Options Trading Glossary

Plain-English definitions for the options terms used across The Options Bench calculators and guides. Where a term has a calculator or guide of its own, follow the link to go deeper.

Contract basics

American style

An option exercise style allowing the holder to exercise at any time before expiration. All single-name US equity and ETF options are American style; index options like SPX are European style.

Call option

A contract giving its holder the right to buy 100 shares at the strike price. The seller of the call is obligated to deliver the shares if assigned. Long Call & Long Put Calculator →

See also: Put option, Strike price, Premium

Contract

One standard equity option contract covers 100 shares of the underlying stock.

Days to expiration (DTE)

The number of calendar days remaining until an option contract expires.

European style

An option exercise style allowing exercise only at expiration. SPX and most cash-settled index options are European style; equity options are American.

Expiration

The date an option contract ends. In-the-money options are typically exercised automatically; out-of-the-money options expire worthless.

LEAPS

Long-term equity options - contracts with expirations a year or more out. Used to control a stock with less capital than buying shares, as in a poor man's covered call. Poor Man's Covered Call Calculator →

Multiplier

One standard US equity option contract covers 100 shares of the underlying. The premium quoted per share is multiplied by 100 to get the contract's dollar value.

Premium

The price of an option — paid by the buyer, collected by the seller — quoted per share. One contract is the per-share premium times 100.

Put option

A contract giving its holder the right to sell 100 shares at the strike price. The seller of the put is obligated to buy the shares if assigned. Long Call & Long Put Calculator →

See also: Call option, Strike price, Premium

Strike price

The fixed price at which an option can be exercised — the price at which you would buy the shares with a put, or sell them with a call. How to choose a strike price →

See also: Moneyness, Premium, Underlying

Underlying

The stock or ETF that an option contract is based on.

See also: Contract, Strike price, Multiplier

Moneyness & value

At-the-money (ATM)

An option whose strike price sits at, or very close to, the current price of the underlying stock.

Breakeven

The underlying price at which a position ends with neither a profit nor a loss at expiration. Payoff Diagram Builder →

Extrinsic value

The part of an option's price beyond its intrinsic value, also called time value. It decays to zero by expiration.

In-the-money (ITM)

An option that has intrinsic value: a call with a strike below the underlying price, or a put with a strike above it.

Intrinsic value

The amount by which an option is in the money. An out-of-the-money option has zero intrinsic value.

Moneyness

An option's strike relative to the current price of the underlying: in-the-money, at-the-money, or out-of-the-money.

Out-of-the-money (OTM)

An option with no intrinsic value: a call with a strike above the underlying price, or a put with a strike below it.

Put-call parity

A pricing identity stating that a long call plus cash equals a long put plus stock at the same strike and expiration. The reason a covered call and a cash-secured put have the same payoff shape. Selling calls vs selling puts →

The order book

Ask

The price at which someone is willing to sell an option (and the price you would pay to close a short position). Always quoted alongside the bid. Reading an Options Chain →

Bid

The price at which someone is willing to buy an option (and the price you would receive selling it). Always quoted alongside the ask. Reading an Options Chain →

Bid-ask spread

The gap between the bid and ask. A transaction cost - you sell at the bid and close at the ask, so a wide spread silently steals returns on small premiums. Reading an Options Chain →

Good-til-canceled (GTC)

An order type that stays live across trading sessions until it fills or you cancel it. The default for most retail option orders.

Limit order

An order that executes only at your specified price or better. The standard order type for option entries - using market orders on options invites bad fills on wide spreads.

Mark (mid price)

The midpoint of bid and ask, used as a fair-value reference for an option. The price you can reasonably expect to fill at on a liquid strike. Reading an Options Chain →

Market order

An order that executes immediately at the best available price. Risky on options because wide spreads can produce fills far from the mid - prefer limit orders.

Open interest

The total number of option contracts outstanding at a given strike and expiration. Higher open interest means deeper liquidity and tighter bid-ask spreads. Reading an Options Chain →

Volume

The number of option contracts that have traded today at a given strike and expiration. A signal of current activity; pairs with open interest to assess liquidity. Reading an Options Chain →

Volatility

Historical volatility

The realized annualized volatility of the underlying over a past window - usually 20 or 30 days. Compared with implied volatility, it shows whether the chain is pricing more or less movement than the stock has actually delivered. Reading an Options Chain →

Implied volatility (IV)

The market's expectation of how much the underlying will move, embedded in an option's price. Higher implied volatility means richer premium — and more risk priced in. IV Rank Calculator →

IV crush

The sharp collapse in implied volatility immediately after a known event - most commonly earnings. Sellers benefit; buyers of pre-event premium suffer. Selling through earnings →

