The net amount an investor or trader will pay for selling one option, and purchasing another. The combination can include any number of puts and calls and their respective position in each.The net option premium can either be positive, which represents a net cash outflow, or a negative number, which represents a net cash inflow. For example, assume an investor wants to take a synthetic covered call position in a particular stock. If the investor pays $2.50 per lot for a put option with a strike price of $55, and then sells a call option at the same strike price for $1.00 per lot. The net option premium in this example is $1.50. If, on the other hand, the investor pays $0.50 per lot for a put option with the same strike price, and sells a call option for $1.00 per lot, then there will be a net cash inflow (a negative net option premium) of $0.50.
In the context of options and futures, it's the month closest to delivery (futures) or expiration (options). Sometimes referred to as nearest month or spot month.
A way of quoting options prices through a list of all of the options for a given security. For each underlying security, the option chain tells investors the various strike prices, expiration dates, and whether they are calls or puts.
The process of granting an option that is dated prior to the date that the company granted that option. In this way, the exercise price of the granted option can be set at a lower price than that of the company's stock at the granting date. This process makes the granted option in-the-money and of value to the holder. This process occurred when companies were only required to report the issuance of stock options to the SEC within two months of the grant date. Companies would simply wait for a period in which the company's stock price fell to a low and then moved higher within a two-month period. The company would then grant the option but date it at or near its lowest point. This is the granted option that would be reported to the SEC.The act of options backdating has become much more difficult as companies are now required to report the granting of options to the SEC within two business days. This adjustment to the filing window came in with the Sarbanes-Oxley legislation.
A stock that has options trading on a market exchange. Not all companies that trade publicly have exchange traded options, this is due to requirements that need to be met, such as minimum share price and minimum outstanding shares. This allows investors to purchase options on the underlying stock, giving them the right to buy or sell shares of the optionable stock at a set price. The easiest way to check whether a stock is optionable is to go to the Chicago Board Options Exchange website and check whether there are options listed for a particular stock.
A specific set of calls or puts on the same underlying security, in the same class and with the same strike price and expiration date. An option series is a certain contract traded on a particular exchange. For example, all ABC July puts would make up an options series.
A list of options grants to an employee or employees of a company that contain the date and size (in shares) of each grant, as well as the expiration date, exercise price and vesting schedule. Option schedules for high-level officers and directors of a public company must be reported to the SEC and are also typically shown on 10-Q and 10-K filings for the company. While the option schedule is most important to the company itself for maintaining proper accounting records, investors are also interested in the option schedule because it provides a window into current and future liabilities. It also shows the potential that common shares will become diluted, as exercised stock options add to the total outstanding share count.There have been many changes in recent years as to how employee stock options may be granted, reported and presented to investors. In the wake of options backdating scandals and other accounting shenanigans, investors are paying more attention than ever to this lucrative form of employee compensation.
Any model- or theory-based approach for calculating the fair value of an option.The most commonly used models today are the Black-Scholes model and the binomial model. Both theories on options pricing have wide margins for error because their values are derived from other assets, usually the price of a company's common stock. Time also plays a large role in option pricing theory, because calculations involve time periods of several years and more. Marketable options require different valuation methods than non-marketable ones, such as those given to company employees. How stock options should be valued has become an important debate in the past few years because U.S. companies are now required to expense the cost of employee stock options on their earnings statements. For many young companies trading on the stock exchanges today, this expense will be considerable no matter what valuation methods are used. The need for consistent and accurate treatment of this increasing expense provides incentive for the creation of new and innovative solutions to option pricing theory.
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