Options Glossary
Beginner12 min read
A reference of the most important terms in options trading. Each entry is a working definition, not a textbook one — written to be useful, not exhaustive. Where a concept has a deeper treatment elsewhere on this site, you'll find a link.
A
- American Option
- An option that can be exercised at any time before expiration, not just at expiration. Most stock options in the US are American-style. The right to exercise early has value in certain situations — mainly for deep ITM puts and calls on stocks approaching an ex-dividend date. Compare with European option.
- Ask
- The lowest price at which someone is willing to sell an option. Also called the offer. You pay the ask when you buy. The difference between the bid and the ask is the spread.
- Assignment
- When an option seller is obligated to fulfill the terms of the contract because the buyer exercised. Call sellers deliver stock; put sellers buy stock. Assignment can happen at any time for American options, though it's most common near expiration or around ex-dividend dates. See The Risk of Selling Options.
- At the Money (ATM)
- An option whose strike price equals or is very close to the current price of the underlying. ATM options have the highest time value, the highest theta, and a delta near 0.50. See Moneyness.
B
- Bear Put Spread
- A bearish strategy: buy a higher-strike put and sell a lower-strike put, same expiration. Defined risk, defined reward. Profits when the stock declines. See Common Option Strategies.
- Bid
- The highest price at which someone is willing to buy an option. You receive the bid when you sell. Wide bid-ask spreads indicate low liquidity.
- Black-Scholes Model
- The foundational option pricing model published in 1973 by Fischer Black, Myron Scholes, and Robert Merton. Takes five inputs (spot, strike, time, rate, volatility) and produces a theoretical option price and Greeks. Still the industry standard for quoting implied volatility. See The Black-Scholes Model.
- Breakeven
- The underlying price at which an option trade neither makes nor loses money at expiration. For a long call: strike + premium paid. For a long put: strike − premium paid. Multi-leg strategies can have multiple breakeven points — the strategy builder calculates them automatically.
- Bull Call Spread
- A bullish strategy: buy a lower-strike call and sell a higher-strike call, same expiration. Costs less than a naked call but caps the upside. See Common Option Strategies.
- Butterfly Spread
- A neutral strategy using three strikes: buy one lower call, sell two middle calls, buy one upper call. Profits when the stock stays near the middle strike. Low cost, narrow profit zone. See Common Option Strategies.
C
- Calendar Spread
- A strategy that sells a near-term option and buys a longer-term option at the same strike. Profits from the difference in time decay between the two expirations. Also called a time spread or horizontal spread. See Common Option Strategies.
- Call Option
- A contract giving the holder the right to buy the underlying asset at the strike price before expiration. Buyers profit when the price rises. See Calls vs Puts Explained.
- Closing a Position
- Exiting an existing trade by making the opposite transaction. If you bought a call to open, you sell that same call to close. You don't need to wait for expiration — most option trades are closed before expiry.
- Contract
- One option contract typically represents 100 shares of the underlying stock. When an option is quoted at $3.00, one contract costs $300.
- Conversion
- An arbitrage strategy: long stock, long put, short call — all at the same strike. If put-call parity holds, a conversion returns the risk-free rate. Used by market makers to keep prices aligned.
- Covered Call
- Selling a call option against stock you already own. Generates income from the premium but caps your upside at the strike. One of the most conservative option strategies. See Common Option Strategies.
D
- Decay
- See Theta and Time Value.
- Deep In the Money
- An option with significant intrinsic value — the underlying is far past the strike. A $80 call on a $110 stock is deep ITM. Deep ITM options have deltas near 1.0 (calls) or −1.0 (puts) and behave almost like stock.
- Deep Out of the Money
- An option where the underlying is far from the strike. A $130 call on a $100 stock is deep OTM. These options are cheap, have low deltas, and a low probability of finishing in the money.
- Delta (Δ)
- The rate of change of an option's price relative to a $1 move in the underlying. Also approximates the probability of finishing in the money. Call deltas range from 0 to 1; put deltas from 0 to −1. See The Greeks Explained.
- Dividend Yield
- The annualized dividend payment expressed as a percentage of the stock price. Dividends reduce call values and increase put values because the stock price drops on the ex-dividend date. Included as an input in the pricer.
E
- European Option
- An option that can only be exercised at expiration, not before. Index options (like SPX) are typically European-style. The Black-Scholes model prices European options in its original form.
- Exercise
- The act of using your right as an option holder. Exercising a call means buying the underlying at the strike. Exercising a put means selling at the strike. Most traders close their positions instead of exercising — it's usually more capital-efficient.
- Expiration
- The date on which an option contract ceases to exist. After expiration, the option can no longer be exercised. Options that finish in the money are typically auto-exercised by the broker.
- Extrinsic Value
- See Time Value.
