Options Trading Glossary
This glossary defines 81 options trading terms in plain English, from calls and puts to the Greeks, implied volatility and assignment. Each term has a one-sentence definition first, then more detail and an example.
0
0DTE
0DTE options are options traded on their expiration day — zero days to expiration.
They have extreme gamma and theta: prices can swing to zero or multiply within hours.
A
American-style option
An American-style option can be exercised at any time up to expiration.
Almost all US stock and ETF options are American-style, which means short positions carry early-assignment risk.
Assignment
Assignment is when an option seller is required to fulfil the contract after the buyer exercises.
A short call seller must deliver shares at the strike; a short put seller must buy shares at the strike. Assignment is allocated randomly among short holders.
At the money (ATM)
An option is at the money when its strike is equal or very close to the underlying's current price.
ATM options carry the most time value and have a delta near 0.50. Theta and gamma are typically highest here.
B
Bid-ask spread
The bid-ask spread is the gap between the highest price buyers pay (bid) and the lowest price sellers accept (ask).
Wide spreads are a hidden cost. Liquid options often have spreads of a few cents; illiquid ones can be much wider.
Example: Bid $1.00, ask $1.20 → spread $0.20 ($20 per contract).
Black-Scholes model
The Black-Scholes model is a formula that estimates a European option's fair value from price, strike, time, volatility and rates.
It assumes constant volatility and lognormal prices, so real prices differ, but it underpins most Greeks calculations.
Breakeven
Breakeven is the underlying price at expiration where a position neither makes nor loses money.
For a long call it's strike plus premium; for a long put it's strike minus premium.
Example: $50 call bought for $2 → breakeven $52.
Buying power
Buying power is the amount your broker lets you commit to new positions.
Short options and spreads reduce buying power by their margin requirement.
C
Calendar spread
A calendar spread sells a near-term option and buys a longer-dated one at the same strike.
It profits from faster decay in the near option and from rising IV in the back month.
Call option
A call option gives its buyer the right to buy 100 shares of the underlying at the strike price until expiration.
Buyers of calls profit when the underlying rises above the strike plus the premium paid. Sellers of calls collect the premium and must deliver shares if assigned. Calls are used for bullish bets, covered-call income and hedging short stock.
Example: A $100 call bought for $3 breaks even at $103 at expiration.
Put optionStrike priceLong Call strategy →Covered Call strategy →
Cash settlement
Cash settlement pays the option's intrinsic value in cash at expiration instead of delivering shares.
Common for index options; there's no stock position after expiry.
Cash-secured
Cash-secured means holding enough cash to buy the shares if a short put is assigned.
A cash-secured put requires strike × 100 in cash per contract.
Example: Selling a $40 put needs $4,000 set aside.
Cash-secured put
A cash-secured put is selling a put while holding the cash to buy the shares if assigned.
It pays you to wait for a lower entry price, with risk similar to owning the stock.
Collar
A collar owns shares, buys a protective put and sells a covered call to help pay for it.
It limits both downside and upside, sometimes at near-zero net cost.
Contract multiplier
The contract multiplier is the number of shares one option contract controls, normally 100 for US stock options.
Multiply the quoted premium and any per-share profit or loss by the multiplier to get dollar values. Adjusted contracts after splits or mergers can have a different multiplier.
Example: Premium $2.40 × 100 = $240.
Covered
A covered option is a short option backed by an offsetting position, such as owning shares against a short call.
Covering limits risk: a covered call's worst case is owning shares that fall, not unlimited loss.
Covered call
A covered call is owning 100 shares and selling a call against them to collect premium.
It adds income and lowers breakeven slightly but caps upside at the strike.
Credit spread
A credit spread sells one option and buys a further OTM one, collecting a net credit.
Max profit is the credit; max loss is the width minus the credit.
Debit spreadBull Put Spread strategy →Bear Call Spread strategy →
D
Debit spread
A debit spread buys one option and sells a cheaper one in the same expiration, paying a net debit.
Risk is limited to the debit; profit is capped at the spread width minus the debit.
Credit spreadVertical spreadBull Call Spread strategy →Bear Put Spread strategy →
Delta
Delta estimates how much an option's price changes for a $1 move in the underlying.
Calls have delta from 0 to 1, puts from 0 to −1. Delta is also a rough estimate of the probability of finishing in the money.
Example: A 0.40-delta call gains about $0.40 if the stock rises $1.
Diagonal spread
A diagonal spread sells a near-term option and buys a longer-dated one at a different strike.
It combines a calendar's time-decay edge with a directional bias.
E
Early assignment
Early assignment is being assigned on a short American-style option before its expiration date.
It usually happens when the option is deep ITM with little time value left, or before an ex-dividend date for short calls.
European-style option
A European-style option can only be exercised at expiration.
Many index options such as SPX are European-style and cash-settled, which removes early-assignment risk.
Ex-dividend date
The ex-dividend date is the first day a stock trades without its upcoming dividend.
Short ITM calls are more likely to be assigned the day before, as holders exercise to capture the dividend.
Exercise
Exercising means the option holder uses the right to buy (call) or sell (put) the underlying at the strike.
