer
The option seller.