Glossary
American exercise style
Options with American style of exercise may be exercised at any time before expiration. All equity options and a small number of index options are American style in their exercise.
Ask price
The market makers post a price at which they are willing to buy the stock or option; this is the bid price. They also post a price at which they are willing to sell the stock or option; this is the ask price. The retail trader sells at the bid price and buys at the ask price. You may negotiate a better price, but think of the bid and ask as the “retail” or maximum prices at which you buy (ask price) and minimum prices at which you sell (bid price).
Assignment
The owner of an equity option contract always has the right to exercise the option by purchasing or selling shares of the underlying stock at any time before expiration. If the option that you are short is exercised, it has been assigned to you or exercised against you.
At-the-money or ATM
An option is said to be ATM when the price of the underlying stock is near the strike price of the option, e.g., if the XYZ stock price is $126.85, the XYZ $125 call and the XYZ $130 call would be considered ATM.
Automatic exercise
All options with intrinsic value of $0.01 or more are required to be exercised on the trader’s behalf at expiration even though the trader did not request exercise. This process is called automatic exercise.
Bear call spread
A bearish position that is created by buying one call option and ...
