Options Trading Terms
Essential Stock Option Trading terms​
1. Option​
A contract that gives the buyer the right, but not the obligation, to buy or sell an underlying asset at a specified price (strike price) on or before a certain date (expiration date). The seller (writer) of the option has the obligation to fulfill the terms of the contract if the buyer exercises the option.
2. Call Option​
A type of option that gives the buyer the right to buy the underlying asset at the strike price. The seller of the call option has the obligation to sell the underlying asset if the buyer exercises the option.
3. Put Option​
A type of option that gives the buyer the right to sell the underlying asset at the strike price. The seller of the put option has the obligation to buy the underlying asset if the buyer exercises the option.
4. Short Call​
An option strategy that involves selling a call option on an underlying asset. The seller receives a premium upfront, but is exposed to unlimited risk if the price of the underlying asset rises above the strike price of the option.
5. Short Put​
An option strategy that involves selling a put option on an underlying asset. The seller receives a premium upfront, but is obligated to buy the underlying asset at the strike price of the option if the buyer exercises the option.
6. Long Call​
An option strategy that involves buying a call option on an underlying asset that the buyer expects to increase in price. The buyer pays a premium upfront, and has the right to buy the underlying asset at the strike price of the option before or on the expiration date.
7. Long Put​
An option strategy that involves buying a put option on an underlying asset that the buyer expects to decrease in price. The buyer pays a premium upfront, and has the right to sell the underlying asset at the strike price of the option before or on the expiration date.
8. Synthetic Future​
Synthetic Futures are an innovative method of trading that allows traders to choose strikes for Straddles with more balanced premiums, giving them an advantage in market prediction and strategy development. The above feature follows a simple formula: Spot ATM Strike - Spot ATM PE + Spot ATM CE = Synthetic Future.
9. Strike Price​
The price at which the underlying asset can be bought or sold by the option holder. The strike price is determined by the option contract and does not change during the life of the option.
10. Expiration Date​
The date on which the option contract expires and becomes worthless. The expiration date is determined by the option contract and does not change during the life of the option.
11. In the Money​
An option that has intrinsic value, is called In the Money option. A call option is in the money when the underlying asset price is above the strike price. A put option is in the money when the underlying asset price is below the strike price.
12. Out of the Money​
An option that has no intrinsic value, is called Out of the Money option. A call option is out of the money when the underlying asset price is below the strike price. A put option is out of the money when the underlying asset price is above the strike price.
13. At the Money​
An option that has zero intrinsic value, is called At the Money option. An at the money option has only time value, which is the potential for the option to become in the money before expiration.
14. Intrinsic Value​
The amount by which an option is in the money. It is the difference between the current market price of the underlying asset and the strike price of the option. Intrinsic value can never be negative, as the option holder can always choose not to exercise the option.
15. Extrensic Value​
Extrinsic value is the difference between an option's market price (the premium) and its intrinsic value. Extrinsic value is also the part of an option's worth determined by variables other than the underlying asset's price. Intrinsic value, or the inherent worth of a choice, is the polar opposite of extrinsic value.
16. Time Value​
The amount by which an option's price exceeds its intrinsic value. It is the premium that the option buyer pays for the possibility that the option will become in the money before expiration. Time value decreases as the option approaches expiration, and becomes zero at expiration.
17. Premium​
The price of an option, which is determined by the supply and demand of the market. The premium consists of the intrinsic value and the time value of the option. The option buyer pays the premium to the option seller to acquire the option contract.
18. Contract Size​
The word "contract size" refers to the deliverable quantity of a stock, commodity, or financial instrument that underpins a futures or option contract. It is a standardized number that informs merchants about the exact quantities being purchased or sold under the terms of the transaction. Contract sizes are frequently defined by exchanges and vary according on the commodity or instrument. They also calculate the monetary worth of a single unit change or tick size in the underlying commodity or instrument.
19. Spot price​
The spot price is the current market price of an asset, currency, or commodity that can be purchased or sold and settled immediately. Stated differently, the asset's current market value is determined by the price that both buyers and sellers agree on.
20. Bid Price​
The maximum price at which a buyer wants to buy a security in the market. The bid price is usually lower than the ask price, and the difference between them is called the bid-ask spread.
21. Ask Price​
The minimum price at which a seller wants to sell a security in market. The ask price is usually higher than the bid price, and the difference between them is called the bid-ask spread.
22. Bid-Ask Spread​
The difference between the bid price and the ask price of an option. The bid-ask spread reflects the liquidity and volatility of the option market. A narrow bid-ask spread indicates a liquid and efficient market, while a wide bid-ask spread indicates a illiquid and inefficient market.
