Options Trading Glossary: Key Terms Explained

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American-style option: An option that can be exercised on any business day up to expiration. Most US stock and ETF options are American-style.
Assignment: When the buyer of an option exercises it, the seller is assigned: a put seller must buy 100 shares per contract at the strike, a call seller must sell 100 shares at the strike. The Wheel Strategy →
At the money (ATM): An option whose strike price is at, or very close to, the current price of the stock. Options Trading Terminology →

Bid-ask spread: The gap between the highest price a buyer will pay (bid) and the lowest price a seller will accept (ask). Narrow spreads mean a liquid option that is cheap to trade.
Break-even price: The stock price at expiration where a trade neither makes nor loses money. For a long call it is the strike plus the premium paid; for a short put it is the strike minus the premium received.

Call option: A contract that gives the buyer the right, but not the obligation, to buy 100 shares at the strike price before expiration. Buyers of calls want the stock to rise. Trading Options 101 →
Cash-secured put: Selling a put while keeping enough cash in the account to buy the shares at the strike if you are assigned. You collect premium for agreeing to buy a stock at a price you like. Cash Secured Put Strategy →
Contract: One standard US equity option, covering 100 shares of the underlying stock. A premium quoted as $1.50 costs $150 per contract.
Covered call: Selling a call option against 100 shares you already own. You collect premium, but give up gains above the strike if the shares are called away. Covered Call Strategy →
Credit spread: Selling one option and buying a cheaper one further out of the money on the same stock and expiration. You receive a net credit and your maximum loss is capped at the width of the strikes minus that credit. Closing a Put Credit Spread →

Debit spread: Buying one option and selling a cheaper one on the same stock and expiration. It costs less than buying the option alone, in exchange for a capped maximum profit.
Delta: How much an option’s price is expected to change for a $1 move in the stock. A call with a delta of 0.40 gains about $0.40 per share when the stock rises $1. Delta is also a rough gauge of the chance of finishing in the money. The Complete Delta 101 Guide →

European-style option: An option that can only be exercised at expiration. Index options such as SPX are European-style and settle in cash. SPX Iron Condor Strategy →
Exercise: Using the right an option gives you: buying the shares (call) or selling them (put) at the strike price.
Expiration date: The last day an option can be traded or exercised. After it, the contract no longer exists. Trading Options 101 →
Extrinsic value: The part of an option’s price above its intrinsic value: what you pay for time and volatility. It shrinks to zero by expiration.

Gamma: How fast delta changes as the stock moves. Gamma is highest for at-the-money options close to expiration, which is why those options swing so sharply. Option Greeks 101 →
Greeks: Measures of how an option’s price reacts to changes in the stock price (delta, gamma), time (theta) and volatility (vega). Option Greeks 101 →

Implied volatility (IV): The size of the future price swings the market is pricing into an option. Higher IV means more expensive options, which favours sellers and hurts buyers. Vega Explained →
In the money (ITM): A call whose strike is below the stock price, or a put whose strike is above it. An ITM option has intrinsic value. Options Trading Terminology →
Intrinsic value: What an option would be worth if exercised right now: stock price minus strike for a call, strike minus stock price for a put, and never less than zero.
Iron condor: A put credit spread and a call credit spread on the same stock and expiration. It profits when the stock stays between the two short strikes, with losses capped on both sides. SPX Iron Condor Strategy →

LEAPS: Long-term options with more than a year until expiration. A deep in-the-money LEAPS call can stand in for shares, as in the poor man’s covered call. Poor Man’s Covered Call →
Liquidity: How easily an option can be bought or sold without moving its price. Look for high open interest, high volume and a narrow bid-ask spread. Picking Stocks for the Wheel →
Long (buy to open): Buying an option. Your risk is limited to the premium you pay.

Open interest: The number of option contracts that are open (not yet closed, exercised or expired) at a given strike and expiration.
Out of the money (OTM): A call whose strike is above the stock price, or a put whose strike is below it. An OTM option has no intrinsic value, only time value. Options Trading Terminology →

Pattern day trader (PDT) rule: A FINRA rule for US margin accounts: four or more day trades within five business days marks you as a pattern day trader, which requires at least $25,000 of equity in the account. The PDT Rule →
Poor man’s covered call: Selling short-term calls against a long-dated, in-the-money call instead of 100 shares. It works like a covered call for much less capital. Poor Man’s Covered Call →
Premium: The price of an option, quoted per share. Buyers pay it and sellers receive it. Multiply by 100 for the cost of one contract. Options Trading Terminology →
Put option: A contract that gives the buyer the right, but not the obligation, to sell 100 shares at the strike price before expiration. Buyers of puts want the stock to fall. Trading Options 101 →

Rolling: Closing an option position and opening a similar one at a later expiration, a different strike, or both, usually to give a trade more time. Closing a Put Credit Spread →

Section 1256 contract: A US tax category that includes broad-based index options such as SPX, NDX and RUT. Gains are taxed 60% long-term and 40% short-term however long you held the position, and open positions are marked to market on December 31. 3 Tax Mistakes to Avoid →
Short (sell to open): Selling an option you do not own. You receive the premium up front and take on the obligation that comes with the contract.
Strike price: The price at which an option lets you buy (call) or sell (put) the underlying shares. Selecting the Perfect Strike Price →

Theta: How much an option’s price falls each day from the passing of time, all else equal. Time decay works against option buyers and for option sellers. Option Greeks 101 →
Time decay: The steady loss of an option’s extrinsic value as expiration approaches. It speeds up in the final weeks. Option Greeks 101 →

Vega: How much an option’s price changes for a one-point change in implied volatility. Long options gain when volatility rises; short options gain when it falls. Vega Explained →

Wash sale: Selling a stock or option at a loss and buying the same or a substantially identical position within 30 days before or after the sale. The loss can’t be claimed that year; it is added to the cost basis of the new position instead. 3 Tax Mistakes to Avoid →
Wheel strategy: Selling cash-secured puts until you are assigned shares, then selling covered calls on those shares until they are called away, and starting again. The Wheel Strategy →

Educational content only, not financial advice. Options trading involves risk and is not suitable for every investor.