Glossary

Options

Contracts, greeks, volatility and strategies. What you need to understand before looking at a chain.

73 terms

IThe contractWhat you buy and what you commit to

American style: Can be exercised any day up to expiration. It is the norm for stock options.
Assignment: Being handed the other side of an exercise: you are made to deliver or to buy. It is the risk the option seller takes on.
ATMAt The Money: The strike sits right at the current price. It is where the contract holds the most extrinsic value and the most gamma.
Callcall option: A contract giving you the RIGHT to buy the underlying at a fixed price before a date. Buying one bets it rises; selling one bets it does not rise that much.
Contract multiplier: How many units of the underlying one contract controls. In stocks it is usually 100, so a premium of 2 costs 200.
European style: Can only be exercised on the expiration date. It is the norm for index options, and it removes early-assignment risk.
Exercise: Using the right the contract grants. The buyer decides it, not the seller.
Expirationexpiry: The date the contract stops existing. From then on it is worth only its intrinsic value, which is almost always zero.
Extrinsic valuetime value: What you pay ABOVE intrinsic value: the chance it still improves. It is the only part time destroys.
Intrinsic value: What the contract would be worth if it expired right now. Never negative: at worst, zero.
ITMIn The Money: The strike is already favourable: a call with price above it, a put below. It has intrinsic value.
Option premiumpremium · option price: What the contract costs. It is intrinsic value plus extrinsic value, and it is the most a buyer can lose.
OTMOut of The Money: The strike is not favourable yet. Everything the contract is worth is extrinsic, and that evaporates with time.
Putput option: A contract giving you the RIGHT to sell the underlying at a fixed price before a date. It is the most direct way to hedge a fall.
Strikeexercise price: The fixed price at which the contract lets you buy or sell. Choosing it changes the outcome more than getting the direction right.

IIThe underlyingThe thing everything else depends on

Cash settlement: At expiry no asset changes hands: only the cash difference is paid. Standard for index options.
Dividend: A payout to shareholders. It drops the share price on the ex-date, so it cheapens calls and richens puts.
Physical settlement: At expiry the actual shares are delivered. That is why an assignment in stocks leaves you with a position, not just a loss.
Spot pricespot: What the underlying costs right now. It is the reference for whether a strike is in or out of the money.
Underlying: The asset the contract depends on: a stock, an index, a future. The option does not exist without it.

IIITimeThe only factor that runs one way

0DTE: Contracts expiring today. All their value is extrinsic and burns in hours: the fastest-moving and the least forgiving.
DTEDays To Expiration: How many days the contract has left. It is the number that decides how much time weighs against direction.
Quarterly expirationtriple witching: The third Friday of March, June, September and December, when options and index products expire together. It concentrates volume and tends to move the market.
Rolling: Closing a contract and opening the same one at another expiry or strike. It does not fix a wrong thesis: it buys time, and time costs money.
Time decaytheta decay: The daily loss of extrinsic value. Not linear: it accelerates towards expiration and is brutal in the final week.

IVVolatilityWhat is really being bought and sold

Implied volatilityIV: The move the contract's price takes for granted between now and expiry. It is not a forecast: it is what you would have to believe for that price to be fair.
IV Percentile: What share of days in the last year had lower implied volatility than today. More robust than rank when there has been an isolated spike.
IV Rank: Where today's implied volatility sits within its range over the last year, from 0 to 100. It tells you rich or cheap FOR THAT asset, not in absolute terms.
Realised volatilityhistorical volatility: How much the underlying ACTUALLY moved. Comparing realised with implied is the central question for an option seller: is the expectation expensive?
Term structure: How implied volatility changes across expirations. When the short dates run above the long ones, the market expects an immediate scare.
VIX: The index summarising 30-day implied volatility on the S&P 500. It rises when the market pays up for protection, so it usually moves opposite to the index.
Volatility crushIV crush: The sharp drop in implied volatility right after a scheduled event. It explains how you can call an earnings move correctly and still lose.
Volatility skewskew: Far puts trading at higher implied volatility than equivalent calls. It is the price of fear: falling scares more than rising.
Volatility smile: The curve implied volatility traces across strikes. If it were flat the model would be enough; that it is not is what has to be interpreted.