23. Volume​
The number of option contracts that are traded in a given period of time. Volume reflects the level of activity and interest in the option market. High volume indicates a high demand and supply of options, while low volume indicates a low demand and supply of options.
24. Open Interest​
The number of option contracts that are open and have not been closed or exercised. Open interest reflects the number of outstanding options in the market. High open interest indicates a high level of commitment and participation in the option market, while low open interest indicates a low level of commitment and participation in the option market.
25. Exercise​
The act of using the right granted by the option contract to buy or sell the underlying asset at the strike price. The option buyer can exercise the option at any time before expiration, while the option seller has no control over when the option will be exercised. The option buyer pays the strike price to the option seller to complete the transaction.
26. Assignment​
The act of fulfilling the obligation imposed by the option contract to buy or sell the underlying asset at the strike price. The option seller is assigned the option when the option buyer exercises the option. The option seller receives the strike price from the option buyer to complete the transaction.
27. American Style Option​
A type of option that can be exercised at any time before expiration. Most equity options are American style options.
28. European Style Option​
A type of option that can only be exercised at expiration. Most index options are European style options.
29. Automatic Exercise​
The process by which in the money options are automatically exercised at expiration, unless the option holder instructs otherwise. Automatic exercise is a service provided by the Options Clearing Corporation (OCC) to protect the option holder from losing the intrinsic value of the option.
30. Expiration Style​
The way in which an option is settled at expiration. There are two main expiration styles physical settlement and cash settlement.
31. Physical Settlement​
A type of expiration style that involves the actual delivery of the underlying asset when the option is exercised or assigned. Most equity options are physically settled.
32. Cash Settlement​
A type of expiration style that involves the payment of cash equivalent to the intrinsic value of the option when the option is exercised or assigned. Most index options are cash settled.
33. Delta​
The measure of the sensitivity of an option's price to a change in the price of the underlying asset. Delta is also known as the hedge ratio, as it indicates how many shares of the underlying asset are needed to hedge one option contract. Delta ranges from 0 to 1 for call options, and from -1 to 0 for put options. Delta is positive for long positions and negative for short positions.
34. Gamma​
The measure of the sensitivity of an option's delta to a change in the price of the underlying asset. Gamma indicates how much the delta of an option will change for a one-unit change in the price of the underlying asset.
35. Theta​
The measure of the sensitivity of an option's price to a change in time. Theta indicates how much the option's price will decrease for a one-unit decrease in time to expiration. Theta is also known as the time decay, as it reflects the erosion of the option's time value.
36. Vega​
The measure of the sensitivity of an option's price to a change in volatility. Vega indicates how much the option's price will change for a one-unit change in the implied volatility of the underlying asset.
37. Rho​
The measure of the sensitivity of an option's price to a change in interest rate. Rho indicates how much the option's price will change for a one-unit change in the risk-free interest rate. Rho is positive for long call and short put positions, and negative for short call and long put positions.
38. Implied Volatility​
The measure of the expected volatility of the underlying asset implied by the option's price. Implied volatility is derived from an option pricing model, such as the Black-Scholes model, by inputting the option's price and solving for the volatility variable. Implied volatility reflects the market's expectation of the future price movements of the underlying asset.
39. Historical Volatility​
The measure of the actual volatility of the underlying asset observed over a given period of time. Historical volatility is calculated by using the standard deviation of the logarithmic returns of the underlying asset. Historical volatility reflects the past price movements of the underlying asset.
40. Volatility Skew​
The phenomenon that different options on the same underlying asset with different strike prices or expiration dates have different implied volatilities. Volatility skew is also known as the smile or smirk, as it creates a curve when plotting the implied volatilities against the strike prices or expiration dates. Volatility skew reflects the market's perception of the probability and magnitude of extreme price movements of the underlying asset.
41. Option Chain​
A table that displays the prices, volumes, and other information of various options on the same underlying asset with different strike prices and expiration dates. Option chains are usually provided by option exchanges or brokers to help traders analyze and compare different options.
42. Option Pricing Model​
A mathematical formula or model that is used to calculate the fair value of an option based on various factors, such as the price of the underlying asset, the strike price, the time to expiration, the volatility, the interest rate, and the dividends. Option pricing models are also used to derive the option greeks and the implied volatility. Some of the common option pricing models are the Black-Scholes model, the binomial model, and the Monte Carlo model.
