Overview

Options trading involves specific terminology that's important to understand. This article explains the key terms you'll encounter when trading options at Wealthsimple. Familiarizing yourself with these definitions will help you better understand how options work.

Common options terms

Here are some common terms used in options trading:

• Strike price: This is the price at which you can buy or sell the underlying stock when you exercise a long option. For a short option, it's the price at which you might be required to buy or sell the underlying stock if assigned.
• Expiry date: This is the last date you can exercise a long option or be assigned for a short option. Options contracts have a limited lifespan and expire on a specific date.
• Premium: This is the amount you pay upfront to buy a long option, or the amount you receive when you sell an option. We display premiums as a cost per share, but since one options contract represents 100 shares, the total premium is 100 times the amount per share.
• In-the-money: This term describes an option that's profitable to execute.
  • For a call option, this means the underlying stock price is above the strike price.
  • For a put option, this means the underlying stock price is below the strike price.
• At-the-money: This term describes an option where the strike price is equal to the current price of the underlying stock.
• Out-of-the-money: This term describes an option that isn't profitable to execute.
  • For a call option, this means the underlying stock price is below the strike price.
  • For a put option, this means the underlying stock price is above the strike price.
• Contract: In options, one contract usually represents 100 shares of the underlying stock. This means that when you exercise an option contract, you're agreeing to buy or sell 100 shares.

Related articles

• Enable options trading in your investing account
• Options trading fees and taxes
• Buy a long option
• Sell a long option
• Sell a covered call
• Buy to close a covered call
• Manage and close options positions
• Use auto-sell for options
• Understand options exercise and assignment
• Trade options in a margin account