Most retail traders close options instead of exercising, because selling the option captures any remaining time value. ITM options are often exercised automatically at expiration.
Expected move
The expected move is the one-standard-deviation price range implied by options for a given expiration.
Roughly: price × IV × √(days/365). The ATM straddle price gives a quick approximation.
Example: $100 stock, IV 30%, 30 days → about ±$8.60.
Expiration date
The expiration date is the last day an option can be exercised; after it, the contract stops existing.
Most US equity options expire on Fridays. Weekly, monthly and quarterly cycles exist. The closer the expiration, the faster time value decays.
Extrinsic value
Extrinsic value is the part of an option's premium above its intrinsic value, reflecting time and volatility.
Extrinsic value shrinks to zero by expiration. Higher implied volatility and more time increase it.
Example: Premium $10, intrinsic $8 → extrinsic $2.
G
Gamma
Gamma measures how fast delta changes when the underlying moves $1.
Gamma is highest for ATM options near expiration, which makes short positions there sensitive to sharp moves.
H
Historical volatility (HV)
Historical volatility measures how much the underlying actually moved over a past period.
Comparing IV with HV helps judge whether options look expensive or cheap.
I
Implied volatility (IV)
Implied volatility is the market's forecast of how much the underlying may move, backed out of option prices.
Higher IV means pricier options. IV often rises before events like earnings and falls afterwards.
In the money (ITM)
An option is in the money when it has intrinsic value: a call with strike below the price, or a put with strike above it.
ITM options cost more, have higher delta and behave more like the stock. They are more likely to be exercised at expiration.
Example: With the stock at $105, the $100 call is $5 in the money.
Index options
Index options are options on a market index such as the S&P 500 (SPX).
Many are cash-settled and European-style.
Intrinsic value
Intrinsic value is the amount an option is in the money: price minus strike for calls, strike minus price for puts, never below zero.
It is what the option would be worth if exercised right now. At expiration, an option is worth only its intrinsic value.
Example: Stock $108, $100 call: intrinsic value $8.
Iron butterfly
An iron butterfly sells an ATM straddle and buys OTM wings for protection.
It collects a larger credit than an iron condor but has a narrower profit zone.
Iron condor
An iron condor sells an OTM put spread and an OTM call spread in the same expiration.
It profits when the underlying stays between the short strikes and has defined risk on both sides.
IV percentile
IV percentile is the share of days over the past year when IV was lower than today.
Unlike IV rank, it isn't distorted by a single extreme spike.
IV rank
IV rank shows where current implied volatility sits between its 52-week low (0) and high (100).
A high IV rank suggests options are expensive relative to the past year, which some traders use to favour selling premium.
Example: IV 30%, 1-year range 20–60% → IV rank 25.
L
LEAPS
LEAPS are long-dated options with more than a year until expiration.
They decay slowly and are often used as a stock substitute.
Legging in
Legging in means entering a multi-leg position one leg at a time instead of as a single order.
It can improve price but adds risk if the market moves between fills.
Limit order
A limit order sets the maximum price you'll pay or the minimum you'll accept.
Limit orders are the standard way to trade options because spreads can be wide and prices move quickly.
Long
Being long means you bought the position and benefit if its value rises.
A long option has risk limited to the premium paid.
M
Margin
Margin is collateral a broker requires to hold certain positions, especially short options.
Margin requirements vary by broker and can rise suddenly in volatile markets.
Max loss
Max loss is the most a position can lose.
Defined-risk strategies have a known max loss at entry; naked short calls do not.
Max profit
Max profit is the most a position can make, which may be capped or unlimited.
Long calls have unlimited max profit; credit spreads are capped at the credit received.
Mid price
The mid price is the halfway point between the bid and the ask.
Placing a limit order near the mid often gets filled at a better price than the ask.
Moneyness
Moneyness describes where a strike sits relative to the underlying price: in, at or out of the money.
Moneyness drives delta, cost and probability of finishing in the money. Traders often describe strikes by delta instead (e.g. a 30-delta put).
N
Naked
A naked option is a short option without an offsetting position.
Naked calls have theoretically unlimited risk and require the highest approval level and margin.
O
Open interest
Open interest is the number of option contracts currently open for a given strike and expiration.
High open interest usually means better liquidity. It updates once per day, unlike volume.
Option
An option is a contract giving the buyer the right, but not the obligation, to buy or sell an asset at a set price before a set date.
Options are derivatives: their value comes from an underlying asset such as a stock or ETF. The buyer pays a premium for the right; the seller collects that premium and takes on the obligation if the buyer exercises. Standard US equity options cover 100 shares.
Example: Paying $2 per share for the right to buy XYZ at $50 within 30 days costs $200 for one contract.
Options approval level
An options approval level is the tier your broker grants that determines which strategies you can trade.
Lower levels allow covered calls and buying options; higher levels allow spreads and naked selling.
Options chain
An options chain is the table listing all available strikes and expirations for an underlying, with prices and data.
Columns usually include bid, ask, last, volume, open interest, IV and Greeks.
Out of the money (OTM)
An option is out of the money when it has no intrinsic value: a call above the price or a put below it.
