Futures & Options Terminologies

American Options: These types of options can be exercised any time up to expiration date.

Arbitrageurs: These are traders who buy and sell simultaneously across different markets to make profit on price differences.

Expiration Date: The date specified in the option contract, the strike date or the maturity date is called Expiration date.

European Options: These options can be exercised on expiration dates only.

Hedger: These types of traders focuses on minimizing the risk by willing to bear some costs to get protection against fluctuating prices.

Intrinsic value of an Option: Intrinsic value of a call is the amount the option is in the money(ITM). For out of the money(OTM) call, the intrinsic value is zero. Intrinsic value of a call is Max [0, (St -K)], here value of call is >0 or (St -K). Intrinsic value of put is Max [0, (K -St)]

Margin Money: Exchange will guaranty the execution by holding an amount as security from both the parties. The amount is called margin money.

Speculator: These types of traders speculates based on the direction of futures prices. Based on the time to hold positions, speculators are divided in to 3 types:

  • Scalpers – hold position for a very short time in minutes
  • Day Traders – hold position for one day
  • Position Traders – Hold position for a long time in weeks/months/years

Spot Price: It is the current market price.

Spread: The difference between the bid price (buy) and ask price(sell) is called a spread.

Strike Price: The price specified in the option contract that is to be considered on expiration is called strike price.

Tick size: This is the minimum permissible price movement from current price either of the upward/downward direction

Time value of an Option: The difference between an Option Premium and its intrinsic value is called time value of an option. When an option is at-the-money, its time value is maximum. With longer expiry time, the time value of an option becomes more. At the day of expiry, an option will have zero-time value.

Types of Orders in Stock Market

  • Time based
  • Price based

Time based:

  • Day Order (Day) – This type of order once punched remains open in exchange order book till the time it is matched for the day or it gets automatically cancelled at the end of the trading day.
  • Immediate or Cancel Order (IOC) – This type of order once release to market gets immediately executed or cancelled. Partial fill of IOC order is also possible.
  • Fill or Kill (FOK) – This type of orders when released to market either immediately gets fully filled or immediately gets cancelled. No partial fill of such orders possible.
  • Market Order – This type of order gets filled immediately unless there is pending order of opposite time at best price obtainable at the time of punching orders to market.
  • Market on Open Order (MOO) – This order allows traders to buy or sell at market open price.
  • Market on Close Order (MOC) This type of order gets executed closest to the end of the day market close
  • Good till Cancelled (GTC) – This type of order remains in order book till the time they are either filled or cancelled. To take profit on an existing position such orders are placed in market.
  • One cancels other (OCO) – When 2 orders in pair are submitted in such a way that on execution of either of the order, the other one gets cancelled. Such order pairs are called OCO orders

Price based:

  • Limit on Close Order (LOC) – This type of order is submitted towards the market close and is executed if the closing price is trading better than the limit price.
  • Stop loss Order – The stop loss order gets executed only if a specified price level is reached during trading thus resulting in stopping the loss in position of a security.
  • Market if Touched Order (MIT) – MIT orders remain open in order book until the specified trigger price is reached and then it gets submitted as market order. MIT order is different than stop loss order because MIT is placed above the current market price and stop loss order is placed below the current market price.

Following are the Greek Alphabets used in Futures and Options:

Excluding Alpha and Beta, above remaining are popularly called Option Greeks.