G
- Gamma (Γ)
- The rate of change of delta relative to a $1 move in the underlying. Measures how quickly your directional exposure shifts. Highest for ATM options near expiration. Positive gamma benefits from movement; negative gamma is hurt by it. See The Greeks Explained.
- Greeks
- A set of risk measures that describe how an option's price responds to changes in various factors. The five standard Greeks are Delta, Gamma, Theta, Vega, and Rho. See The Greeks Explained.
H
- Hedge
- A position taken to reduce or offset the risk of another position. Buying a put to protect a stock holding is a hedge. Delta hedging means adjusting stock holdings to neutralize the directional exposure of an option position.
- Historical Volatility (HV)
- The actual, measured volatility of the underlying over a past period. Calculated from the standard deviation of daily returns, then annualized. Compare with Implied Volatility. See Understanding Implied Volatility.
I
- Implied Volatility (IV)
- The level of future volatility priced into an option's market price. Derived by solving the Black-Scholes formula backward — given the option's price, what volatility makes the model match? Higher IV means more expensive options. See Understanding Implied Volatility.
- In the Money (ITM)
- A call is ITM when the underlying is above the strike. A put is ITM when the underlying is below the strike. ITM options have intrinsic value. See Moneyness.
- Intrinsic Value
- The portion of an option's price that reflects its immediate exercise value. For a call: max(stock − strike, 0). For a put: max(strike − stock, 0). An option is worth at least its intrinsic value. See Intrinsic vs Time Value.
- Iron Condor
- A neutral strategy combining a short put spread and a short call spread. Profits when the stock stays within a range. Defined risk on both sides. See Common Option Strategies.
- IV Crush
- A sharp drop in implied volatility, typically after an anticipated event like earnings. Options lose value rapidly even if the stock moves favorably, because the uncertainty that was priced in has been resolved. See Understanding Implied Volatility.
- IV Rank / IV Percentile
- Measures where current implied volatility sits relative to its historical range. An IV rank of 80% means current IV is higher than 80% of observations over the lookback period. Useful for deciding whether options are relatively expensive or cheap.
L
- LEAPS
- Long-Term Equity Anticipation Securities — options with expirations more than a year out. LEAPS behave more like stock due to high delta and significant time value. Interest rate sensitivity (rho) matters more for LEAPS than for short-dated options.
- Leg
- One component of a multi-leg option strategy. An iron condor has four legs. Each leg is an individual option contract.
- Liquidity
- How easily an option can be bought or sold at a fair price. Measured by bid-ask spread, volume, and open interest. Illiquid options have wide spreads and make it expensive to enter and exit positions.
- Long
- Owning an option or stock. "Long the $100 call" means you bought it. Long positions in options benefit from favorable movement and lose from time decay (for buyers).
M
- Margin
- Collateral required by a broker to cover potential losses when selling options. Margin requirements increase as positions move against you. Insufficient margin leads to forced liquidation. See The Risk of Selling Options.
- Mark
- The midpoint between the bid and the ask. Often used as a fair-value estimate when the spread is narrow. Less reliable when spreads are wide.
- Max Loss
- The worst-case loss of a trade. For option buyers, it's the premium paid. For defined-risk spreads, it's the width of the spread minus premium received. For naked sellers, it can be unlimited (calls) or substantial (puts). The strategy builder shows max loss for any strategy.
- Max Profit
- The best-case outcome of a trade. For option buyers, it's theoretically unlimited (calls) or strike minus premium (puts). For credit strategies, it's the premium received.
- Moneyness
- Describes the relationship between the underlying price and an option's strike. The three states: in the money (ITM), at the money (ATM), and out of the money (OTM). See Moneyness.
N
- Naked Option
- A sold option without an offsetting position in the underlying or another option. Naked calls have theoretically unlimited risk. Naked puts risk the full strike price minus premium. See The Risk of Selling Options.
- Net Debit / Net Credit
- The net cash flow when entering a trade. A debit strategy costs money to enter (you pay more for what you buy than you receive for what you sell). A credit strategy brings in cash upfront.
O
- Open Interest
- The total number of outstanding option contracts at a given strike and expiration. High open interest indicates liquidity. Changes daily as new positions are opened and existing ones are closed.
- Option Chain
- A table showing all available options for a given underlying, organized by expiration and strike. Displays bid, ask, volume, open interest, and implied volatility for each contract.
- Out of the Money (OTM)
- A call is OTM when the underlying is below the strike. A put is OTM when the underlying is above the strike. OTM options have zero intrinsic value — their entire price is time value. See Moneyness.
P
- Payoff Diagram
- A chart showing the profit or loss of an option position at various underlying prices, typically at expiration. Essential for visualizing the risk/reward profile of any strategy. The strategy builder generates these automatically.
