Business Glossary

person or financial institution that sells put and call options. A writer of a put option contracts to buy 100 shares of stock from the put option buyer by a certain date for a fixed price. For example, an option writer who sells XYZ April 50 put agrees to buy XYZ stock from the put buyer at $50 a share any time until the contract expires in April.

A writer of a call option, on the other hand, guarantees to sell the call option buyer the underlying stock at a particular price before a certain date. For instance, a writer of an XYZ April 50 call agrees to sell stock at $50 a share to the call buyer any time before April.

In exchange for granting this right, the option writer receives a payment called an option premium. For holders of large portfolios of the premiums from stocks, option writing therefore is a source of additional income.

term used to describe an option whose strike price for a stock is either higher than the current market value, in the case of a call, or lower, in the case of a put . For example, an XYZ December 60 call option would be out of the money when XYZ stock was selling for $55 a share. Similarly, an XYZ December 60 put option would be out of the money when XYZ stock was selling for $65 a share.

Someone buying an out-of-the-money option hopes that the option will move in the money, or at least in that direction. The buyer of the above XYZ call would want the stock to climb above $60 a share, whereas the put buyer would like the stock to drop below $60 a share.

1. option to buy (or call) an asset at a specified price within a specified period.
2. right to buy 100 shares of stock at a specified price within a specified period.See also option.
3. process of redeeming a bond or preferred stock issue before its normal maturity. A security with acall provision typically is issued at an interest rate higher than one without a call provision. This is because investors demand it-they look at yield-to-call rather than yield-to-maturity.

option contract on a stock whose current market price is above the striking price of a call option or below the striking price of a put option. A call option on XYZ at a striking price of 100 would be in the money if XYZ were selling for 102, for instance, and a put option with the same striking price would be in the money if XYZ were selling for 98.

option contracts that are variations on simple puts and calls or are different products with optionality built into them. Exotic options are available in various asset classes on which options are available, but are mostly found in the foreign exchange market. A common example is the barrier option, which itself comes in various forms such as knock-in options and knock-out options (and reversed versions of both) that can be either single-barrier options or double-barrier options. What those terms refer to and what barrier options have in common are one or two trigger prices that, if touched, will cause an option with predetermined characteristics to be created (knock-in option) or will cause an existing option to cease to exist (knock-out option). A double-barrier option has barriers on either side of the exercise price (i.e., one trigger price is higher than the strike price and the other is lower), whereas a single-barrier option has one trigger price that may be higher or lower than the strike price. Barrier options, because they risk either not being knocked in, or being knocked out, are cheaper than ordinary puts and calls, and a double knockout option is cheaper than a single knockout option.

Other examples of exotic options: basket options, which give the owner the right to receive two or more designated foreign currencies in exchange for a base currency, either at a prearranged rate of exchange or at the prevailing spot market rate; compound options, which are options on options, whereby the holder has the right to purchase another option at a pre-set date, at a pre-set option premium (a put on a call or a call on a put or a put on a put or a call on a call), and are used by corporations to hedge the foreign exchange risk of an uncertain acquisition or by speculators to bet on the volatility of volatility; Bermuda options, which combine the attributes of an american-style option and a european-style exercise; all-ornothing options that pay out a set amount if the underlying asset price is above or below the exercise price at the time of expiration; best-of-two options that pay off based on the independent performances of two different securities or indexes, or better-of-two options that pay off on the better performing of two underlying assets or indexes; and others.

option for which the buyer or seller has no underlying security position. A writer of a naked call option, therefore, does not own a long position in the stock on which the call has been written. Similarly, the writer of a naked put option does not have a short position in the stock on which the put has been written. Naked options are very risky-although potentially very rewarding. If the underlying stock or stock index moves in the direction sought by the investor, profits can be enormous, because the investor would only have had to put down a small amount of money to reap a large return. On the other hand, if the stock moved in the opposite direction, the writer of the naked option could be subject to huge losses.

