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Definition of Option price

Option Price Image 1

Option price

Also called the option premium, the price paid by the buyer of the options contract for the right
to buy or sell a security at a specified price in the future.



Related Terms:

Bargain-purchase-price option

Gives the lessee the option to purchase the asset at a price below fair market
value when the lease expires.


Escalating Price Option

A nonqualified stock option that uses a sliding scale for
the option price that changes in concert with a peer group index.


Gamma

The rate of change of delta for a derivative security relative to the
price of the underlying asset; i.e., the second derivative of the option price
relative to the security price.


Implied volatility

The expected volatility in a stock's return derived from its option price, maturity date,
exercise price, and riskless rate of return, using an option-pricing model such as Black/Scholes.


Implied volatility

For an option, the variance that makes a call option price
equal to the market price. Given the option price, strike price, and other
factors, the Black-Scholes model computes implied volatility.



Lambda

The ratio of a change in the option price to a small change in the option volatility. It is the partial
derivative of the option price with respect to the option volatility.


Nonqualified Stock Option

A stock option not given any favorable tax treatment
under the Internal Revenue Code. The option is taxed when it is exercised,
based on the difference between the option price and the fair market
value of the stock on that day.


Option Price Image 2

Option premium

The option price.


Options contract

A contract that, in exchange for the option price, gives the option buyer the right, but not
the obligation, to buy (or sell) a financial asset at the exercise price from (or to) the option seller within a
specified time period, or on a specified date (expiration date).


Premium Grant

A nonqualified stock option whose option price is set substantially
higher than the current fair market value at the grant date.


Theta

Also called time decay, the ratio of the change in an option price to the decrease in time to expiration.


Time premium

Also called time value, the amount by which the option price exceeds its intrinsic value. The
value of an option beyond its current exercise value representing the optionholder's control until expiration,
the risk of the underlying asset, and the riskless return.


Abandonment option

The option of terminating an investment earlier than originally planned.


American option

An option that may be exercised at any time up to and including the expiration date.
Related: European option


American option

An option that can be exercised any time until its
expiration date. Contrast with European option.


American-style option

An option contract that can be exercised at any time between the date of purchase and
the expiration date. Most exchange-traded options are American style.


Arbitrage-free option-pricing models

Yield curve option-pricing models.


Arm's length price

The price at which a willing buyer and a willing unrelated seller would freely agree to
transact.



Asian option

option based on the average price of the asset during the life of the option.


Ask price

A dealer's price to sell a security; also called the offer price.


Barrier options

Contracts with trigger points that, when crossed, automatically generate buying or selling of
other options. These are very exotic options.


Basis price

price expressed in terms of yield to maturity or annual rate of return.


Basket options

Packages that involve the exchange of more than two currencies against a base currency at
expiration. The basket option buyer purchases the right, but not the obligation, to receive designated
currencies in exchange for a base currency, either at the prevailing spot market rate or at a prearranged rate of
exchange. A basket option is generally used by multinational corporations with multicurrency cash flows
since it is generally cheaper to buy an option on a basket of currencies than to buy individual options on each
of the currencies that make up the basket.


Bid price

This is the quoted bid, or the highest price an investor is willing to pay to buy a security. Practically
speaking, this is the available price at which an investor can sell shares of stock. Related: Ask , offer.


Binomial option pricing model

An option pricing model in which the underlying asset can take on only two
possible, discrete values in the next time period for each value that it can take on in the preceding time period.


Black-Scholes option-pricing model

A model for pricing call options based on arbitrage arguments that uses
the stock price, the exercise price, the risk-free interest rate, the time to expiration, and the standard deviation
of the stock return.


cafeteria plan a “menu” of fringe benefit options that include

cash or nontaxable benefits


Call an option

To exercise a call option.



Call option

An option contract that gives its holder the right (but not the obligation) to purchase a specified
number of shares of the underlying stock at the given strike price, on or before the expiration date of the
contract.
Call premium
Premium in price above the par value of a bond or share of preferred stock that must be paid to
holders to redeem the bond or share of preferred stock before its scheduled maturity date.


