Options Glossary
This glossary defines contract, pricing, trading, and risk terminology used in options markets. References to share transactions concern standard U.S. stock and ETF options unless another product is identified. Contract specifications determine the actual exercise style, multiplier, deliverable, and settlement obligations; adjusted or cash-settled contracts can differ from the standard share-based examples.
0DTE
0DTE means zero days to expiration and describes an option on its expiration day. Any remaining time value reflects the possibility of changes in the payoff before the contract ends; it does not indicate that the option was first listed or purchased that day.
Adjusted option
An adjusted option has revised terms following a corporate action, such as a split, merger, or special distribution. The applicable strike, deliverable, multiplier, or expiration determines the holder’s remaining right and the seller’s obligation rather than an assumption that the original standard terms still apply.
American-style option
An American-style option permits its holder to exercise before expiration as well as at expiration. Exercise remains subject to the contract’s terms and the applicable procedures and deadlines. The term describes exercise timing rather than the location of the market.
Ask
The ask, or offer, is the lowest displayed price at which a seller offers the option for the stated quantity. That displayed price is not necessarily available for a larger order or after the quotation changes.
Assignment
Assignment allocates an exercised option’s obligation to a seller with an open short position. A physically settled short call requires delivery at the strike, while a short put requires a purchase there. A cash-settled option requires the payment specified by its terms.
At the money (ATM)
An option is at the money when the underlying price equals its strike. Market usage can also apply the term to the nearest listed strike when no strike matches the underlying price exactly. An exactly at-the-money option has zero intrinsic value.
Automatic exercise
Automatic exercise is the processing of a qualifying in-the-money option at expiration without a new exercise instruction from the holder. Customer outcomes depend on the broker’s policies, account requirements, and any contrary instructions submitted within the applicable deadline. The term should not be treated as an unconditional settlement guarantee.
Bearish
Bearish describes an expectation of a decline in the underlying or a position that benefits from such a decline with other pricing inputs unchanged. A favorable directional move need not produce a profit when other valuation changes or trading costs offset it.
Bid
The bid is the highest displayed price offered by a buyer for the stated quantity of an option. An incoming sale can receive a different price if that quantity is exhausted or the market changes before execution.
Bid-ask spread
The bid-ask spread is the difference between the ask and bid prices. Purchasing at the ask and immediately selling at an unchanged bid produces a loss equal to that difference per quoted unit before fees. Contract size and quantity scale the dollar effect.
Binomial model
A binomial model values an option using possible upward and downward underlying-price movements over a sequence of time steps. The calculation works backward from expiration payoffs. For an American-style option, each exercise step compares immediate exercise value with the value of continued ownership.
Black–Scholes–Merton model
The Black–Scholes–Merton model is a valuation model for European-style calls and puts under assumptions that include continuous underlying-price changes, constant volatility, and frictionless trading. A dividend-adjusted formulation represents distributions through a continuous yield. Its result is a theoretical value conditional on those assumptions.
Break-even point
A break-even point is an underlying price at which a specified position’s profit or loss is zero. Before costs, a standalone call with a positive entry premium breaks even at expiration at strike plus premium per share; a put breaks even at strike minus premium when that price is nonnegative. Combined positions can have several break-evens or a zero-P/L interval.
Bullish
Bullish describes an expectation of an increase in the underlying or a position that benefits from such an increase with other pricing inputs fixed. The term concerns directional exposure rather than a guarantee about the position’s final result.
Buying power
Buying power is the account capacity available to open or increase positions under a broker’s rules. It reflects cash, eligible collateral, existing obligations, and margin requirements. A change in market values or requirements can alter buying power while positions remain unchanged.
Call
A call gives its holder the right to buy the underlying at the strike during the permitted exercise period. For a physically settled call, an assigned seller must deliver the specified underlying at that price. The premium is the price of the right, not the strike payment.
Call spread
A call spread combines long and short calls on the same underlying. A vertical call spread uses equal quantities and matching expirations and contract sizes at different strikes. Buying the lower strike and selling the higher creates a bull call spread; the reverse creates a bear call spread.
Calendar spread
A calendar spread combines long and short options of the same type and strike on one underlying at different expirations. A common construction purchases the later option and sells the nearer one. At the first expiration, the later contract still has a remaining term and must be valued accordingly.
