Options
Premium
The price paid to buy an option contract. Determined by intrinsic value (how far ITM it is) and time value (time until expiration and implied volatility).
Premium = Intrinsic Value + Time Value
Related Terms
Call Option
A contract giving the buyer the right (not obligation) to purchase 100 shares of a stock at the strike price before expiration. Profitable when the stock rises above the strike plus premium paid.
Put Option
A contract giving the buyer the right (not obligation) to sell 100 shares at the strike price before expiration. Used as a hedge or to profit from a declining stock.
Strike Price
The fixed price at which an option contract can be exercised. Also called the exercise price.
Implied Volatility (IV)
The market's forecast of a stock's future price movement, derived from option prices. High IV = expensive options; low IV = cheap options. IV spikes before earnings.
ITM / ATM / OTM
In-the-Money (ITM): the option has intrinsic value (call: stock > strike; put: stock < strike). At-the-Money (ATM): stock price ≈ strike. Out-of-the-Money (OTM): no intrinsic value yet.
Delta
How much the option price moves per $1 move in the underlying stock. Ranges 0–1 for calls, −1–0 for puts. A delta of 0.5 means the option gains $0.50 for every $1 the stock rises.