Glossary of terms

Derivative: A derivative is a financial contract which derives its value from an underlying asset or group of assets. The most common types of derivatives are futures contracts, forward contracts, swaps and options.

Option: An option is a contract between two parties that gives the buyer the right, but not the obligation, to exercise the contract.

Buyer of an option: The buyer of an option is the one who, by paying the option premium, buys the right but not the obligation to exercise his option on the seller/writer.

Writer/seller of an option: The writer/seller of a call/put option is the one who receives the option premium and is, thereby, obliged to sell/buy the asset if the buyer exercises on him.

Call option: A call option gives the holder the right, but not the obligation, to buy an asset by a certain date for a certain price.

Put option: A put option gives the holder the right, but not the obligation, to sell an asset by a certain date for a certain price.

Option price/premium: It is the price an option buyer pays to the option seller.

Open interest: It is the total number of option contracts outstanding for an underlying asset.

At-the-money option: An option's strike price is equal to the price of the underlying asset/security.

In-the-money option: In a call option, the strike price is below the underlying asset price, whereas in a put option the strike price is above the underlying asset price.

Out-of-the-money option: In a call option, the strike price is higher than the underlying asset. For a put, the strike price is lower than the underling asset’s market price.

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