Options Trading Glossary: 26 Terms Explained

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Call option

A contract giving the buyer the right, but not the obligation, to buy 100 shares (for a standard US equity option) of the underlying at the strike price before or at expiration.

Put option

A contract giving the buyer the right, but not the obligation, to sell the underlying at the strike price before or at expiration.

Strike price

The price at which the option holder can buy (call) or sell (put) the underlying.

Expiration date

The last day an option can be exercised. After it, the contract no longer exists.

Premium

The price paid for an option contract, quoted per share.

Underlying

The stock, ETF, or index an option is based on.

In the money (ITM)

A call whose strike is below the underlying price, or a put whose strike is above it.

Out of the money (OTM)

A call whose strike is above the underlying price, or a put whose strike is below it. It has no intrinsic value.

At the money (ATM)

An option whose strike is at or very near the current underlying price.

Intrinsic value

The amount an option is in the money. OTM options have zero intrinsic value.

Extrinsic (time) value

The part of the premium above intrinsic value, reflecting time left and implied volatility.

Implied volatility (IV)

The market's expectation of future volatility, backed out from option prices. Higher IV means pricier options.

Delta

How much an option's price is expected to change for a $1 move in the underlying. Also used as a rough probability of finishing in the money.

Gamma

How much delta changes for a $1 move in the underlying.

Theta

How much an option's value is expected to lose per day from time decay, all else equal.

Vega

How much an option's price changes for a 1 percentage-point change in implied volatility.

Open interest

The number of option contracts outstanding that have not been closed or exercised.

Volume

The number of contracts traded during a period, usually a day.

Exercise

Using the right in an option contract to buy or sell the underlying at the strike.

Assignment

When an option seller is required to fulfill the contract after a holder exercises.

Covered call

Owning 100 shares and selling a call against them to collect premium, capping upside above the strike.

Cash-secured put

Selling a put while holding enough cash to buy the shares if assigned.

Vertical spread

Buying and selling options of the same type and expiration at different strikes, limiting both risk and reward.

Iron condor

Selling an OTM put spread and an OTM call spread on the same underlying and expiration, profiting if the price stays in a range.

Options flow

Data on large or unusual option trades, used by some traders to gauge positioning.

Gamma exposure (GEX)

An estimate of how much options dealers may need to hedge as the underlying moves, based on their assumed gamma positions.

Options carry significant risk and are not suitable for all investors. Read the OCC's "Characteristics and Risks of Standardized Options" before trading. Not investment advice.