VThe greeksWhat your position is sensitive to

Charmdelta decay: How much delta changes from time alone. It is what forces dealers to re-hedge without price having moved.
Delta: How much the premium moves per unit the underlying moves. It also reads as your position's equivalent exposure in shares.
Gamma: How much delta changes when price moves. It is the acceleration: high near the money and near expiry, which is why everything moves faster there.
Rho: Sensitivity to interest rates. Irrelevant on short horizons and anything but on contracts beyond a year.
Theta: What the premium loses from one day simply passing. Negative for the buyer and positive for the seller: it is the rent on time.
Vanna: How much delta changes when volatility changes. It links fear to flow: when implied volatility falls, it forces buying of the underlying.
Vega: How much the premium changes if implied volatility rises one point. It is the greek that explains losses that do not match the price move.

VIThe strategiesCombining contracts to choose your risk

Butterfly: Three strikes: a bet that price ends pinned at the middle one. It costs little and hits rarely, but pays a lot when it does.
Calendar spread: Same strike, different expirations. Sell the near one and buy the far one: a bet on time passing, not on direction.
Cash-secured put: Selling a put with the cash set aside to buy if assigned. It is committing to buy cheaper and getting paid to wait.
Collar: On shares you already hold: buy a put for protection and sell a call to pay for it. You bound the fall and the rise alike.
Covered call: Selling a call while owning the shares. You take in premium and give up the upside above the strike.
Credit spread: The vertical you get paid for on opening. You win if NOTHING happens and time works for you — but you lose more than you took in if you are wrong.
Debit spread: The vertical you pay for on opening. You need the underlying to move your way: time works against you.
Iron condor: One credit spread above and another below. You get paid for betting price stays in a range, with the loss bounded on both sides.
Long straddlestraddle: A call and a put at the same strike. It wins on a big move in either direction; it loses if the market sits still.
Long stranglestrangle: Like the straddle but with separated strikes: cheaper to open and needing a bigger move to pay.
Vertical spread: Buying and selling the same contract type at different strikes and the same expiry. It caps the maximum gain in exchange for bounding the loss.

VIIThe horizonsThe horizon changes which strategy makes sense

Event-driven trade: A position built around a known date — earnings, a macro release. What is traded is implied volatility, not the news.
LEAPS: Contracts beyond a year. Theta barely weighs and vega rules: closer to owning the asset than to trading an option.

VIIIRiskWhat can go wrong, and by how much

Break-even: The price at which the position neither wins nor loses at expiry. On a long call it is the strike plus the premium, not the strike.
Defined risk: The maximum loss is known at entry and cannot grow. Everything you buy is; spreads are too.
Early assignment: Being assigned before expiration. It only happens American-style and is triggered above all when a dividend is in play.
Margin requirement: The money the broker locks up while the position is open. It is not what you can lose: it is what you cannot use.
Pin risk: Expiring with price glued to the strike, not knowing whether you will be assigned. You can wake up on Monday holding a position you did not choose.
Undefined risk: The loss has no known ceiling, as in a naked short call. The odds of winning are high, which is what makes it tempting; the size of the failure is what ruins you.

IXThe dealersWho is on the other side and what forces their hand

Dealer gammaGEX · gamma exposure: The net sign of the gamma market makers are holding. When positive their hedging brakes price; when negative it pushes it.
Dealer hedging: The buying and selling of the underlying a market maker does to stay neutral. It is forced flow, and that is what makes it predictable.
Gamma flip: The level where dealer gamma changes sign. Above it the market tends to calm; below it, to accelerate.
Gamma wallcall wall · put wall: The strike with the most accumulated gamma. It acts as magnet and as brake, because that is where hedging piles up.
Market makerdealer: Whoever quotes both sides and keeps the spread. They do not bet on direction: they hedge what they are forced to take on.

XThe chainReading the table of contracts

Bid-ask spread: The gap between what you are paid and what you are charged. On thinly traded options it eats the profit before you start.
Max pain: The strike where the largest number of contracts would expire worthless. A statistical observation, not a prediction of where price ends up.
Mid pricemid: The point between bid and ask. A sensible reference for working the entry, not a price that fills by itself.
Open interestOI: How many contracts remain open at that strike. Unlike volume it does not reset daily: it says where positions are, not where the rush was.
Option chain: The table of every contract on an underlying, by strike and expiration. It is the map: without reading it, picking a strike is guessing.

XIThe methodThe decisions, in order

Directional thesis: What you expect the underlying to do, with a horizon and a size. Without all three you cannot choose strike or expiry: only buy for the sake of buying.
Exit plan: At what price or on what date you close, written before entering. An option can run out of time while you wait to be proved right.
Position sizing: How many contracts, decided from the maximum loss you accept. Worked out before opening; after that it is negotiating with yourself.