VANILLA OPTIONS: DEFINITIONS OF PUTS, CALLS AND OTHER KEY TERMS

 

CALL OPTION: An option where the option buyer acquires the RIGHT, but not the obligation to BUY the underlying asset at a predetermined price (the STRIKE) during the term of the option or at expiration.

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PUT OPTION: An option where the option buyer acquires the RIGHT, but not the obligation to SELL the underlying asset at a predetermined price (the STRIKE).

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PREMIUM: The price of individual CALLS and PUTS, paid at inception by the option buyer to the option seller (or writer).

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UNDERLYING ASSETS: traded assets with respect to which option and derivative contracts are written, and whose values determine such contracts payouts (examples of underlying include stocks, bonds, currencies, commodities, interest rates, etc). Some contracts settle financially, with delivery of the price of the underlying instead of the underlying.

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EXPIRATION DATE: The last day on which an option contract can be exercised.

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TERM: Duration of an option contract, from inception to the expiration date.

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Vanilla options can either be exercised at any time during their term (AMERICAN) – or only on the expiration date (EUROPEAN). Some contracts list a limited number of specific exercise dates (as an example every 6 months), and are referred to as Bermudan.