Options Trading Glossary

In investing and trading, the breakeven point is the price level at which the total cost of an investment is covered, meaning any move beyond that point would result in a profit, and any move below would result in a loss.

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Breakeven applies across different types of investments (such as shares, options, and structured products) and is calculated using the initial purchase price, plus any applicable fees and charges. In the case of options, the breakeven includes the premium paid.

In options trading:

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• For a call option, the breakeven is the strike price plus the premium paid‍
• For a put option, it’s the strike price minus the premium paid
  
  

Understanding the breakeven level may assist investors in assessing how far the underlying asset’s price would need to move before a position covers its costs.

At the money (ATM) is a term used in options trading to describe a situation where the strike price of the option is equal (or very close) to the current market price of the underlying asset.

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This can apply to both call options and put options:

• A call option is at the money when the share price equals the strike price for buying.
• A put option is at the money when the share price equals the strike price for selling.
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At-the-money options typically have the highest time value, as there's still a reasonable chance they could move into a profitable position before expiry. However, at that moment, the option has no intrinsic value - it wouldn’t result in a gain if exercised right away.

The bid price is the amount a buyer is willing to pay for a security, like a share, bond, or option. It sits on the other side of the ask price, which is the lowest amount a seller is willing to accept. Together, they form the bid-ask spread - a key part of how prices are set in live financial markets.

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Bid prices are continuously updated based on supply, demand, and trading activity. When you’re selling a security, the bid price is typically the indicative amount you might receive if you executed a sale at that moment, subject to market conditions and any associated costs. The difference between the bid and ask prices can indicate how liquid or actively traded a security is. Smaller spreads often suggest high liquidity, while wider spreads can suggest lower trading volume or greater uncertainty in pricing.

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The ask price (also known as the offer price) is the minimum price a seller is willing to accept when selling a security, such as a share or bond. It’s part of the bid-ask spread, which represents the difference between the highest price a buyer is willing to pay (the bid) and the lowest price a seller is asking for.

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The ask price is set by the market and can change throughout the day, depending on supply and demand, trading activity, and market sentiment. When an investor chooses to buy a security, they will usually pay the current ask price (or close to it), depending on the type of order used.

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Ask prices are shown in real time (or with a short delay) on trading platforms.

An American style option gives the buyer the right - but not the obligation - to buy or sell an asset at a set price at any point up to and including the expiry date.

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This is different from a European style option, which can only be exercised on expiry. The American style option offers more flexibility, which may be beneficial if market conditions move in the buyer’s favour before the option expires.

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These options are common in the US but are available toUK investors through certain brokerages and platforms, like Investa, particularly when trading stocks, ETFs or index options listed on US markets.

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Please note that the terms “American” and “European” refer to the exercise style of the option contract and do not indicate the geographic location of the investor or the underlying asset.

An American Depositary Receipt (ADR) is a negotiable security issued by a US bank that represents shares in a company based outside the United States. These receipts trade on American stock exchanges in US dollars, and provide a way for investors (including those in the UK) to gain exposure to overseas companies without directly buying shares through a foreign market.

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Instead of dealing directly with different currencies, foreign tax rules or unfamiliar exchanges, ADRs allow investors to trade international stocks in a more accessible way. Each ADR may represent one or more underlying shares of the foreign company, depending on how the bank sets it up.

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There are different types of ADRs, depending on how the company chooses to list and the level of regulatory disclosure and reporting requirements involved.

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Note: ADRs are subject to their own risks, including foreign exchange rate fluctuations, foreign dividend withholding taxes, limited liquidity, and differences in accounting, auditing and financial reporting standards between jurisdictions.