Cash-secured put
A cash-secured put is a short put supported by enough cash or cash equivalents to fund assignment. The premium reduces the effective cost of shares acquired at the strike, but the shares can be worth less than that cost. The reserve changes funding arrangements rather than the option’s payoff.
Cash settlement
Cash settlement fulfills an option’s exercise obligation with a payment based on its exercise value and multiplier rather than a delivery of shares. The contract specifies the settlement reference, its calculation, and the payment timing.
Closing transaction
A closing transaction reduces an existing position in the same option series. A holder sells to close a long option, and a seller buys to close a short option. Only the executed quantity is closed; the unfilled portion of a closing order leaves the corresponding exposure open.
Collateral
Collateral is cash or eligible securities held to secure an account obligation. The amount required depends on the positions being supported, applicable margin rules, and the broker’s house requirements. It is not necessarily equal to the maximum possible loss.
Complex order
A complex order submits multiple option legs in a specified ratio, commonly subject to a net debit or credit limit. Electronic package fills preserve the ratio for the portion executed, while unfilled packages remain governed by the order instructions. The options retain separate exercise and assignment treatment.
Contract
An option contract is one unit of the specified right and obligation, defined by its underlying, type, strike, expiration, and exercise and settlement terms. Matching contracts belong to the same series. A standard stock or ETF option contract normally covers 100 shares.
Contract multiplier
The contract multiplier converts a quoted per-unit premium or payoff into an amount for one contract. Standard stock and ETF options normally use 100, so a $2 premium represents $200 per contract. The number of contracts is a separate factor in the total position amount.
Covered call
A covered call combines a short call with sufficient owned shares for delivery if assigned. Above the strike at expiration, the growing call obligation offsets additional share gains. The premium cushions part of a share-price decline but leaves the shareholder exposed to the remaining downside.
Credit
A credit is money received from a transaction. An option package produces a net credit when premiums received exceed premiums paid after the quantities and multipliers are applied. Receiving a credit does not itself establish a loss limit.
Debit
A debit is money paid for a transaction. An option package produces a net debit when premiums paid exceed premiums received after accounting for quantities and multipliers. The debit is the maximum loss only for positions whose combined payoff supports that conclusion.
Defined risk
Defined risk describes a position with a finite maximum loss under its stated payoff assumptions and time horizon. The limit concerns the complete specified position. Removing protection or retaining shares after an option expires changes the exposure and can produce a different loss range.
Deliverable
The deliverable is the shares, cash, or other property specified for transfer on exercise. A standard stock option normally delivers 100 shares, while an adjusted contract can require a different share quantity or a package containing other property.
Delta
Delta is the local change in option value for a $1 change in the underlying price, with other inputs fixed. A per-share delta of 0.50 estimates a $50 increase for one purchased 100-share contract after a small $1 underlying rise. A short position reverses the sign.
Diagonal spread
A diagonal spread combines long and short options of the same type on one underlying at different strikes and expirations. The later option remains alive when the earlier contract expires, so its remaining market or modeled value contributes to the result at that date.
Dividend yield
Dividend yield expresses annual dividends relative to the share price. A pricing model may represent expected distributions with a continuous annual yield or include separate expected payments on specific dates. Those treatments are assumptions about the cash flows relevant to valuation.
Early assignment
Early assignment is assignment before expiration on a short option whose exercise terms permit it. For a physically settled contract, it creates a share purchase or delivery while other legs remain separate positions. Protective options require their own subsequent decisions.
Early exercise
Early exercise uses an option’s right before expiration. It brings forward the strike transaction and does not pay remaining time value. Dividends, financing, available closing prices, and transaction costs affect whether immediate exercise is preferable to continued ownership or a sale.
European-style option
A European-style option permits exercise only at expiration. It can still be bought or sold during its listed trading period, so its holder can close before expiration without exercising.
Entry price
The entry price is the execution price at which a position is opened. For an option, it is the premium paid or received. When the opening order has several fills, the recorded entry price may be a quantity-weighted average.
Exercise
Exercise uses the contractual right held by the option owner. A physically settled call purchases the deliverable at the strike, and a put sells it there. A cash-settled contract instead produces the payment specified by its settlement terms.