Call Option

A contract that gives the holder the right to buy an asset for a
specified price on or before a given expiration (maturity) date


call option

Right to buy an asset at a specified exercise price on or before the exercise date.


Call price

The price, specified at issuance, at which the issuer of a bond may retire part of the bond at a
specified call date.


Call price

The price for which a bond can be repaid before maturity under a call provision.


Clean price

Bond price excluding accrued interest.


Compound option

option on an option.


Consumer Price Index (CPI)

The CPI, as it is called, measures the prices of consumer goods and services and is a
measure of the pace of U.S. inflation. The U.S.Department of Labor publishes the CPI very month.


Consumer Price Index (CPI)

An index calculated by tracking the cost of a typical bundle of consumer goods and services over time. It is commonly used to measure inflation.


Conversion parity price

Related:Market conversion price


Convertible price

The contractually specified price per share at which a convertible security can be
converted into shares of common stock.


Covered or hedge option strategies

Strategies that involve a position in an option as well as a position in the
underlying stock, designed so that one position will help offset any unfavorable price movement in the other,
including covered call writing and protective put buying. Related: naked strategies


Currency option

An option to buy or sell a foreign currency.


Dealer options

Over-the-counter options, such as those offered by government and mortgage-backed
securities dealers.


Delivery options

The options available to the seller of an interest rate futures contract, including the quality
option, the timing option, and the wild card option. Delivery options make the buyer uncertain of which
Treasury Bond will be delivered or when it will be delivered.


Delivery price

The price fixed by the Clearing house at which deliveries on futures are in invoiced; also the
price at which the futures contract is settled when deliveries are made.


Devaluation A decrease in the spot price of the currency



Dirty price

Bond price including accrued interest, i.e., the price paid by the bond buyer.


Dollar price of a bond

Percentage of face value at which a bond is quoted.


Doubling option

A sinking fund provision that may allow repurchase of twice the required number of bonds
at the sinking fund call price.


Down-and-in option

Barrier option that comes into existence if asset price hits a barrier.


Down-and-out option

Barrier option that expires if asset price hits a barrier.


Effective call price

The strike price in an optional redemption provision plus the accrued interest to the
redemption date.


Elasticity of an option

Percentage change in the value of an option given a 1% change in the value of the
option's underlying stock.


Embedded option

An option that is part of the structure of a bond that provides either the bondholder or
issuer the right to take some action against the other party, as opposed to a bare option, which trades
separately from any underlying security.


Equilibrium market price of risk

The slope of the capital market line (CML). Since the CML represents the
return offered to compensate for a perceived level of risk, each point on the line is a balanced market
condition, or equilibrium. The slope of the line determines the additional return needed to compensate for a
unit change in risk.


Equity options

Securities that give the holder the right to buy or sell a specified number of shares of stock, at
a specified price for a certain (limited) time period. Typically one option equals 100 shares of stock.


European option

option that may be exercised only at the expiration date. Related: american option.


European option

An option that can be exercised only on its expiration date.
Contrast with American option.


European-style option

An option contract that can only be exercised on the expiration date.


Exercise price

The price at which the underlying future or options contract may be bought or sold.


Exercise price

The price set for buying an asset (call) or selling an asset (put).
The strike price.


Exercising the option

The act buying or selling the underlying asset via the option contract.


Exit Options

A variety of options available to an investor to recover their invested capital and the return on their investment.


Fair market price

Amount at which an asset would change hands between two parties, both having
knowledge of the relevant facts. Also referred to as market price.


Fair price

The equilibrium price for futures contracts. Also called the theoretical futures price, which equals
the spot price continuously compounded at the cost of carry rate for some time interval.


Fair price provision

See:appraisal rights.


Fixed price basis

An offering of securities at a fixed price.


Fixed-price tender offer

A one-time offer to purchase a stated number of shares at a stated fixed price,
usually a premium to the current market price.


Flat price (also clean price)

The quoted newspaper price of a bond that does not include accrued interest.
The price paid by purchaser is the full price.


Flat price risk

Taking a position either long or short that does not involve spreading.


