Terminology
This page contains a very terse, dictionary-style definition for the words used on Real Options Education. The educational materials describe each of these in much more depth. This should be used as you progress through the educational material, as a reference.
Buyer: The person (company, organization, etc.) that is purchasing a security.
Call/Call Option: An option that gives the buyer a right to buy an equity and obligates the seller to sell the equity if the price of the underlying is at or above the strike.
Capital: The amount of cash available to use for trades.
Covered Call: A call option that is sold and that is secured by shares of stock the seller already owns.
(Cash) Covered Put: A put option that is bought and that is secured by cash in the buyer’s account.
Equity: The amount of cash that is equivalent to some share of an investment you own, for example, if you own 10% of the shares of a company worth $100, your equity in that company is $10.
Exercise: The act of enforcing the terms of a contract. For example, exercising an option means that the buyer enforces their right to buy or sell the underlying to the seller.
Expiry: The date on which a contract expires, usually after the end of the trading session on that day.
Greeks: An informal way of referring to the parameters, identified by letters taken from the Greek alphabet, that represent various quantities associated with option contracts, such as time decay (“theta”, \(\theta\)). Note that some parameters are not actually from greek letters, but are still included with the “greeks”, e.g., vega.
Holder of Record: The person or entity that owns a security.
Mean: The statistical average value of a stock over some period of time.
Option: A contract that grants the buyer the right to sell (put) or buy (call) a security for a set price (the contract price, or strike price) on a fixed date (the expiry).
Portfolio: The collection of capital and securities held in an investment account.
Price: The cash value of a security.
Put/Put Option: An option that gives the buyer the right to sell an equity and obligates the seller to buy the equity if the price of the underlying is at or below the strike.
Risk: The amount, sometimes expressed as a percentage, of capital that might be lost in a trade.
Security: A general term that is used as a shorthand for some investment ownership, for example, both “stocks” and “municipal bonds” are securities.
Seller: The person (company, organization, etc.) that is selling a security.
Settlement Date: The date when the buyer of a security becomes the holder of record.
Settlement Period: The period of time between the date of execution of the trade of a security and the date when the funds and security have been exchanged.
Spot Price: The price of a security at a given point in time.
Stock: A security that represents a share of ownership of a company, index fund, or similar thing.
Strike/Strike Price: The price of an underlying security for an option that the seller of the option is obligated to pay or receive in the event of an exercise.
Theta: The Greek letter representing the parameter that quantifies time decay.
Time Decay: A parameter, denoted by the Greek “theta” (\(\theta\)), representing the decay of an option’s value over time.
Underlying: The security that a contract, such as an option, transfers in the event of an exercise.
Vega: A parameter, sometimes denoted by “IV” (for “implied volatility”) and often included in “the Greeks”, representing the sensitivity of an option to changes in volatility of the underlying.
Volatility: A parameter, denoted by the Greek “sigma” (\(\sigma\)), measuring the deviation (variance) from some mean value for a stock.
Write: Another way of saying sell when referring to an option. For example, a person writing an option is selling that contract, not buying it.