Exercise by exception
Exercise by exception is OCC’s administrative process for exercising qualifying expiring options unless contrary instructions are submitted. It operates between OCC and clearing members. Customer handling, account requirements, and instruction deadlines also depend on the broker.
Exercise style
The exercise style determines when the holder can exercise. American-style options permit early exercise as well as exercise at expiration; European-style options permit exercise only at expiration. The style is separate from whether settlement is physical or in cash.
Expiration
Expiration is the end of an option’s exercise right. Its last trading time can precede that deadline, and shares created by exercise or assignment can remain after it. Expiration therefore does not necessarily end all related account exposure.
Extrinsic value
Extrinsic value is the option’s price minus its intrinsic value and is also called time value. Immediate exercise gives an American-style option an intrinsic-value floor under frictionless assumptions. A European option can have a negative remainder when delayed exercise makes its value smaller than the immediate strike-price advantage.
Gamma
Gamma is the local change in delta for a $1 change in the underlying. Purchased standard calls and puts normally have positive gamma, while short positions reverse that exposure. Gamma is often concentrated near the strike as expiration approaches.
Greeks
The Greeks are modeled sensitivities to changes in underlying price, time, volatility, and interest rates with other inputs fixed. Position Greeks combine the legs’ sensitivities after applying their long or short signs, quantities, and multipliers. They are local estimates rather than guarantees of subsequent price changes.
Holder
A holder owns an option and its exercise right. The holder can sell the contract, exercise when permitted, or leave it unexercised. The option seller bears the corresponding obligation if assigned.
Implied volatility (IV)
Implied volatility is the annualized volatility input that makes a pricing model reproduce a selected option premium while other inputs are fixed. It depends on the chosen price and assumptions. A solution requires a premium within the model’s attainable range.
In the money (ITM)
A call is in the money when the underlying is above its strike; a put is in the money when the underlying is below its strike. The positive price advantage is intrinsic value. Whether the trade is profitable also depends on its entry premium and expenses.
Intrinsic value
Intrinsic value is the positive strike-price advantage measured against the current underlying price. For price and strike , a call has intrinsic value and a put has intrinsic value . The maximum function sets an unfavorable difference to zero.
Last price
The last price is the most recent reported trade price for the contract. Its timestamp is important because the transaction may precede the current bid and ask by a substantial interval. It does not necessarily represent an available execution price.
LEAPS
LEAPS, or Long-Term Equity Anticipation Securities, are long-dated listed calls and puts. Equity and ETF LEAPS have more than twelve months to expiration when first listed and permit American-style exercise. Their extended term does not make them equivalent to shares.
Leg
A leg is a component of a combined position, identified by its contract, quantity, and long or short side. Two purchased calls in one series can constitute a single leg. These terms determine its contribution to the position’s payoff and sensitivities.
Legging risk
Legging risk arises when the parts of an intended multi-leg transaction execute separately. Market prices can change between fills, altering the final net cost and leaving an interim position whose risk differs from that of the completed combination.
Limit order
A limit order sets the maximum price for a purchase or the minimum price for a sale. Execution requires available prices and quantities consistent with that limit and the applicable priority rules. The order can remain partially or entirely unfilled.
Liquidity
Liquidity is the ability to transact a desired quantity without a substantial price concession. Bid-ask width, displayed size, and market depth all contribute. Historical trading activity does not by itself establish the price available for a new order.
Long option
A long option is a purchased position whose holder owns the exercise right. Its premium can be lost in full if the contract expires worthless. A sale to close removes the option exposure for the quantity executed, while exercise can create a different position.
Margin
Margin is cash or eligible securities required to support a brokerage position. For a short option, it secures the potential obligation. Requirements can change with market conditions, account offsets, and house rules, and need not equal the position’s maximum loss.
Market order
A market order seeks execution at the best available prices without a customer-specified price limit, subject to applicable execution controls. An order can trade at multiple price levels as the available quantity at each level is used.
Mark
A mark is a reference price used to value an open position, such as the midpoint, last trade, or theoretical value. The marking convention affects displayed unrealized profit or loss. It does not guarantee that the position can be closed at that value.
Maximum loss
Maximum loss is the greatest loss within the outcomes and time horizon specified for a position. Some exposures, such as an uncovered call on a stock, have no finite loss bound. Changes in the position or its horizon require a new assessment.
