Common Terms In The Derivatives Market You Need To Be Aware Of
The derivatives market can seem impenetrable to new traders. There are so many contracts and additional terms and conditions that it can be hard to know where to start. However, if you're interested in trading derivatives, you must understand the basic concepts before going further.
Here are some common terms in the derivative market you need to be aware of:
Call option
It gives the holder of the contract the right, but not the obligation, to purchase shares at a specific price on or before their expiration date. If you buy a call option, you are speculating that an underlying stock will rise in price before its expiration date.
Time Decay
Time decay is a function of theta, the Greek letter theta (θ). Theta is the amount of time value an option loses per day.
Market lot
A market lot is a specific quantity of a commodity or index that you can trade on the open market. It differs from standard lots in that it's 20% larger than what would be considered an equal quantity for everyday trading purposes.
Option writing
You can sell options at any time and at any price. The premium you earn from selling an option depends on how close it is to expiration, but the more expensive your choice is to purchase, the higher its strike price will be.
The money option
An option is said to be out of the money when its strike price (the price you can purchase or sell) is below the current asset price and above the market value of your underlying asset.
In the money put options
In the money, put options have a strike price lower than the current stock price.
In contrast to out-of-the-money puts, which can lose all value if they expire worthless while still being far away from their maximum value (they are essentially naked calls), in-the-money puts will only lose a small percentage of their value if they expire worthlessly - usually 2% or less per year depending on how risky this type of position get considered by investors who purchase them!
You need to understand the essential terms of derivatives and how they work before you start trading.
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