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Term or abbreviation Definition 
American-style option An option that can be exercised at any time prior to its expiration date. See also European-style option.
Assignment Notification by an owner of an option that they are exercising their rights under the option.
At-the-money / ATM A term that describes an option with a strike price that is equal to the current market price of the underlying commodity. The spot price is equal to the strike price.
Bearish An adjective describing the opinion that market price will decline; a negative or pessimistic outlook.
Bullish An adjective describing the opinion that market price will rise; a positive or optimistic outlook.
Call option An option contract that gives the owner the right, but not the obligation, to buy the underlying commodity at a specified price (its strike price) for a certain, fixed period (until its expiration). For the writer of a call option, the contract represents an obligation to sell the underlying product if the option is exercised.
Collar A protective strategy in which a written OTM call and a long OTM put are taken against an underlying long position and are exposed to potential falling prices. The options typically have different strike prices (put strike lower than call strike). Expiration months may or may not be the same. The investor may also use the reverse (a long OTM call combined with a written OTM put) if they have an underlying short position and are exposed to potential rising prices.
Decay A term used to describe how the theoretical value of an option erodes or declines with the passage of time. Also known as time decay.
Delivery The process of meeting the terms of a written option contract when notification of exercise or assignment has been received. 
Early exercise A feature of American-style options that allows the owner to exercise an option at any time prior to expiration.
European-style option An option that can be exercised only during a specified period just prior to expiration. See also American-style option.
Exercise To invoke the rights granted to the owner of an option contract. In the case of a call, the option owner buys the underlying commodity. In the case of a put, the option owner sells the underlying commodity.
Exercise price The price that the owner of a call option can purchase, or the owner of a put can sell, the underlying commodity. Used interchangeably with strike or strike price.
Expiration or expiry date The date that an option and the right to exercise it cease to exist.
Hedge / Hedged position A position established with the specific intent of protecting an existing underlying position against adverse price movement. In-the-money / ITM
In-the-money / ITM A term used to describe an option with intrinsic value. For vanilla options, a call option is in-the-money if the spot price of the underlying commodity is above the strike price. A put option is in-the-money if the spot price is below the strike price.
Intrinsic value The in-the-money proportion of an option's premium. See also In-the-money. An options total value is made up of intrinsic value and time value. A premium paid to purchase an out-of-the-money (OTM) is made up only of time value as there is no intrinsic value given the current spot price of the underlying commodity.
Listed option A put or call traded on an options exchange where the options have standardised terms. In contrast, over-the-counter (OTC) options usually have non-standard or negotiated terms.
Long position A strategy that profits from a price rise. The investor has an underlying exposure to a fall in commodity prices, an investor that risks losing money if spot prices fall is described as being “long” 
Mark-to-market An accounting process by which the price of financial products held in an account are valued each day to reflect the closing price. As a result, the equity in an account is updated daily to reflect current market prices.
Naked or uncovered option A situation whereby the writer of an option does not have an underlying physical position that would be closed out if the option was exercised. The writer of a call option is exposed to rising spot prices in the physical market, the writer of a put option is exposed to falling spot prices in the physical market and are described as being “uncovered or naked”
Option A contract that gives the owner the right, but not the obligation, to buy or sell a commodity at a fixed price (the strike price) for a specific period of time (until expiration). The contract also obligates the writer to meet the terms of delivery if the owner exercises the contract right. A single call or put option are sometimes called “vanilla options” as opposed to a combination of multiple options that create a structured product such as a collar.
Option writer The seller of an option contract who is obligated to meet the terms of delivery if the option owner exercises his or her right. This seller has made an opening sale transaction, has received the premium, and has not yet closed that position.
OTC option An over-the-counter option is traded in the over-the-counter market. OTC options are not listed on an options exchange and do not have standardized terms. These are to be distinguished from exchange-listed options, which are standardized.
Out-of-the-money / OTM A term used to describe an option that has no intrinsic value. The option’s premium consists entirely of time value. For vanilla options, a call option is out-of-the-money if the spot price of the underlying commodity is below its strike price. A put option is out-of-the-money if the spot price is above its strike price. See also Intrinsic value and Time value.
Owner An investor that has made an opening purchase transaction of a call or put, and has paid the premium to the option writer. The option owner now holds the ability to exercise the option anytime until the option expiry date for an American style option and at the expiry date for a European style option.
Payoff diagram A chart of the profits and losses for a particular options strategy prepared in advance of the execution of the strategy. The diagram is a plot of expected profits or losses against the price of the underlying security
Position The combined total of an investor's open option contracts (Calls and/or puts) and the long or short position of the underlying physical commodity.
Premium Total price of an option paid to the writer of the option by the owner of the option (the buyer of the put or call). 
Put option An option contract that gives the owner the right to sell the underlying commodity at a specified price (its strike price) for a certain, fixed period (until its expiration). For the writer of a put option, the contract represents an obligation to buy the underlying commodity from the option owner if the option is assigned.
Short option position The position of an option writer that represents an obligation on the part of the option's writer to meet the terms of the option if its owner exercises it. The writer can terminate this obligation by buying back (cover or close) the position with a closing purchase transaction.
Short position A strategy that profits from a price decline. An underlying exposure exists to a rise in commodity prices, an investor that risks losing money if spot prices rise is described as being “short”.
Spot price The current market price of the relevant underlying commodity that the option has been written for. 
Standardisation  Interchangeability results from standardisation. Options listed on exchanges have standardised contract terms to allow easier tradability, while over-the-counter (OTC) options generally are not standardised and are customised to the requirement of the option owner.
Strike / Strike price The price at which the owner of an option can purchase (call) or sell (put) the underlying commodity. Used interchangeably with exercise price.
Time decay A term used to describe how the part of the value of an option erodes or reduces with the passage of time. Also known as decay.
Time value The part of an option's total price that exceeds its intrinsic value. The premium of an out-of-the-money option consists entirely of time value.
Type of options The classification of an option contract as either a put or a call.
Underlying commodity The commodity that is the subject of a particular option contract. 
Volatility A measure of commodity price fluctuation. Mathematically, volatility is the annualized standard deviation of a commodity’s daily price changes. 
Write / Writer An investor that writes an option is known as the writer. This is the person who is the seller of the option (put or call) and receives the premium from the option owner (buyer of the put or call). The writer is obliged to fulfil the terms of the relevant option contract should the owner decide to exercise the option. The owner of a call option has the right, but not the obligation to buy the underlying commodity at the strike price. The writer of that call option has the obligation to sell the underlying commodity to the owner of the call should they decide to exercise. Similarly, the owner of a put option has the right, but not the obligation to sell the underlying commodity at the strike price. The writer of this put option has the obligation to buy the underlying commodity from the owner of the put should they decide to exercise.

 

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