Options glossary

The working vocabulary of options, in plain language. Fifty terms, cross-linked.

A B C D E G I L M N O P R S T U V W

A

American style Option contracts that can be exercised at any point between trade entry and expiration. Almost all US equity options (AAPL, SPY, QQQ) are American style. Contrast with European style options, which exercise only at expiration. Assignment When the short side of an option is exercised against by the long side, forcing the short to deliver (call) or buy (put) 100 shares at the strike. American-style options can be assigned any time before expiration. ATM At The Money. A strike that sits at or extremely close to the underlying price. Calls and puts at the same ATM strike trade with similar time value and roughly mirrored deltas.

B

Bid-ask spread The gap between the highest price a buyer is offering (bid) and the lowest price a seller will accept (ask). A round-trip trade pays the full spread. On liquid options (SPY, large caps) the spread is a few cents; on thin strikes it can be a large share of the premium and is a hidden tax on the trade. Breakeven The underlying price at which a position produces zero profit and zero loss at expiration. For a long call: strike + premium paid. For a long put: strike - premium paid. Butterfly A three-strike defined-risk structure: long one lower strike, short two middle strikes, long one higher strike. Pays maximum at the middle strike on expiration; loses the debit paid outside the wings. Variants include call butterflies, put butterflies, and the iron butterfly (one-leg-each iron condor).

C

Calendar spread Same strike, two expirations: short the near-dated leg, long the far-dated leg. Profits from the theta decay differential when the underlying stays near the strike, and from IV expansion (the longer leg has more vega than the shorter). Call A contract that gives the buyer the right to buy 100 shares of the underlying at the strike price by expiration. Long call profits when the underlying rises past strike + premium. Cash-secured put A short put backed by enough cash in the account to buy 100 shares at the strike if assigned. The income-trading equivalent of "I would buy this stock at X anyway." Yield comes from premium collected; the worst case is owning the underlying at the agreed price. Collar Long 100 shares + long a protective put below the price + short a covered call above. Caps both upside and downside; often sized so the call premium funds most of the put cost (near zero-cost collar). Used for protecting concentrated long positions through known volatility windows without selling the shares. Covered call Long 100 shares of the underlying plus a short call at a higher strike. The shares cover the delivery obligation if the call is assigned. Generates income from the call premium in exchange for giving up upside above the strike. Credit spread A vertical spread that opens with a net credit (more premium collected on the short leg than paid for the long leg). Bull put spreads and bear call spreads are credit spreads. Capped reward = credit; capped risk = wing width minus credit; theta-positive.

D

Debit spread A vertical spread that opens with a net debit. Bull call spreads and bear put spreads are debit spreads. Capped reward = wing width minus debit; capped risk = debit paid; theta-negative for the holder. Delta The Greek that measures rate of change in option price per $1 move in the underlying. Call delta sits between 0 and 1. Put delta sits between -1 and 0. Also a rough proxy for the probability that the option finishes ITM. Diagonal spread Different strike and different expiration, same option type. Combines features of a vertical (different strikes) and a calendar (different expirations). The "poor man's covered call" is a diagonal long call structure used as a capital-efficient covered call replacement. DTE Days To Expiration. Trading days are not the same as calendar days for pricing, but DTE is conventionally measured in calendar days. Theta decay accelerates as DTE drops below about 45 days for ATM options.

E

European style Option contracts that can only be exercised at expiration, never earlier. US index cash-settled options (SPX, NDX, RUT, VIX) are European style. No early-exercise risk; no pin risk because they cash-settle. Exercise When the long side of an option uses its right to trade the underlying at the strike. A long call exercises into 100 long shares at the strike. A long put delivers 100 shares at the strike: if you already own them, the position goes flat; if you do not, you become short 100 shares. Expiration The date on which the option contract ceases to exist. US equity options expire at the close of trading on the third Friday of the contract month (monthlies). Weeklies and dailies also exist on liquid underlyings.

G

Gamma The Greek that measures rate of change of delta per $1 move in the underlying. Highest for ATM options near expiration. High gamma means delta swings fast, which is why short gamma positions become risky in the final days. Greeks Risk measures derived from the option pricing model. Delta (direction), Gamma (curvature), Theta (time), Vega (volatility), Rho (rates). Together they map how a position responds to each input changing in isolation.

I

Implied Volatility Often shortened to IV. The volatility number the market is pricing into an option, back solved from current premium using the pricing model. Higher IV means richer premium. IV is forward-looking, unlike historical (realized) volatility. Intrinsic value The portion of premium that comes from the option being in the money. Call intrinsic = max(underlying - strike, 0). Put intrinsic = max(strike - underlying, 0). The rest of the premium is time value. Iron Condor A four-leg defined-risk strategy. Sell an OTM call, buy a further OTM call, sell an OTM put, buy a further OTM put. Profits if the underlying stays inside the short strikes through expiration. Pays for slow markets. ITM In The Money. Call is ITM when underlying > strike. Put is ITM when underlying < strike. ITM options carry intrinsic value plus residual time value. IV crush The sharp drop in implied volatility right after a known catalyst (most commonly earnings) resolves. The market pays up for unknowns and dumps the protection once the unknown becomes known. Long premium positions held through events often lose money even when the directional call was correct. IV rank Today's implied volatility expressed as a percentage of the 52-week high-low range. Rank 0 means at the year's low IV; rank 100 means at the year's high. A common heuristic: rank above 50 favors selling premium, rank below 30 favors buying premium.