43. Black-Scholes Model​
A widely used option pricing model that was developed by Fischer Black, Myron Scholes, and Robert Merton in 1973. The Black-Scholes model assumes that the underlying asset follows a lognormal distribution, the volatility and interest rate are constant, and there are no dividends.
44. Break-Even Point​
The underlying stock price at which an option strategy will realize neither a profit nor a loss, generally at option expiration.
45. Bull Butterfly Spread​
This is an advanced strategy that can be used when the outlook of an underlying security is bullish. Learn how to use a Bull Butterfly Spread.
46. Bull Call Spread​
A simple strategy, using calls, that can be used when the expectation is that the underlying security will increase in price. Learn how to use a Bull Call Spread.
47. Bull Put Spread​
A simple strategy, using puts, that can be used when the expectation is that the underlying security will increase in price.
48. Bear Butterfly Spread​
An option strategy that involves buying a call option with a low strike price, selling two call options with a middle strike price, and buying a call option with a high strike price. All options have the same expiration date and are on the same underlying asset. This strategy is used to profit from a moderate decline in the underlying asset's price, with limited risk and reward.
49. Bear Call Spread​
An option strategy that involves selling a call option with a lower strike price and buying a call option with a higher strike price. Both options have the same expiration date and are on the same underlying asset. This strategy is used to profit from a slight decline or no change in the underlying asset's price, with limited risk and reward.
50. Bear Put Spread​
An option strategy that involves buying a put option with a higher strike price and selling a put option with a lower strike price. Both options have the same expiration date and are on the same underlying asset. This strategy is used to profit from a moderate decline in the underlying asset's price, with limited risk and reward.
51. Butterfly Spread​
The term ""butterfly spread"" refers to an options strategy that comprises bull and bear spreads with defined risk and profit limits. The most profitable situation for these spreads, which are intended to be market-neutral strategies, is for the underlying asset to stay constant until option expiration. They either have four puts, four calls, or a combination of the two with three strike prices.
52. Buy To Close​
A transaction that eliminates or reduces a short position in an option. The buy to close order is used to close out an existing short position that was created by initially selling to open.
53. Buy To Open​
A transaction that creates or increases a long position in an option. The buy to open order is used to enter a long position on an option contract.
54. Buy-Write​
A strategy that involves buying a stock and writing (selling) a call option on the same stock. The buy-write strategy is also known as a covered call.
55. Calendar Spread​
A strategy that involves buying and selling options with different expiration dates, but the same type, strike price, and underlying security. The calendar spread can be constructed using calls or puts, and it can be either bullish or bearish.
56. Call Ratio Back spread​
A strategy that involves buying more call options than the number of call options sold. The call ratio backspread is a bullish strategy that profits from a large increase in the underlying security's price.
57. Put Ratio Backspread​
A put ratio backspread is an options trading strategy that combines short and long puts to construct a position with profit and loss possibilities based on the ratio of these puts.
58. Long Strangle​
An option strategy that involves buying a call option and a put option with different strike prices, but the same expiration date and the same underlying asset. The strike price of the call option is higher than the strike price of the put option. This strategy is used to profit from a large movement in the price of the underlying asset, in either direction, with unlimited reward and limited risk.
59. Short Straddle​
An option strategy that involves selling a call option and a put option with the same strike price, expiration date, and underlying asset. This strategy is used to profit from a lack of movement in the price of the underlying asset, with limited reward and unlimited risk.
60. Strangle​
A general term for an option strategy that involves buying or selling a call option and a put option with different strike prices, but the same expiration date and the same underlying asset. See also Long Strangle and Short Strangle.
61. Iron Condor​
An option strategy that involves selling a OTM call option, buying a call option with a higher strike price, selling a OTM put option, and buying a put option with a lower strike price. All options have the same expiration date and are on the same underlying asset. This strategy is used to profit from a narrow range of movement in the price of the underlying asset, with limited risk and limited reward.
62. Iron Butterfly​
An option strategy that involves selling a call option and a put option with the same strike price, buying a call option with a higher strike price, and buying a put option with a lower strike price. All options have the same expiration date and are on the same underlying asset. This strategy is used to profit from a slight movement or no change in the price of the underlying asset, with limited risk and limited reward.
63. Synthetic Call​
An option strategy that involves buying a put option and buying the underlying asset. This strategy replicates the payoff of a long call option, but with more flexibility and lower cost.
64. Synthetic Put​
An option strategy that involves buying a call option and selling the underlying asset. This strategy replicates the payoff of a long put option but with more flexibility and lower cost.
