Options Glossary

Assignment

An options seller gets assigned if the owner of the option decides to exercise an option, i.e., transfer the rights back to the seller.

At the Money

An options contract with a strike price that's equal to the price of the underlying security.

Call

A call is an options contract to buy an underlying asset. A call buyer has the right, but not the obligation, to purchase an underlying asset such as a stock, exchange-traded fund, or futures contract at a specific price. A call seller has the obligation to supply the underlying asset at a specific price if the contract is “exercised” by the buyer. When this happens, the call seller is said to be “assigned.” You can buy options on an index but they don't have an underlying asset. Instead, index options are cash-settled.

Calendar spread

A calendar spread is an options strategy that involves opening a long and short options contract. The two contracts have the same strike price but different expiration dates. Generally, you would sell a near-dated contract and buy a longer-dated contract.

Cash-secured put

A cash-secured put is when you sell a put option on an underlying and set aside enough cash in your brokerage account to buy the stock in the event you are assigned.

Covered call

An options trading strategy that involves selling a call on a stock you already own. In other words, you're selling the right to buy a stock that you own at a specific price by a certain time.

Delta

The delta of an option measures how much the price of an option changes when the underlying moves by one point, all else being equal.

Exercise

When a call or put owner exercises their right to buy or sell the underlying position. Call owners will exercise their right to buy shares and put owners exercise their right to sell shares.

Gamma

An option's gamma measures the approximate change in the delta of an option relative to the change in price of the underlying, all else being equal.

Implied Volatility (IV)

IV is an indication of how much the market expects the price of the underlying security to move annually. IV is expressed as a percentage that can change depending on circumstances.

In the money (ITM)

A call option that has a strike price that's lower than the prevailing price of the underlying asset is ITM. A put option with a strike price that is higher than the prevailing price of the underlying asset is ITM.

Open interest

Open interest refers to the number of active contracts for a particular underlying asset. Active contracts are those that haven't been settled (or closed) yet. An options contract with a relatively high open interest means the contract has more liquidity.

Options expiration

The options expiration date of an options contract is the last day you can exercise or trade the contract. Although most options contracts expire at the close of the expiration day, some expire in the morning. Be sure to check the exact time of expiration before you trade an options contract.

Out of the money (OTM)

A call option that has a strike price that's higher than the prevailing price of the underlying asset is OTM. A put option with a strike price that's lower than the prevailing price of the underlying asset is OTM.

Protective put

A protective put is when you have a long position in an underlying and simultaneously a long position in a put option on the underlying. The put option protects your long position from a loss.

Put

A put is an options contract to sell an underlying asset. A put buyer has the right, but not the obligation, to sell the underlying asset at a specific price. A put seller has the obligation to buy the underlying asset if the put contract is “exercised” by the buyer.

Rho

Rho measures the sensitivity of an option's price relative to a change in the risk-free interest rate. In other words, rho measures how much an option will lose or gain when there’s a 1% change in the risk-free interest rate.

Straddle

A straddle is an options strategy that involves buying a call and a put of the same strike price and expiration date.

Strangle

A strangle is an options strategy that involves buying an out-of-the-money (OTM) call and OTM put. Both contracts have the same expiration date but different strike prices.

Strike price

The price at which an option holder has the right to buy or sell the underlying security or the price at which an option can be exercised.

Theta

The theta of an option represents time decay. As the expiration date of an option gets closer, the option's value decreases. Theta represents how much the price of an option decays as time passes one calendar day.

Vega

The vega of an option measures the change in the price of the option relative to a 1% change in implied volatility.

Vertical spread

A vertical spread comprises a long option and a short option—both must be calls or puts. In addition, both contracts have to be of the same quantity and expiration. There are different types of vertical spreads, depending on whether you're buying and selling calls or puts.