Maximum profit
Maximum profit is the greatest profit under a position’s stated payoff assumptions. Uncapped profit potential means that the mathematical payoff has no finite upper bound, not that any particular large gain is likely.
Midpoint
The midpoint is the arithmetic average of the bid and ask. It is commonly used as a reference value. An actual trade there requires matching interest inside the spread and may not be available for the intended quantity.
Model price
A model price is a theoretical value calculated from a chosen pricing model and specified inputs. Model assumptions, transaction costs, and actual market conditions can cause it to differ from quoted or executed prices.
Moneyness
Moneyness is the relationship between the underlying price and the strike, classified as in, at, or out of the money. It applies to the contract equally for its holder and seller and does not include either party’s entry premium.
Multiplier
A multiplier converts a quoted per-unit premium or payoff to the amount for one contract. Standard stock and ETF options normally use 100. Adjusted contracts have their own specified terms, and the multiplier should be distinguished from the deliverable and from contract quantity.
Naked option
A naked option is another name for an uncovered short option. The term concerns the absence of the relevant coverage or protection, not the option type or exercise style.
Net credit
A net credit is total premiums received less total premiums paid across a transaction’s legs after quantities and multipliers are applied. It is the opening cash inflow before costs, not necessarily the strategy’s realized profit.
Net debit
A net debit is total premiums paid less total premiums received across a transaction’s legs after quantities and multipliers are applied. It is the opening cash outflow before costs. The strategy’s payoff determines whether that debit also represents its maximum loss.
Open interest
Open interest counts contracts outstanding after clearing, with each contract counted once despite having a long and a short side. It increases when both sides open, decreases when both close, and remains unchanged when an existing position transfers between holders or between sellers. Exercise and expiration also reduce the outstanding total.
Option
An option gives its holder the right, but not the obligation, to complete a specified transaction under contractual terms. A call provides a purchase right and a put a sale right. The seller receives the premium and assumes the corresponding obligation if assigned.
Option chain
An option chain lists calls and puts on an underlying, commonly grouped by expiration and strike. It can include bids, offers, last trades, volume, open interest, and model-derived measures such as implied volatility and Greeks.
Out of the money (OTM)
A call is out of the money when the underlying is below its strike, and a put is out of the money when the underlying is above its strike. Intrinsic value is zero; any remaining positive premium is time value.
Payoff
An option’s payoff is its value at expiration before the entry premium is included. Per share, a call pays the positive difference above its strike and a put the positive difference below its strike. The payoff is zero when there is no favorable strike-price difference.
Physical settlement
Physical settlement completes exercise through delivery of the specified underlying against the strike payment. For standard stock and ETF options, the holder and assigned seller exchange the required shares and money. The transaction can leave a share position after the option ends.
Pin risk
Pin risk is uncertainty about exercise, assignment, and the resulting position when the underlying is near a strike at expiration. After-hours changes and exercise instructions can determine whether shares remain after the option or a protective leg has expired.
Premium
The premium is the option’s price, paid by its purchaser and received by its seller. Standard stock and ETF premiums are quoted per share. Multiplying by the contract multiplier and quantity gives the transaction’s total premium amount.
Profit or loss (P/L)
Profit or loss is the financial result after accounting for the position’s entry cost or credit and any expenses included in the calculation. Unrealized P/L uses a current valuation; a closing transaction realizes the result at its execution prices. Payoff alone excludes the entry premium.
Position value
Position value is the combined current value of the position’s assets and obligations. Long options contribute positive value and short options negative value after quantities and multipliers are applied. It is distinct from profit or loss, which also includes the opening cash flow.
Put
A put gives its holder the right to sell the underlying at the strike during the permitted exercise period. For a physically settled put, an assigned seller must purchase the specified deliverable at that price.
Ratio spread
A ratio spread uses unequal quantities of long and short options. The ratio determines how much exposure remains after the legs offset. Excess short calls can leave unlimited loss as the underlying rises; excess long options produce a different tail profile.
Rho
Rho measures the local option-value response to a one-percentage-point increase in the interest rate with other inputs fixed. In standard models it is generally positive for purchased calls and negative for purchased puts. A short position reverses the corresponding sign.
