Glossary: Options Fundamentals
Glossary: Options Fundamentals
This glossary provides concise definitions for essential options trading terminology. Terms are organized alphabetically for quick reference.
American-Style Option: An option that can be exercised at any time before expiration. Most equity options in the U.S. are American-style.
Ask Price: The lowest price a seller is willing to accept for an option contract. Also called the offer price.
Assignment: The process by which a short option holder is obligated to sell (call) or buy (put) shares when an option is exercised against them.
At-the-Money (ATM): An option whose strike price is equal to or very close to the current price of the underlying asset.
Bid Price: The highest price a buyer is willing to pay for an option contract.
Bid-Ask Spread: The difference between the bid and ask prices, representing transaction costs and liquidity conditions.
Call Option: A contract giving the holder the right, but not the obligation, to buy the underlying asset at the strike price before expiration.
Cash Settlement: Settlement of an option position through cash payment rather than delivery of the underlying asset. Common for index options.
Covered Call: A strategy where an investor holds long stock and sells call options against that position, generating income while capping upside.
Delta: The measure of how much an option's price changes for a $1 change in the underlying price. Also approximates the probability of expiring in-the-money.
European-Style Option: An option that can only be exercised on the expiration date, not before. Common for index options like SPX.
Exercise: The act of using an option's right to buy (call) or sell (put) the underlying at the strike price.
Expiration Date: The last day on which an option can be exercised. After this date, unexercised options cease to exist.
Extrinsic Value: The portion of an option's premium that exceeds intrinsic value, also called time value. Reflects time remaining, volatility, and other factors.
Gamma: The rate of change of delta for a $1 move in the underlying. Measures how quickly delta will change.
Implied Volatility (IV): The market's expectation of future price volatility as reflected in option prices. Higher IV means higher premiums.
In-the-Money (ITM): A call option where the underlying price exceeds the strike price, or a put option where the underlying price is below the strike price.
Intrinsic Value: The amount by which an option is in-the-money. For calls: stock price minus strike price. For puts: strike price minus stock price.
LEAPS: Long-Term Equity Anticipation Securities. Options with expiration dates one to three years in the future.
Multiplier: The number of shares controlled by one option contract. Standard equity options have a multiplier of 100.
Naked Option: A short option position without an offsetting position in the underlying asset or a protective option.
Open Interest: The total number of outstanding option contracts that have not been closed, exercised, or expired.
Option Chain: A display of all available options for an underlying, organized by strike price and expiration date.
Options Clearing Corporation (OCC): The central clearinghouse for all U.S. listed options, guaranteeing contract performance.
Out-of-the-Money (OTM): A call option where the underlying price is below the strike price, or a put option where the underlying price exceeds the strike price.
Physical Settlement: Settlement of an option through delivery of the underlying shares rather than cash payment. Standard for equity options.
Premium: The price paid to purchase an option contract, or the price received when selling one.
Put Option: A contract giving the holder the right, but not the obligation, to sell the underlying asset at the strike price before expiration.
Rho: The measure of how much an option's price changes for a 1% change in interest rates. Generally small for short-dated options.
Strike Price: The fixed price at which an option holder can buy (call) or sell (put) the underlying asset. Also called exercise price.
Theta: The measure of how much an option loses value each day due to time decay, assuming no change in other factors.
Time Decay: The gradual reduction in an option's extrinsic value as expiration approaches.
Underlying: The stock, ETF, index, or other asset that an option contract references.
Vega: The measure of how much an option's price changes for a 1% change in implied volatility.
Volatility Crush: A sharp decline in implied volatility, often occurring after earnings or other anticipated events, causing option premiums to drop.
Volume: The number of option contracts traded during a specified period, typically the current trading day.
Weekly Options: Options that expire each Friday (or the last trading day of the week), providing short-term exposure.
This glossary is updated periodically. For detailed explanations, see the linked articles throughout the Options Fundamentals section, including Call vs. Put Options: Payoffs and Use Cases and Option Contract Specifications: Strike, Expiry, Style.