Bare options are written or options are written when the seller has no position in the underlying security.
Selling this kind of option creates the risk that the seller may have to quickly acquire a position in the security when the option buyer wants to exercise the option.
The risk of a naked option is that the potential profit is limited, but the potential loss can lead to a loss several times greater than the largest profit that can be made.
A horizontal spread is a simultaneous long and short position in derivatives for the same underlying asset and strike price, but with different expiration dates.
Boundary conditions were used to establish the minimum and maximum possible values of call and put options prior to the introduction of binomial tree and Black-Scholes pricing models.
Deep-in-the-money options have strike prices that are significantly above or below the market price of the underlying asset and thus contain mostly intrinsic value.
Delta hedging is an options strategy that aims to be directional neutral by establishing compensating long and short positions in the same underlying asset.
The extrinsic value is the difference between the market price of an option, also known as its premium, and its intrinsic price, which is the difference between the strike price of the option and the price of the underlying asset.