IV percentile

The percentage of trading days in the last 12 months on which implied volatility was lower than it is now. A high IV percentile means today's IV is unusually elevated for this name. Reading an Options Chain →

IV rank

Where today's implied volatility sits between this stock's 12-month low and high IV, on a 0-100 scale. Useful for deciding whether the chain is paying enough premium to be worth selling. Reading an Options Chain →

Realized volatility

How much the underlying actually moved over a past window. Sellers profit when realized volatility comes in below the implied volatility they sold. Reading an Options Chain →

VIX

The CBOE Volatility Index - implied volatility of S&P 500 options over the next 30 days, annualized. A market-wide barometer of expected volatility.

Volatility skew

The pattern that low-strike puts trade at higher implied volatility than high-strike calls on equities. The market pricing crash risk asymmetrically; the reason equity put premiums tend to outpay call premiums at the same delta. Selling calls vs selling puts →

The Greeks

Delta

How much an option's price is expected to move for a $1 move in the underlying. For an option seller it also works as a rough estimate of the chance the option finishes in the money. How to choose a strike price →

Gamma

How much an option's delta changes per $1 move in the underlying. Short option sellers are short gamma - delta accelerates against them on adverse moves, especially in the last two weeks before expiration. The Greeks for Option Sellers →

Rho

An option's sensitivity to a 1% change in the risk-free interest rate. Negligible for retail traders on 30-45 DTE options; matters more for LEAPS. The Greeks for Option Sellers →

Theta

The daily price decay of an option, all else equal. Theta is the income an option seller collects each day the underlying does not move enough to matter. The Greeks for Option Sellers →

Vega

An option's price change per 1 percentage-point change in implied volatility. Sellers are short vega - rising IV makes the option you sold more expensive even if the underlying does not move. The Greeks for Option Sellers →

Assignment & exercise

Assignment

When an option you sold is exercised by its holder and you must fulfill the contract — buying the stock if you sold a put, or selling it if you sold a call. Assignment guide →

See also: Early assignment, Exercise, Pin risk

Automatic exercise

In-the-money options are automatically exercised at expiration by the clearinghouse unless the holder explicitly opts out. As a seller this is why an ITM short option held to expiry is assigned without warning. Assignment guide →

See also: Exercise, Settlement, Expiration

Early assignment

Assignment before the expiration date. It is possible on American-style options and is most common on a short in-the-money call just before an ex-dividend date. Assignment guide →

Ex-dividend date

The cut-off date for owning a stock to receive its next dividend. It is the key date behind early-assignment risk on covered calls. Assignment guide →

Exercise

The action of an option holder using their right — to buy the underlying with a call, or sell it with a put. When a holder exercises, a seller is assigned. Assignment guide →

Naked option

A short option that is not backed by stock or cash to cover assignment — the opposite of a covered call or a cash-secured put.

Pin risk

The uncertainty, when a stock closes right at your strike at expiration, over whether the option will be exercised and you will be assigned. Assignment guide →

See also: Assignment, Expiration, Strike price

Settlement

The clearing process that follows exercise or assignment - shares change hands for equity options, cash is paid for index options. For US equity options, settlement is T+1.

See also: Exercise, Assignment, Expiration

Strategies & positions

Butterfly spread

A three-strike, defined-risk position - long one lower strike, short two at the body, long one upper - that profits most if the underlying finishes at the body strike. Cheap to open, with a narrow profit zone. Butterfly Spread Calculator →

Calendar spread

An options position with the same strike but different expirations - sell the near-dated option, buy the longer-dated one (or vice versa). Profits if the underlying stays near the strike. Calendar Spread Calculator →

Cash-secured put

A short put backed by enough cash to buy the shares if the put is assigned. Setting that cash aside is what makes the put secured rather than naked. Cash-Secured Put Calculator →

See also: Covered call, The wheel, Put option

Collar

Long stock plus a protective put and a short call that helps finance it. The put sets a downside floor, the short call caps the upside - often structured for little or no net cost. Collar Calculator →

Covered call

Selling a call against 100 shares you already own, collecting premium in exchange for capping your upside at the strike price. Covered Call Calculator →

Credit spread

A two-leg position - sell a richer option, buy a cheaper one of the same type and expiration - that opens for a net credit. Capped profit and capped loss; the loss is the strike width minus the credit. Payoff Diagram Builder →

Debit spread

A two-leg position that opens for a net debit - buy a richer option, sell a cheaper one of the same type and expiration. Capped profit and capped loss; the loss is the debit paid. Payoff Diagram Builder →

Diagonal spread

A spread with different strikes and different expirations. The poor man's covered call is the best-known example. Diagonal Spread Calculator →

