Options Glossary: P

Parity

A term used to describe an option contract's total premium when that premium is the same amount as its intrinsic value. For example, an option is ‘worth parity’ when its theoretical value is equal to its intrinsic value. An option is said to be ‘trading for parity’ when an option is trading for only its intrinsic value. Parity may be measured against the stocks last sale, bid or offer.

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.

PHLX

NASDAQ OMX PHLX

Physical delivery option

An option whose underlying entity is a physical good or commodity, like a common stock or a foreign currency. When its owner exercises that option, there is delivery of that physical good or commodity from one brokerage or trading account to another.

Pin risk

The risk to an investor (option writer) that the stock price will exactly equal the strike price at expiration (that option will be exactly at-the-money). The investor will not know how many of their written(short) options will be assigned or whether a last second move in the underlying will leave any long options in- or out-of-the-money. The risk is that on the following Monday the option writer might have an unexpected long (in the case of a written put) or short (in the case of a written call) stock position, and thus be subject to the risk of an adverse price move.

Position

The combined total of an investor's open option contracts (Calls and/or puts) and long or short stock.

Position trading

An investing strategy in which open positions are held for an extended period.

Premium

1. Total price of an option: intrinsic value plus time value.
2. Often (Erroneously) this word is used to mean the same as time value.

Primary market

For securities traded in more than one market, the primary market is usually the exchange where trading volume in that security is highest.

Profit/loss graph

A graphical presentation of the profit and loss possibilities of an investment strategy at one point in time (usually option expiration), at various stock prices.

Put option

An option contract that gives the owner the right to sell the underlying stock 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 stock from the option owner if the option is assigned.

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