L

Leg One option contract inside a multi-leg position. An Iron Condor has four legs. A vertical spread has two legs. Each leg has its own strike, side, and quantity.

M

Moneyness The relationship between strike and underlying price. Three states: ITM, ATM, OTM. The pricing of every Greek shifts noticeably across moneyness, especially gamma which peaks ATM.

N

Naked option A short option position not backed by shares (for short calls) or by cash (for short puts). Margin-secured. Higher capital efficiency than the covered or cash-secured variants, materially higher risk: a naked short call has theoretically unlimited loss if the underlying rallies.

O

Open interest The number of outstanding contracts at a given strike and expiration. Open interest grows when new positions open, shrinks when positions close. High open interest typically means tight bid-ask spreads and liquid order flow. OTM Out of The Money. Call is OTM when underlying < strike. Put is OTM when underlying > strike. OTM options carry no intrinsic value. All premium is time value.

P

Payoff The profit or loss of a position as a function of the underlying price at expiration. Plotted as the payoff diagram. The same structure can be evaluated at T+N (any future date before expiration) using the current Greeks. Pin risk The ambiguity around whether an at-the-money short option will be assigned over expiration. Some longs exercise, some do not; some shorts get assigned, some do not. The trader does not learn the outcome until Monday morning. Cash-settled index options (SPX, NDX) avoid pin risk because no shares change hands. Premium The price paid by the buyer and collected by the seller of an option. Quoted per share, so multiply by 100 for the contract value. A 1.25 premium on a standard option means $125 cash exchanged per contract. Protective put Long stock plus a long put on the same underlying at a chosen floor strike. Insurance against a drop in the stock; cost is the put premium. Payoff at expiration is identical to a long call at the same strike (put-call parity), with the floor sitting at strike minus premium paid. Put A contract that gives the buyer the right to sell 100 shares of the underlying at the strike price by expiration. Long put profits when the underlying falls below strike - premium.

R

Rho The Greek that measures rate of change in option price per 1% move in the risk-free interest rate. Tiny effect for short-dated options. Becomes material for LEAPS (very long-dated options).

S

Skew The pattern that out-of-the-money puts trade at higher implied volatility than equidistant calls on the same expiration. Reflects structural demand for crash protection. Steeper in equity indices and individual stocks than in commodities or currencies. Spread A position that combines two or more option legs to shape a specific payoff. Verticals, calendars, diagonals, ratios, butterflies, condors are all spreads. Defined-risk spreads have known max profit and max loss before opening. Straddle Long (or short) one call and one put at the same strike and expiration. A direction-blind bet on (or against) movement. The straddle's entry price is roughly the implied move the market is pricing in for the holding period. Strangle Like a straddle but with the call and put placed at different OTM strikes (call above spot, put below). Cheaper to open than a straddle because both legs are OTM, but requires a larger underlying move to reach profit. Strike The fixed price at which the option holder can buy (call) or sell (put) the underlying. Strikes are listed at standardized intervals that vary by underlying price and liquidity. Synthetic position A combination of instruments that replicates the payoff of a different position. Long stock plus long put behaves like a long call (protective put = synthetic call). Short put plus long call behaves like long stock (synthetic stock). Useful when the synthetic is cheaper or more capital-efficient than the original instrument.

T

Theta The Greek that measures rate of change in option price per day passing, holding everything else constant. Theta is negative for long options (decay hurts) and positive for short options (decay helps). Accelerates near expiration for ATM strikes. Time value Premium minus intrinsic value. Captures the option market's pricing of remaining time, volatility, rates, and dividends. Pure time value at OTM strikes. Decays to zero at expiration.

U

Underlying The stock, ETF, or index the option contract references. AAPL options are on Apple shares. SPY options are on the SPDR S&P 500 ETF. Some indices (SPX, NDX) settle in cash rather than shares.

V

Vega The Greek that measures rate of change in option price per 1% move in implied volatility. Long options are long vega (rising IV helps). Short options are short vega. Vega is highest for ATM strikes with more time to expiration. Vertical spread Two-leg spread on the same expiration with different strikes, both calls or both puts. Bull call, bear put, bull put, bear call are the four vertical variants. Defined risk, defined reward; the building block of most multi-leg strategies.

W

Wing A long leg that bounds the loss of a short leg in a defined-risk spread. The two outer long legs of an Iron Condor are its wings. Wider wings cost more but absorb larger underlying moves before the loss caps out.