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Options Glossary
Plain-English definitions of the words used across MarketWrench's guides and calculators.
- Option
- A contract giving the buyer the right, but not the obligation, to buy or sell a stock at a set price before a set date.
- Call
- An option giving the right to buy 100 shares at the strike.
- Put
- An option giving the right to sell 100 shares at the strike.
- Strike price
- The price at which the option lets you buy (call) or sell (put).
- Expiration
- The last day the option exists. After that it is exercised or expires worthless.
- The price of an option, quoted per share. One contract usually covers 100 shares, so a $2.00 premium costs $200.
- Contract
- The standard unit of options trading, usually covering 100 shares.
- In the money (ITM)
- A call with a strike below the stock price, or a put with a strike above it. It has intrinsic value.
- At the money (ATM)
- An option whose strike is at or very near the stock price.
- Out of the money (OTM)
- A call with a strike above the stock price, or a put with a strike below it. It has no intrinsic value.
- Intrinsic value
- What an option would be worth if exercised right now: stock − strike for a call, strike − stock for a put, never below zero.
- Extrinsic (time) value
- The part of the premium above intrinsic value, reflecting time left and volatility. It shrinks toward zero by expiration.
- Exercise
- Using the option's right to buy or sell the shares at the strike.
- Assignment
- When you sold an option and the buyer exercises it, so you must buy or sell the shares at the strike.
- American vs. European
- American-style options can be exercised any time before expiration; European-style only at expiration. Most US stock options are American.
- Long / short
- Long means you bought; short means you sold (or wrote) the option or shares.
- Debit / credit
- A debit trade costs you money up front; a credit trade pays you money up front.
- Spread
- A position combining two or more options on the same stock, such as a bull call spread.
- Breakeven
- The stock price at expiration where the position neither makes nor loses money.
- Max profit / max loss
- The most a position can make or lose, usually measured at expiration.
- Implied volatility (IV)
- The amount of movement the options market is pricing in, as a yearly percent. Higher IV means more expensive options.
- Expected move
- A price range implied by IV for a given date, often shown as one standard deviation.
- Black-Scholes
- A mathematical model that estimates a European option's fair price from the stock price, strike, time, volatility, interest rate and dividends.
- Delta
- About how much an option's price changes when the stock moves $1. Also a rough gauge of how likely it is to finish in the money.
- Gamma
- How fast delta changes as the stock moves.
- Theta
- How much value an option loses per day as time passes, all else equal.
- Vega
- How much an option's price changes when implied volatility moves 1 percentage point.
- Rho
- How much an option's price changes when interest rates move 1 percentage point.
- Time decay
- The steady loss of extrinsic value as expiration approaches. It helps option sellers and hurts buyers.
- Bid / ask
- The bid is the highest price buyers are offering; the ask is the lowest price sellers will accept. The gap is the spread.
- Open interest
- The number of option contracts that are open and not yet closed or exercised.
- Covered call
- Selling a call against 100 shares you own.
- Cash-secured put
- Selling a put while holding enough cash to buy the shares if assigned.
- The wheel
- Repeating cash-secured puts until assigned, then covered calls until the shares are called away.
- Cost basis
- What you paid for a position, used to measure gains and losses and for taxes.
- Stop-loss
- A planned price at which you exit a losing trade.
- Risk-free rate
- The interest rate on very safe cash, such as short-term Treasury bills.
- Dividend yield
- Yearly dividends per share divided by the share price.
- Dollar-cost averaging (DCA)
- Investing a fixed amount on a regular schedule regardless of price.
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Calls vs Puts for Beginners · What Is Implied Volatility (IV)? · How to Read the Option Greeks · Covered Call vs Cash-Secured Put · The Wheel Strategy Explained
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