Options Trading Glossary
American-style option
An option that can be exercised at any time prior to its expiration date. Different from European-Style option.
Arbitrage
A trading technique that involves the simultaneous purchase and sale of identical assets or of equivalent assets in two different markets with the intent of profiting by the price discrepancy.
Assigned
Received notification of an assignment by The Options Clearing Corporation (OCC).
Assignment
Notification by the OCC to a clearing member that an owner of an option has exercised his or her rights there under. For equity and index options, assignments are made on a random basis by the OCC.
At-The-Money
A term that describes an option with a strike price that is equal to the current market price of the underlying stock share.
Backspread
A delta-neutral spread composed of more long options than short options on the same underlying instrument. This position generally profits from a large movement in either direction in the underlying security.
Bear spread
Strategies involving two or more options that can only profit well from a fall in the price of the underlying stock.
Bear CALL spread
The simultaneous writing of one call option with a lower strike price and the purchase of another call option with a higher strike price.
Bear PUT spread
The simultaneous purchase of one put option with a higher strike price and the writing of another put option with a lower strike price.
Beta
A measure of how closely the movement of an individual stock tracks the movement of the entire stock market.
Black-Scholes formula
The first widely-used model for option pricing. This formula can be used to calculate a theoretical value for an option using current stock prices, expected dividends, the option's strike price, expected interest rates, time to expiration and expected stock volatility. While the Black-Scholes model may not be 100% perfect it is widely used today to calculate theoretical prices.
Bull spread
One of a variety of strategies involving two or more options that will profit only from a rise in the price of the underlying stock.
Bull CALL spread
The simultaneous purchase of one call option with a lower strike price and the writing of another call option with a higher strike price.
Bull PUT spread
The simultaneous writing of one put option with a higher strike price and the purchase of another put option with a lower strike price.
Butterfly spread
A strategy involving three strike prices that has both limited risk and limited profit potential. A long call butterfly is established by: buying one call at the lowest strike price, writing two calls at the middle strike price, and buying one call at the highest strike price. A long put butterfly is established by: buying one put at the highest strike price, writing two puts at the middle strike price, and buying one put at the lowest strike price.
Buy-write
A covered call position in which stock is purchased and an equivalent number of calls written at the same time.
Calendar spread
An option strategy which generally involves the purchase of a farther-term option (call or put) and the writing of an equal number of nearer-term options of the same type and strike price.
Call option
An option contract that gives the owner the right to buy the underlying security at a specified price (its strike price) for a certain, fixed period of time (until its expiration). For the writer of a call option, the contract represents an obligation to sell the underlying stock if the option is assigned.
Class of options
A term referring to all options of the same type -- either calls or puts -- covering the same underlying stock.
Collar
A protective strategy in which a written call and a long put are taken against an existing long stock position. The options may have the same strike price or different strike prices and the expiration months may or may not be the same. Often used by employees who have shares in their own corporation.
Condor spread
A strategy involving four strike prices that has both limited risk and limited profit potential. A long call condor spread is established by buying one call at the lowest strike, writing one call at the second strike, writing another call at the third strike, and buying one call at the fourth (highest) strike. This spread is also referred to as a 'flat-top butterfly.'
Covered CALL
An option strategy in which a call option is written against an equivalent amount of long stock.
Credit spread
A spread strategy that increases the account's cash balance when it is established. A bull spread with puts and a bear spread with calls are examples of credit spreads.
Debit spread
A spread strategy that decreases the account's cash balance when it is established. A bull spread with calls and a bear spread with puts are examples of debit spreads.
Decay
A term used to describe how the theoretical value of an option 'erodes' or reduces with the passage of time. Time decay is specifically quantified by theta.
Delta
A measure of the rate of change in an option's theoretical value for a one-unit change in the price of the underlying stock.
Derivative security
A financial security whose value is determined in part from the value and characteristics of another security, the underlying security.
Diagonal spread
A strategy involving the simultaneous purchase and writing of two options of the same type that have different strike prices and different expiration dates.
European-style option
An option that can be exercised only during a specified period of time just prior to its expiration.
Exercise
To invoke the rights granted to the owner of an option contract. In the case of a call, the option owner buys the underlying stock. In the case of a put, the option owner sells the underlying stock.
Exercise price
The price at which the owner of an option can purchase (call) or sell (put) the underlying stock.
Expiration date
The date on which an option and the right to exercise it cease to exist.
Gamma
A measure of the rate of change in an option's delta for a one-unit change in the price of the underlying stock.
Historic volatility
A measure of actual stock price changes over a specific period of time.
Horizontal spread
An option strategy which generally involves the purchase of a farther-term option (call or put) and the writing of an equal number of nearer-term options of the same type and strike price.
Implied volatility
The volatility percentage that produces the 'best fit' for all underlying option prices on that underlying stock.