Iron butterfly

A four-leg position - a short at-the-money straddle wrapped in long protective wings. Collects a large credit for a narrow profit zone around the strike, with defined risk on both sides. Iron Butterfly Calculator →

Iron condor

A four-leg position - a short out-of-the-money put spread plus a short out-of-the-money call spread - that profits if the underlying finishes between the short strikes. Defined risk on both sides. Iron Condor Calculator →

Leg

A single option or stock position that forms one part of a larger multi-part strategy. Payoff Diagram Builder →

Married put

Long stock plus a long put at or near the money. The put acts as insurance against a drawdown, capping the downside at the strike minus the premium. Protective Put Calculator →

Payoff diagram

A chart showing a position's profit or loss across a range of underlying prices at expiration. Payoff Diagram Builder →

Poor man's covered call (PMCC)

A diagonal spread used as a cheaper substitute for a covered call: long a deep-in-the-money LEAPS call instead of 100 shares, short a near-dated call against it. Poor Man's Covered Call Calculator →

Protective put

A long put held against shares you own to cap downside risk - portfolio insurance that sets a floor at the strike minus the premium. The same structure as a married put. Protective Put Calculator →

Ratio spread

A spread with an unequal number of long and short options - for example buying one option and selling two further out of the money. The extra short leg can introduce undefined risk on one side. Payoff Diagram Builder →

Spread (vertical)

Two options of the same type and expiration but different strikes - one long, one short. Vertical spreads cap both the profit and the loss. Payoff Diagram Builder →

See also: Credit spread, Debit spread, Leg

Straddle

Long a call and a put at the same strike and expiration. Profits on a large move in either direction; loses to time decay if the underlying sits. Straddle & Strangle Calculator →

Strangle

Long an out-of-the-money call and an out-of-the-money put at the same expiration. Cheaper than a straddle but needs a larger move to profit. Straddle & Strangle Calculator →

Synthetic position

A combination of options and stock that replicates the payoff of a different instrument. Long stock plus a short call equals a short put, by put-call parity. Selling calls vs selling puts →

The wheel

An income strategy that loops cash-secured puts and covered calls on a stock you are willing to own: sell puts until assigned, sell calls until called away, then repeat. The wheel strategy explained →

Rolling & adjustment

Roll down

Closing an existing short option and opening a new one at a lower strike, usually for the same expiration or a later one. Lowers the breakeven on a short put; used as stage 1 of a credit roll. Rolling Decision Calculator →

Roll out

Closing an existing short option and opening a new one at the same strike but a later expiration. Collects more premium and pushes the decision forward. Rolling Decision Calculator →

Roll up

Closing an existing short option and opening a new one at a higher strike, usually for the same expiration or a later one. Used on short calls to capture more upside; rarely credit-positive. Rolling Decision Calculator →

Rolling

Closing an existing option and opening a later-dated one, often at a different strike, usually to repair or extend a position. A roll done for a net credit is generally preferred. Rolling Decision Calculator →

Returns, risk & account

Annualized return

A trade return scaled to a yearly figure, using the return times 365 divided by days to expiration. It lets trades of different lengths be compared on equal footing, but it is a comparison aid, not a yield you can count on repeating. Covered Call Calculator →

Buying power reduction (BPR)

The capital your broker holds against a short option position. For a cash-secured put it equals the strike times 100; for a naked put under margin rules it can be much less.

Cost basis

The price you originally paid per share. Premium collected from selling options against a position lowers your effective cost basis. Wheel Strategy Calculator →

Downside protection

How far the underlying can fall before a covered call position starts to lose money, expressed as a percentage of the current share price. Covered Call Calculator →

See also: Protective put, Collar, Married put

Margin

Borrowed buying power from your broker, secured against the value of your account. Naked options use margin; cash-secured puts and covered calls do not.

Pattern day trader (PDT)

A US regulatory designation for accounts that execute four or more day trades within five business days. Pattern day traders need at least $25,000 in equity to keep day-trading.

Probability of profit

The estimated chance a trade finishes profitable. For a sold option it is slightly better than one minus delta, because the premium collected widens the profitable range. How to choose a strike price →

Return on capital

A trade's profit measured against the capital it ties up — cash secured for a put, or the market value of the shares for a covered call. Cash-Secured Put Calculator →

More terms

Broken wing butterfly

A butterfly with one wing wider than the other, usually opened for a net credit. The skew removes the risk on one side - a put version has no upside risk, a call version no downside - leaving the defined loss only on the wider-wing side. Broken Wing Butterfly Calculator →

Educational reference only. Nothing here is financial advice.