OTM options are made entirely of extrinsic value. They are cheaper but expire worthless unless the price moves past the strike.
P
Paper trading
Paper trading is practising trades with simulated money instead of real funds.
It lets beginners learn order types, Greeks and management with no financial risk, though fills are more optimistic than live trading.
Pattern day trader (PDT) rule
The PDT rule was a former FINRA rule that required $25,000 in equity for margin accounts making four or more day trades in five business days.
The SEC approved its elimination on April 14, 2026, effective June 4, 2026. Brokers have until October 20, 2027 to implement the change, so check your broker's current policy.
Payoff diagram
A payoff diagram is a chart of a position's profit or loss across underlying prices at expiration.
The shape shows max profit, max loss and breakeven at a glance.
Physical settlement
Physical settlement delivers the actual shares when an option is exercised or assigned.
Standard for US stock and ETF options.
Pin risk
Pin risk is the uncertainty of assignment when the underlying closes very near a short strike at expiration.
You may not know whether you'll be assigned until after the close, leaving unexpected stock over the weekend.
Poor man's covered call
A poor man's covered call buys a deep ITM LEAPS call and sells short-term OTM calls against it.
It mimics a covered call with less capital, but the long call can lose value faster than stock.
Premium
The premium is the price of an option, quoted per share, paid by the buyer to the seller.
Premium equals intrinsic value plus extrinsic value. Because one contract usually covers 100 shares, the dollar cost is the quoted premium times 100.
Example: A quoted premium of $1.50 costs $150 per contract.
Probability of profit (POP)
Probability of profit is a model estimate of the chance a position makes at least $0.01 at expiration.
POP relies on implied volatility and a lognormal model; it is not a prediction and ignores management.
Protective put
A protective put is buying a put on shares you own to limit downside.
It works like insurance: the premium is the cost, the strike sets the floor.
Put option
A put option gives its buyer the right to sell 100 shares of the underlying at the strike price until expiration.
Put buyers profit when the underlying falls below the strike minus the premium. Puts are also used as insurance on shares you own. Put sellers collect premium and must buy shares at the strike if assigned.
Example: A $100 put bought for $4 breaks even at $96.
Call optionProtective putLong Put strategy →Protective Put strategy →Cash-Secured Put strategy →
R
Rho
Rho estimates how much an option's price changes for a 1-percentage-point change in interest rates.
Rho matters most for long-dated options such as LEAPS.
Rolling
Rolling closes an existing option and opens a similar one with a different strike or expiration.
Traders roll to extend time, collect more credit or adjust strikes; it does not erase a loss.
S
Short
Being short means you sold the position and benefit if its value falls.
Short options collect premium but carry obligations and, for naked calls, unlimited risk.
Straddle
A straddle buys (or sells) a call and a put at the same strike and expiration.
Long straddles profit from big moves in either direction; their price approximates the expected move.
Strangle
A strangle buys (or sells) an OTM call and an OTM put in the same expiration.
Cheaper than a straddle but needs a larger move to profit when long.
Strike price
The strike price is the fixed price at which an option holder can buy (call) or sell (put) the underlying.
Strike choice sets the trade's risk and reward. Strikes near the current price cost more and react strongly to moves; strikes far away are cheaper but need a larger move to pay off.
T
The Greeks
The Greeks are measures — delta, gamma, theta, vega and rho — that describe how an option's price reacts to market changes.
They are model estimates, not guarantees, and change constantly as price, time and volatility move.
Theta
Theta estimates how much value an option loses per day from the passage of time.
Long options have negative theta; short options have positive theta. Decay speeds up in the final 30 days.
Example: Theta of −0.05 means about $5 per contract lost per day, all else equal.
Time value
Time value is another name for extrinsic value: the premium paid for the chance the option gains value before expiry.
Time value decays faster as expiration approaches, especially in the final weeks for ATM options.
U
Underlying
The underlying is the asset an option is based on, such as a stock, ETF or index.
The option's value moves with the underlying's price, volatility and time to expiration. Index options use a cash-settled index as the underlying.
V
Vega
Vega estimates how much an option's price changes for a 1-point change in implied volatility.
Long options gain when IV rises; short options gain when IV falls. Longer-dated options have more vega.
Vertical spread
A vertical spread uses two options of the same type and expiration at different strikes.
Verticals can be bullish or bearish, debit or credit, and always have defined risk.
Volatility crush
Volatility crush is a sharp drop in implied volatility, typically right after an earnings report or event.
Long options can lose value even when the stock moves in the right direction, because IV collapses.
Volatility skew
Volatility skew is the pattern of different implied volatilities across strikes of the same expiration.
In equities, downside puts usually carry higher IV than upside calls, reflecting demand for crash protection.
Volume
Volume is the number of contracts traded during the current session.
Volume shows today's activity. Combined with open interest it helps judge how easily you can enter and exit.
W
Weekly options
Weekly options are contracts that expire each week rather than monthly.
They offer flexibility but decay fast and carry high gamma.
Wheel strategy
The wheel strategy alternates selling cash-secured puts and, after assignment, covered calls on the same stock.
It aims for steady premium on stocks the trader is willing to own, but carries full stock downside.
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