For instance, if someone wrote a naked call option at $60 a share on XYZ stock without owning the shares, and if the stock rose to $70 a share, the writer of the option would have to deliver XYZ shares to the call buyer at $60 a share. In order to acquire those shares, he or she would have to go into the market and buy them for $70 a share, sustaining a $10-a-share loss on his or her position. If, on the other hand, the option writer already owned XYZ shares when writing the option, he or she could just turn those shares over to the option buyer. This latter strategy is known as writing a covered call.

contract backed by owning the stock underlying the option. Assume the owner of 500 shares of XYZ writes (sells) 5 XYZ call options. The seller now has a covered option position. If the price of the stock rises and there is an exercise of the option, the seller has the stock to deliver to the purchaser. If the seller did not own the shares, he or she would be termed a naked writer.

call option whose exercise price is well below the market price of the underlying stock (deep in the money) or well above the market price (deep out of the money). The situation would be exactly the opposite for a put option. The premium for buying a deep-in-the-money option is high, since the holder has the right to purchase the stock at a striking price considerably below the current price of the stock. The premium for buying a deep-out-of-the-money option is very small, on the other hand, since the option may never be profitable.

acronym for Long-Term Equity AnticiPation Securities, LEAPS are long-term equity options traded on U.S. exchanges and over the counter. Instead of expiring in two near-term and two farther out months as most equity options do, LEAPS expire in two to five years, giving the buyer a longer time for his strategy to come to fruition. LEAPS are traded on many individual stocks listed on the New York Stock Exchange, the American Stock Exchange, and NASDAQ.

to combine a call and put on the identical stock with the same expiration date and strike price. It is employed to take advantage of significant variability in stock price. High beta (a measure of volatility) stocks might be most suited for this. A significant price movement on one side will cover the cost of obtaining the options.

at the current price, as an option with an exercise price equal to or near the current price of the stock or underlying futures contract.

term used to describe an option whose strike price for a stock is either higher than the current market value, in the case of a call, or lower, in the case of a put . For example, an XYZ December 60 call option would be out of the money when XYZ stock was selling for $55 a share. Similarly, an XYZ December 60 put option would be out of the money when XYZ stock was selling for $65 a share.

Someone buying an out-of-the-money option hopes that the option will move in the money, or at least in that direction. The buyer of the above XYZ call would want the stock to climb above $60 a share, whereas the put buyer would like the stock to drop below $60 a share.

1. measure of the relationship between an option price and the underlying futures contract or stock price. For a call option, a delta of 0.50 means a half-point rise in premium for every dollar that the stock goes up. For a put option contract, the premium rises as stock prices fall. As options near expiration, in-the-money contracts approach a delta of 1.
2. on the London Stock Exchange, delta stocks were the smallest capitalization issues before the system was replaced with today's Normal Market Size.

option contract on a stock whose current market price is above the striking price of a call option or below the striking price of a put option. A call option on XYZ at a striking price of 100 would be in the money if XYZ were selling for 102, for instance, and a put option with the same striking price would be in the money if XYZ were selling for 98.

choice of one of the following available to a life insurance policyowner (or beneficiary, if entitled to receive a death benefit in a lump sum at the death of an insured):

1. interest option-death benefit left on deposit at interest with the insurance company with earnings paid to the beneficiary annually. The beneficiary can withdraw part or all of the principal of the death proceeds, subject to any restrictions the policyowner may have placed on this option.
2. fixed amount option-death benefit paid in a series of fixed amount installments until the proceeds and interest earned terminate.
3. fixed period option-death benefit left on deposit with the insurance company with the death benefit plus interest thereon paid out in equal payments for the period of time selected.
4. life income option-death benefit plus interest paid through a life annuity. Income continues under a straight life income option,as long as the beneficiary lives; or whether or not the beneficiary lives, under a life income with period certainoption.