65. Bear Call Ladder​
An option strategy that involves selling a call option with a lower strike price, buying a call option with a middle strike price, and buying another call option with a higher strike price. All options have the same expiration date and are on the same underlying asset. This strategy is used to profit from a moderate decline in the price of the underlying asset, with limited risk and unlimited reward.
66. Hedge​
A hedge is an investment position designed to counterbalance any losses or benefits from a companion investment.
67. All-or-None (AON) Order​
An order that must be fully completed or will not be fulfilled. This is a valuable order for option traders undertaking complex option strategies that require exact execution.
68. Payoff graph​
Payoff graphs are graphical representations of option payoffs. They are frequently referred to as "risk graphs." The x-axis indicates the spot price of a call or put stock option, while the y-axis reflects the profit or loss generated by the stock/index options.
69. Arbitrage​
The simultaneous buying and sale of financial assets in order to profit from price differences. Option traders frequently look for parity in the pricing of the options and future contracts, thereby benefiting from a risk free trade.
70. Weekly Expiry​
Weekly expiry contracts are those that expire on a specific day of every week depending on instument, unless it is a trading holiday in which case they expire on the preceding trading day. Weekly expiry contracts offer more flexibility and opportunities for traders to take advantage of short-term price movements and events.
71. Monthly Expiry​
Monthly expiry contracts are those that expire on a specific day of every month, unless it is a trading holiday, in which case they expire on the preceding trading day. Monthly expiry contracts are more suitable for long-term investors and hedgers who want to reduce their exposure to market risks.
72. Condor Spread​
A complicated neutral option strategy with limited profit and limited loss seeks profit from low volatility or high volatility. A long condor spread works well in a low-volatility environment. A short condor spread works well in a high-volatility environment.
73. Calendar Strangle​
Calendar Strangle is a sophisticated neutral options strategy that involves purchasing a long-term strangle and selling a short-term strangle.
74. Calendar Straddle or Combination​
A complex neutral options strategy that includes buying a long-term straddle and selling a short-term straddle.
75. Diagonal Spread​
An options spread on the same underlying, same type but different expiration month along with strike.
76. Fiduciary Call​
A fiduciary call is a method for trading options that is equivalent to buying a regular call option. The main difference is that the strike price, rather than being utilized to purchase the assets immediately, is invested where it may earn interest.
77. Front Ratio Spreads​
Front Ratio Spread is a strategy that involves purchasing a long option and selling a greater number of higher OTM strike options of the same expiry.
78. Front Ratio Call Spread​
Front Ratio Call Spread is a strategy that involves buying an ATM or OTM call option and selling two OTM call options with a higher strike of the same expiry.
79. Front Ratio Put Spread​
Front Ratio Call Spread is a strategy that involves buying an ATM/OTM Put option and selling 2 OTM Put option with a higher strike of the same expiry.
80. Positional Trading​
Positional trading is a trading method in which traders hold their positions for a lengthy period of time, usually several weeks, months, or even years. The approach aims to profit on long-term market trends rather than short-term changes.
81. Quadruple Witching​
Quadruple witching is a phenomenon when stock options, stock futures, stock index options, and stock index futures all expire on the same day.
82. Ratio Backspread​
A ratio backspread is an options trading method used by bullish investors who predict the underlying security or stock will grow significantly while reducing losses. The strategy involves buying more call options in order to sell fewer calls at a different strike but the same expiration date. While the downside is limited, returns might be substantial if the underlying security rallies considerably due to the ratio feature. The ratio of lengthy to short calls is usually 2:1, 3:2, or 3:1.
83. Ratio Calendar Spread​
Credit volatility options trading method that allows for maximum profit on one leg by selling a lower quantity of in-the-money options in exchange for purchasing at-the-money or out-of-the-money options of the same type.
84. Ratio Spread​
Using either puts or calls, the technique consists of purchasing a particular number of options and then selling a bigger number of out-of-the-money options.
85. Ratio Strategy​
A strategy using an uneven number of long and short options. Normally, it signifies a preference for short options over long options.
86. Return If Unchanged​
The return that an investor would receive on a specific position if the underlying stock's price remained unchanged at the expiration of the options in the position.
88. Reverse Strategy​
A generic term used to describe techniques that are diametrically opposed to more well-known strategies. A ratio spread, for example, is the purchase of calls at a lower strike and the sale of additional calls at a higher strike. A reverse ratio spread, also known as a backspread, involves selling calls at a lower strike and purchasing more calls at a higher strike. The results are obviously directly opposite to each other.
89. Debit Spread​
A debit spread, also known as a net debit spread, is an options strategy that involves simultaneously purchasing and selling options of the same class with different strike prices, resulting in a net "debit" for the trader.