Foreign currency option

An option that conveys the right to buy or sell a specified amount of foreign
currency at a specified price within a specified time period.


Full price

Also called dirty price, the price of a bond including accrued interest. Related: flat price.


Futures option

An option on a futures contract. Related: options on physicals.


Futures price

The price at which the parties to a futures contract agree to transact on the settlement date.


Garmen-Kohlhagen option pricing model

A widely used model for pricing foreign currency options.


Greenshoe option

option that allows the underwriter for a new issue to buy and resell additional shares.


Heavenly Parachute Stock Option

A nonqualified stock option that allows a deceased option holder’s estate up to three years in which to exercise his or her
options.


High price

The highest (intraday) price of a stock over the past 52 weeks, adjusted for any stock splits.


Incentive Stock Option

An option to purchase company stock that is not taxable
to the employee at the time it is granted nor at the time when the employee
eventually exercises the option to buy stock.


Index and Option Market (IOM)

A division of the CME established in 1982 for trading stock index
products and options. Related: Chicago Mercantile Exchange (CME).


Index option

A call or put option based on a stock market index.


Interest Option

One of several investment accounts in which your premiums may be invested within your life insurance policy.


Intrinsic value of an option

The amount by which an option is in-the-money. An option which is not in-themoney
has no intrinsic value. Related: in-the-money.


Invoice price

The price that the buyer of a futures contract must pay the seller when a Treasury Bond is delivered.


Irrational call option

The implied call imbedded in the MBS. Identified as irrational because the call is
sometimes not exercised when it is in the money (interest rates are below the threshold to refinance).
Sometimes exercised when not in the money (home sold without regard to the relative level of interest rates).


Law of one price

An economic rule stating that a given security must have the same price regardless of the
means by which one goes about creating that security. This implies that if the payoff of a security can be
synthetically created by a package of other securities, the price of the package and the price of the security
whose payoff it replicates must be equal.


law of one price

Theory that prices of goods in all countries should be equal when translated to a common currency.


Limit price

Maximum price fluctuation
Limitation on asset dispositions A bond covenant that restricts in some way a firm's ability to sell major
assets.


Limit price

Maximum price fluctuation


Liquid yield option note (LYON)

Zero-coupon, callable, putable, convertible bond invented by Merrill


Liquid yield option note (LYON)

Zero-coupon, callable, putable, convertible bond invented by Merrill Lynch & Co.


Lookback option

An option that allows the buyer to choose as the option strike price any price of the
underlying asset that has occurred during the life of the option. If a call, the buyer will choose the minimal
price, whereas if a put, the buyer will choose the maximum price. This option will always be in the money.


Low price

This is the day's lowest price of a security that has changed hands between a buyer and a seller.


Low price-earnings ratio effect

The tendency of portfolios of stocks with a low price-earnings ratio to
outperform portfolios consisting of stocks with a high price-earnings ratio.


Margin requirement (Options)

The amount of cash an uncovered (naked) option writer is required to
deposit and maintain to cover his daily position valuation and reasonably foreseeable intra-day price changes.


Market conversion price

Also called conversion parity price, the price that an investor effectively pays for
common stock by purchasing a convertible security and then exercising the conversion option. This price is
equal to the market price of the convertible security divided by the conversion ratio.


Market price of risk

A measure of the extra return, or risk premium, that investors demand to bear risk. The
reward-to-risk ratio of the market portfolio.


Market prices

The amount of money that a willing buyer pays to acquire something from a willing seller,
when a buyer and seller are independent and when such an exchange is motivated by only commercial
consideration.


Marketplace price efficiency

The degree to which the prices of assets reflect the available marketplace
information. Marketplace price efficiency is sometimes estimated as the difficulty faced by active
management of earning a greater return than passive management would, after adjusting for the risk
associated with a strategy and the transactions costs associated with implementing a strategy.


material price variance

total actual cost of material purchased
minus (actual quantity of material  standard
price); it is the amount of money spent below (favorable)
or in excess (unfavorable) of the standard price for the
quantity of materials purchased; it can be calculated based
on the actual quantity of material purchased or the actual
quantity used



 

 

 

 

 

 

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