Option Terminology

Key terms in options: -

When we open option chain in our first demat broking app, we’ll see a quote full of numbers and terms like strike price, premium, open interest, expiry, and many more. It can feel overwhelming at first, but once you understand each term, reading an options quote becomes simple.

Let’s understand each term with the simple example –

The example Quotes –

Nifty Call Option – as on May 10, 20XX

Nifty Put Option – as on May 10,20XX

Now let’s understand each term one by one.

1.     Instrument type -

This simply tells you what kind of contract you’re looking at. It could be an option on an index (like Nifty or Sensex) or an option on an individual stock (like ONGC, NTPC etc.)

In both quotes given above, the instrument type is “option Index” meaning these are the options on index.

2.     Underlying Asset -

This is the asset on which the option is based. The price of the option moves based on how this underlying asset moves.

Here the underlying asset is Nifty 50. So, the value of both Call and Put option depends on how the Nifty 50 index behaves.

3.     Expiry Date -

Every option has a fixed time span. The expiry date is the last day on which the option is valid. After this date, the contract ceases to exist.

Both options here expire on May 25, 20XX. This contract only remains active until that date.

4.     Option type -

This tells us two thing – whether it is a call option or put option. And the second thing is exercise style. European options can only be exercised on the expiry date itself, not before but the American options can be exercised on or before the expiry date.

The first quote is a Call European option, and the second is a Put European option. This means both can only be exercised on May 25, 20XX not before that.

5.     Strike Price -

This is the fixed predetermined price at which you have the right to buy (Call) or sell (Put) the underlying asset. It is the lock in price we discussed in our earlier post about options.

In our examples both quotes have a strike price of 18,400. This means –

The Call option gives the right to buy Nifty at 18,400 and the Put option gives the right to sell Nifty at 18,400.

6.     Premium (Open, High, Low and Close price) –

The premium is the price which a buyer or the holder of an option pays to option seller for buying the right to buy or sell. The price of the premium changes throughout the day based on demand, time left to expiry and market volatility. The open, high, low and close prices simply show how this premium moved during the trading day, just like stock’s price chary.

In our example, for the Call option, the premium opened at 125, touched a high of 130, and touched to the lowest of 93.65 and closed at 124.50 at the day end.

7.     Traded Volume -

This tells us how many contracts of that specific contract option were bought and sold during the day. Higher volume usually indicates higher trading interest and better liquidity.

In above example, the call option has 61,330 contracts traded, while the put option has 31,388 contracts traded.

8.     Open Interest (OI) -

Open interest shows the total number of contracts outstanding at the end of the day. Rising OI signals fresh money entering the market, while falling OI can indicate that the positions are being closed.

Above the Call option has an Open Interest of 14,97,650

9.     Underlying Value -

This is simply the current price of the actual index or stock the option is based on. It is the benchmark against which the strike price is compared.

In our example, the value of underlying asset is 18,315.10 or we can simply say that the nifty 50 is currently trading at this level.

10.  Lot Size -

Unlike stocks, where you can buy even one share, options are traded in fixed batches called a lot. You cannot buy or sell just one unit, you must have to trade in multiples of the lot size, which is set by the exchange for each underlying asset and revised periodically.

For example: - Nifty lot size is 65. If you buy one lot of the above Call option at the premium of rs. 124.50, your actual investment (premium paid) would be –

124.50*65 = 8,092.5

This is the real amount you have to pay not just the per unit premium that shows on the quote.