General Options Terminology

This is a vocabulary sheet: the one-liners carry the terms, and the gotchas carry the pairs the exam likes to flip.

Which One-Liners Win Points?

• Call = the right to establish a long futures position at the strike price. Put = the right to establish a short futures position at the strike price.
• Grantor and Writer name the same party, the option seller, who collects the premium and takes the obligation if assigned.
• Exercise converts the option into the underlying futures position (long from a call, short from a put) at the strike price.
• Premium = intrinsic value plus time value, and represents the buyer's maximum loss. Intrinsic value = the in-the-money amount, never negative. Time value = premium minus intrinsic value, eroding toward zero at expiration.
• Delta = the expected premium change per one-unit move in the futures price; a call's delta runs 0 to +1, a put's 0 to -1.

How Does Moneyness Work?

• In-the-money (ITM): a call is ITM when the futures price is ABOVE the strike; a put is ITM when the futures price is BELOW the strike.
• At-the-money (ATM): the strike equals the futures price; zero intrinsic value, the same condition for calls and puts.
• Out-of-the-money (OTM): a call is OTM when the futures price is BELOW the strike; a put is OTM when the futures price is ABOVE the strike.
• Only in-the-money options have intrinsic value; at-the-money and out-of-the-money options are pure time value.

What Do the Multi-Leg and Synthetic Names Mean?

• Spread = buying one option and selling another of the SAME type (both calls or both puts), differing in strike and/or expiration.
• Straddle = a call AND a put with the same strike and expiration. Strangle = a call AND a put with different strikes but the same expiration, cheaper and needing a larger move.
• Synthetic long futures = a long call plus a short put at the same strike and expiration (delta near +1). Synthetic short futures = a short call plus a long put (delta near -1).
• Conversion = a long futures position plus a long put and a short call at the same strike and expiration, locking in a value independent of the futures price (delta near 0).

Which Gotchas Trip Students Up?

• THE BIG ONE: a call gives the right to go LONG futures; a put gives the right to go SHORT futures. This is the single most flipped pair on the exam. Do not carry over any "call equals bullish on a stock you will own" shortcut.
• Grantor equals Writer equals the option seller: one party, three names. Treating them as different roles is wrong.
• Moneyness runs OPPOSITE for calls and puts. An answer that applies the call's rule to a put is wrong.
• If a premium is larger than the in-the-money amount, the excess is time value, not extra intrinsic value.
• A straddle uses one shared strike; a strangle spreads the strikes apart. An answer that gives a straddle two different strikes is describing a strangle.

One-Breath Recap

These are options on futures: a call is the right to go long futures at the strike, a put the right to go short futures at the strike, and the Grantor or Writer, the same seller, takes the opposite obligation if assigned. Premium equals intrinsic value plus time value; only in-the-money options carry intrinsic value, a call above the strike and a put below it, with at-the-money the shared zero case. A straddle pairs a call and a put at the same strike; a strangle spreads the strikes apart for a cheaper cost and a larger required move. A synthetic long futures (long call, short put), a synthetic short futures (short call, long put), and a conversion all rest on the same fixed relationship among a call, a put, and the futures.

Need more than the recap? Read the full General Options Terminology unit.