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Options Terminology

You know what options are — contracts that give someone the right to buy or sell shares at a set price before a deadline. Now here are the terms you’ll encounter everywhere. We’ll use a real-world example throughout: it’s January, and shares of Microsoft (MSFT) are trading at $420.

Strike Price

Section titled “Strike Price”

The strike price is the price at which the option buyer can buy (for calls) or sell (for puts) the stock. Think of it as the locked-in deal price.

A MSFT call option with a $430 strike means the buyer has the right to purchase Microsoft shares at $430 each, regardless of where the stock actually trades.

Expiration Date

Section titled “Expiration Date”

Every option has an expiration date — the deadline by which the buyer must decide whether to exercise their right. After that date, the contract is worthless.

Options can expire in a week, a month, three months, or even a year or more. The further out the expiration, the more the option typically costs — more time means more chance of a favorable move.

So “MSFT March 21 $430 Call” is a call option on Microsoft with a $430 strike price, expiring on March 21st.

Premium

Section titled “Premium”

The premium is the price of the option contract itself — what the buyer pays and the seller collects.

That MSFT March 21 $430 Call might have a premium of $8.50 per share. Since each options contract covers 100 shares, you’d pay $850 to buy one contract.

What Influences Premium

Section titled “What Influences Premium”

A few factors determine how much an option costs:

  • Distance to strike. A $425 call when the stock is at $420 costs more than a $450 call — it’s closer to being profitable.
  • Time remaining. More time until expiration means a higher premium.
  • Volatility. A stock that swings wildly will have pricier options than a sleepy utility stock.

In the Money, Out of the Money, At the Money

Section titled “In the Money, Out of the Money, At the Money”

These sound fancy but they’re simple:

  • In the money (ITM): The option has intrinsic value right now. A $410 call when MSFT is at $420 is in the money — you could buy at $410 something worth $420.
  • Out of the money (OTM): The option has no intrinsic value yet. A $430 call when MSFT is at $420 is out of the money — why buy at $430 what you can buy at $420?
  • At the money (ATM): The strike price is right around the current stock price. A $420 call when MSFT is at $420.

ITM, ATM, and OTM zones for call options

ITM, ATM, and OTM zones for put options

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