In-The-Money
An adjective used to describe an option with intrinsic value. A call option is in the money if the stock price is above the strike price. A put option is in the money if the stock price is below the strike price.
Index option
An option whose underlying interest is an index. Usually, index options are cash-settled.
Intrinsic value
The in-the-money portion of an option's price.
Iron butterfly
An option strategy with limited risk and limited profit potential that involves both a long (or short) straddle, and a short (or long) combination. An iron butterfly contains four options as is an equivalent strategy to a regular butterfly spread which contains only three options.
Kappa
A measure of the rate of change in an option's theoretical value for a one-unit change in the volatility assumption.
Last trading day
The last business day prior to the option's expiration date during which purchases and sales of options can be made. For equity options, this is generally the third Friday of the expiration month. Note: If the third Friday of the month is an exchange holiday, the last trading day will be the Thursday immediately preceding the third Friday.
LEAPS (Long-term Equity AnticiPation Securities)
Calls and Puts with an expiration as long as thirty-nine months. Currently, equity LEAPS have two series at any time with a January expiration.
Listed option
A put or call traded on a national options exchange. In contrast, over-the-counter options usually have non-standard or negotiated terms.
Naked Uncovered option
A short option position that is not fully collateralized if notification of assignment is received. A short call position is uncovered if the writer does not have a long stock or long call position. A short put position is uncovered if the writer is not short stock or long another put.
Neutral strategy
An option strategy (or stock and option position) expected to benefit from a neutral market outcome.
Open interest
The total number of outstanding option contracts on a given series or for a given underlying stock.
Option
A contract that gives the owner the right, but not the obligation, to buy or sell a particular asset (the underlying stock) at a fixed price (the strike price) for a specific period of time (until expiration) . The contract also obligates the writer to meet the terms of delivery if the contract right is exercised by the owner.
Option pricing model
The first widely-used model for option pricing is the Black Scholes. This formula can be used to calculate a theoretical value for an option using current stock prices, expected dividends, the option's strike price, expected interest rates, time to expiration and expected stock volatility. While the Black-Scholes model does not perfectly describe real-world options markets, it is still often used in the valuation and trading of options.
Option writer
The seller of an option contract who is obligated to meet the terms of delivery if the option owner exercises his or her right. This seller has made an opening sale transaction, and has not yet closed that position.
Optionable stock
A stock on which listed options are traded.
Out-of-the-money
This term is used to describe an option that has no intrinsic value, i.e., all of its value consists of time value. A call option is out of the money if the stock price is below its strike price. A put option is out of the money if the stock price is above its strike price.
Premium
Total price of an option: intrinsic value plus time value.
Put option
An option contract that gives the owner the right to sell the underlying stock at a specified price (its strike price) for a certain, fixed period of time (until its expiration). For the writer of a put option, the contract represents an obligation to buy the underlying stock from the option owner if the option is assigned.
Series of options
Option contracts on the same class having the same strike price and expiration month.
Straddle
A trading position involving puts and calls on a one-to-one basis in which the puts and calls have the same strike price, expiration, and underlying stock. A long straddle is when both options are owned and a short straddle is when both options are written.
Strike price
The price at which the owner of an option can purchase (call) or sell (put) the underlying stock. Used interchangeably with striking price, strike, or exercise price.
Strike price interval
The normal price differential between option strike prices. Equity options generally have $2.50 strike price intervals (if the underlying stock price is below $25), $5.00 intervals (from $25 to $200), and $10 intervals (above $200). LEAPS generally start with one at-the-money, one in-the-money, and one out-of-the-money strike price. The latter two are usually set 20%-25% away from the former.
Theta
A measure of the rate of change in an option's theoretical value for a one-unit change in time to the option's expiration date.
Theoretical value
The estimated value of an option derived from a mathematical model.
Time decay
A term used to describe how the theoretical value of an option 'erodes' or reduces with the passage of time. Time decay is specifically quantified by theta.
Time spread
An option strategy which generally involves the purchase of a farther-term option (call or put) and the writing of an equal number of nearer-term options of the same type and strike price.
Time value
The part of an option's total price that exceeds its intrinsic value. The price of an out-of-the-money option consists entirely of time value.
Uncovered CALL option writing
A short call option position in which the writer does not own an equivalent position in the underlying security represented by his option contracts.
Uncovered PUT option writing
A short put option position in which the writer does not have a corresponding short position in the underlying security or has not deposited, in a cash account, cash or cash equivalents equal to the exercise value of the put.
Underlying security
The security subject to being purchased or sold upon exercise of the option contract.
Vega
A measure of the rate of change in an option's theoretical value for a one-unit change in the volatility assumption.
Vertical spread
Most commonly used to describe the purchase of one option and writing of another where both are of the same type and of same expiration month, but have different strike prices.
Volatility
A measure of stock price fluctuation. Mathematically, volatility is the annualized standard deviation of a stock's daily price changes.
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