90. Credit spread​
A credit spread is the process of selling a high-premium option while acquiring a low-premium option in the same class or asset, resulting in a credit to the trader's or investor's account.
91. Short Calendar Spread​
A volatile options strategy that profits largely on the difference in time decay between long and short term options, which is accomplished by writing longer term options and purchasing short term options.
92. Vertical Spread​
A vertical spread is the simultaneous purchase and sale of options of the same kind (e.g., puts or calls) and expiry but with different strike prices. The term'vertical' is derived from the location of the strike prices.
93. Vertical Ratio Spread​
A vertical spread that buys and sells an uneven quantity of options on each leg. Vertical ratio spreads essentially combine the directional merit of vertical spreads with the neutral and volatile inclination of ratio spreads, resulting in unique neutral and volatile options trading strategies that allow maximum profit or unlimited profit in one direction while establishing vertical ratio spread positions with a net credit, which significantly reduces risk and increases the probability of winning.
94. Volatile Strategy​
An option strategy designed to profit from volatility regardless of whether the underlying stock swings up or down swiftly.
95. Volatility​
Volatility is a measure of how much an underlying security is projected to move over a certain time period. Volatility, as defined by the yearly standard deviation of daily price swings in the investment, is not the same as the stock's Beta.
96. Volatility Crush​
A quick, severe decline in implied volatility that causes a substantial reduction in extrinsic value and, as a result, option prices decline.
97. Call Ratio Spread​
Call Ratio Spread is a credit options trading method that allows you to benefit whether a stock moves up, down, or sideways by shorting more out of the money calls than buying ATM calls.
98. Call Time Spread​
Call Time Spread is another term for Call Calendar Spread. To profit from time decay, an Options Trading technique involves buying long-term call options and writing near-term call options.
99. Bearish Options Strategies​
Various strategies for profiting from an downward movement in the underlying stock.
100. Horizontal Put Time Spread​
An option strategy in which longer term at the money put options are purchased and short term at the money put options are issued in order to benefit while the underlying stock remains stable.
101. Adjusted Options​
Non-standardized stock options with tailored terms to reflect significant changes in the underlying stock's capital structure.
102. Box Spread​
A box spread, also known as a long box, is an options trading strategy in which you buy a bull call spread and a matching bear put spread. A box spread consists of two vertical spreads with identical strike prices and expiration dates. A Box Spread, sometimes known as an Alligator Spread owing to the way commissions eat up any potential profits, is an options trading technique that takes advantage of price differences to generate risk-free arbitrage.
103. OHLC​
OHLC stands for Open, High, Low, and Close, representing key data points in financial trading that describe the movement of a security over a specified period. These four data points are essential for understanding market trends and making informed trading decisions.
The "Open" indicates the price at which a security first traded upon the opening of an exchange on a given trading day.
The "High" is the highest price at which a security traded during the trading day.
The "Low" represents the lowest price at which a security traded.
The "Close" denotes the price at which a security last traded upon the close of an exchange.
Together, these elements provide a comprehensive snapshot of a security's trading activity, serving as the foundation for various types of financial analysis, including technical analysis and the creation of candlestick charts.
104. Candlestick Charts (Candles)​
Candlestick charts, commonly referred to as "candles," are a type of financial chart used to represent price movements of a security, derivative, or currency. Each candlestick typically shows one day, week, month, or another user-defined time frame's worth of trading activity. A single candlestick is composed of a body and wicks (or shadows) extending from the top and bottom. The body's length represents the range between the opening and closing prices, while the wicks indicate the high and low prices during the period.
Bullish Candle: If the close is above the open, the candle is typically colored white or green, representing a price increase during the period.
Bearish Candle: Conversely, if the close is below the open, the candle is usually colored black or red, indicating a price decrease.
Candlestick charts are highly valued for their ability to visually convey market sentiment and potential price reversals, making them indispensable tools for traders employing technical analysis.
105. BTST​
BTST stands for "Buy Today Sell Tomorrow."
It is a trading strategy employed in the stock market where a trader buys shares on one trading day and sells them on the next trading day. This strategy capitalizes on the anticipated overnight price movement of a stock due to news, events, or market sentiment that may occur after the close of the trading session on the day of purchase.
BTST allows traders to leverage short-term price movements without the need to wait for the settlement of the trade, which traditionally takes T+2 days (Transaction Date plus two working days) for completion. This strategy is particularly popular in markets that experience significant daily price fluctuations and is used by traders looking to profit from quick, short-term gains.