Risk-free rate
The risk-free rate is a pricing model’s interest-rate assumption for discounting payments without default risk. It is commonly entered as a continuously compounded annual rate. The model input should not be confused with the actual financing rate charged to a particular account.
Risk reversal
A bullish risk reversal purchases calls and sells an equal quantity of puts on the same underlying and expiration, usually with a lower put strike and a higher call strike. It combines upside exposure with downside obligation. The bearish reverse purchases puts and sells calls.
Roll
A roll closes an existing option position and opens a replacement, often at another strike or expiration. The closing trade realizes the original result, while the replacement establishes a new premium and remaining term. Rolling does not erase the first trade’s profit or loss.
Settlement
Settlement completes a trade or exercise obligation through the required payment and delivery. Option exercise can settle through shares or through cash according to the product terms. Settlement timing can differ from both the trade time and expiration.
Short option
A short option is established by selling to open and receiving a premium. The seller remains responsible for the obligation until the position is closed, assigned, or expires. An assignment can replace the option obligation with a share transaction or cash payment.
Skew
Skew is a pattern of differing implied volatilities across strikes of one expiration. Equity-index options often have higher IV at lower strikes, reflecting the relative pricing of downside exposure. Changes in skew can affect a spread even when a single overall volatility measure changes little.
Smile
A volatility smile is a pattern in which implied volatility is higher at both lower and higher strikes than around the central strikes of the same expiration. It indicates that one constant volatility does not reproduce all observed option prices under the selected model.
Spot price
The spot price is the current market price of the underlying asset or security, or the current level of an underlying index. It is distinct from the option’s strike and from any separately specified expiration settlement value.
Spread
A spread can mean either the difference between bid and ask or a position combining long and short options. A vertical option spread uses equal quantities of the same option type on one underlying, with matching expiration and contract size at different strikes.
Strike price
The strike price, or exercise price, is the contractual price for purchasing through a call or selling through a put. It normally remains fixed for the contract’s life unless an adjustment changes its terms. It is separate from the premium paid for the option.
Theoretical value
Theoretical value is an option value calculated using a model and assumptions about price, strike, time, volatility, rates, dividends, and exercise terms. Different assumptions can produce different values for the same contract, and none guarantees an available market execution.
Theta
Theta measures the local option-value change as time passes, commonly per calendar day with other inputs fixed. It is usually negative for purchased options. A deeply in-the-money European put can have positive theta when the increasing present value of its approaching strike proceeds outweighs the loss of optionality.
Time decay
Time decay is the usual reduction in time value as an option’s remaining term shortens, holding other pricing inputs fixed. Its rate depends on moneyness and the time left. It is not a fixed daily payment to an option seller.
Time value
Time value is another name for extrinsic value, the option price less intrinsic value. It reflects the valuation of the remaining contractual right, including the effects of volatility, financing, dividends, and exercise timing rather than time alone.
Underlying
The underlying is the asset, security, or index whose price or value determines the option’s exercise result. For a standard stock or ETF option it is the shares; for an index option it is the specified index value.
Uncovered option
An uncovered option is a short option lacking the relevant coverage or protection for its obligation. An uncovered call lacks shares or protective options. An uncovered put lacks offsetting protection or the full cash reserve for assignment and relies on margin arrangements or other funding.
Undefined risk
Undefined risk is a common trading label for uncovered short-option exposure. It does not mean that every position in the category has mathematically unlimited loss. An uncovered stock call has no finite upper loss bound, while a short stock put has a finite maximum loss at a zero underlying price.
Vega
Vega measures the local option-value response to a one-percentage-point increase in implied volatility, such as a move from 20% to 21%, with other inputs fixed. Purchased standard calls and puts normally have positive vega. Short positions reverse that sensitivity.
Volatility
Volatility measures return variability, commonly as an annualized standard deviation. Historical volatility is calculated from past returns, while implied volatility is inferred from an option price through a valuation model. Neither measure specifies the direction of the next price move.
Volume
Volume counts contracts traded during a session. Each matched transaction is counted once, including opening trades, closing trades, and transfers of existing positions. It describes activity over the session rather than the number of contracts remaining outstanding.
Writer
A writer is a seller who opens a short option position, receives the premium, and accepts its contractual obligation. Buying the same series to close removes the open, unassigned position for the quantity executed. An assignment already made requires its own settlement or subsequent transaction.