- Pin Risk
- The risk that a stock closes very near a short option's strike at expiration, creating uncertainty about whether assignment will occur. Particularly problematic for short straddles and strangles.
- Protective Put
- Buying a put on stock you already own as a hedge against downside risk. Acts as a price floor for your shares. See Common Option Strategies.
- Put Option
- A contract giving the holder the right to sell the underlying asset at the strike price before expiration. Buyers profit when the price falls. See Calls vs Puts Explained.
- Put-Call Parity
- The fundamental pricing relationship between calls and puts at the same strike and expiration: Call − Put = Stock − Strike × e−rT. If this doesn't hold, an arbitrage opportunity exists. See Put-Call Parity.
R
- Reversal
- The opposite of a conversion: short stock, short put, long call at the same strike. Another arbitrage structure used by market makers to enforce put-call parity.
- Rho (ρ)
- The sensitivity of an option's price to a 1% change in the risk-free interest rate. Mostly negligible for short-dated options; more relevant for LEAPS. See The Greeks Explained.
- Risk-Free Rate
- The theoretical return on a riskless investment, typically approximated by Treasury bill yields. An input to the Black-Scholes model and the pricer. Usually set around 4–5% in current market conditions.
- Roll
- Closing an existing option position and simultaneously opening a new one at a different strike, expiration, or both. Rolling a covered call forward means buying back the expiring short call and selling a new one further out.
S
- Settlement
- How an option is resolved at expiration. Physical settlement means actual delivery of the underlying (most stock options). Cash settlement means payment of the difference between the strike and the underlying's settlement price (most index options like SPX).
- Short
- Having sold an option you don't own — creating an obligation. "Short the $100 call" means you sold it. Short option positions collect premium but take on risk of adverse moves.
- Spread
- A strategy involving two or more options. Vertical spreads use different strikes at the same expiration. Horizontal (calendar) spreads use the same strike at different expirations. Diagonal spreads differ in both strike and expiration. Also refers to the bid-ask spread on a quote.
- Straddle
- A volatility strategy: buy a call and a put at the same ATM strike. Profits from a large move in either direction. Expensive to enter because you're buying two ATM options. See Common Option Strategies.
- Strangle
- Similar to a straddle but using OTM strikes: buy an OTM call and an OTM put. Cheaper than a straddle but requires a larger move to profit. See Common Option Strategies.
- Strike Price
- The price at which the option holder can buy (call) or sell (put) the underlying asset. Also called the exercise price. The strike determines moneyness and is a key input to any pricing model.
- Synthetic Position
- A position created by combining options and/or stock to replicate the payoff of another instrument. A long call plus a short put at the same strike behaves like long stock. See Put-Call Parity.
T
- Theta (Θ)
- The rate at which an option loses value per day due to the passage of time, all else equal. Negative for long options (time works against you), positive for short options (time works for you). Accelerates as expiration approaches. See The Greeks Explained.
- Time Decay
- The erosion of an option's time value as expiration approaches. Driven by theta. Non-linear — slow at first, rapid near expiration. See Intrinsic vs Time Value.
- Time Value
- The portion of an option's price above its intrinsic value. Reflects the probability that the option will gain more value before expiration. Driven by time remaining, volatility, and moneyness. See Intrinsic vs Time Value.
U
- Underlying
- The asset on which an option is based. For stock options, the underlying is the stock. For index options, it's the index. The underlying's price is the primary driver of an option's value.
V
- Vega (ν)
- The sensitivity of an option's price to a 1 percentage point change in implied volatility. Highest for ATM, long-dated options. Positive for long options, negative for short options. See The Greeks Explained.
- VIX
- The CBOE Volatility Index — measures the implied volatility of S&P 500 index options over the next 30 days. Often called the "fear index" because it spikes during market selloffs. Not directly tradeable, but VIX futures and options exist.
- Volatility
- A measure of how much the underlying's price fluctuates. Historical volatility measures past movement; implied volatility reflects the market's expectation of future movement. Volatility is the single most important driver of option prices after the underlying itself. See Understanding Implied Volatility.
- Volatility Skew
- The pattern of implied volatility varying across strikes. In equities, OTM puts typically have higher IV than OTM calls — reflecting demand for downside protection. Also called the volatility smile or smirk depending on the shape. See Understanding Implied Volatility.
- Volatility Surface
- The three-dimensional representation of implied volatility across both strikes and expirations. Shows how the market prices risk at different points. Professional traders calibrate pricing models to fit the observed surface.
- Volume
- The number of contracts traded during a given period. High volume indicates active interest and typically better liquidity. Distinct from open interest, which measures outstanding positions.
W
- Writer
- The seller of an option. The writer receives the premium and takes on the obligation to buy (put writer) or sell (call writer) the underlying if the option is exercised. See The Risk of Selling Options.
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