Options Trading Glossary

An option that can be exercised at any time before or on its expiration date, providing greater flexibility than European options.

The lowest price at which a seller is willing to sell an option contract. The difference between the ask and bid is the bid-ask spread.

The process by which an option writer is required to fulfill the obligation of the contract when the buyer exercises the option.

An option whose strike price is equal to or very close to the current market price of the underlying asset.

A vertical spread strategy involving buying a higher-strike put and selling a lower-strike put, used when expecting a moderate decline in the underlying.

The difference between the highest price a buyer will pay (bid) and the lowest price a seller will accept (ask) for an option.

A mathematical pricing model for European options that calculates theoretical option values based on stock price, strike price, time, volatility, and risk-free interest rate.

A vertical spread strategy involving buying a lower-strike call and selling a higher-strike call, used when expecting a moderate rise in the underlying.

A three-strike strategy combining a bull spread and a bear spread that profits when the underlying stays near the middle strike at expiration.

A strategy involving options at the same strike price but different expiration dates, profiting from time decay differences between the near-term and far-term options.

A protective strategy combining a covered call and a protective put on the same underlying, creating a bounded profit-and-loss range.

A Greek measuring the rate of change of an option's price relative to a one-dollar change in the underlying asset's price.

An option that can only be exercised on its expiration date, not before. Most index options are European-style.

The act of an option holder invoking the right to buy (call) or sell (put) the underlying asset at the strike price.

The date on which an option contract becomes void and the right to exercise ceases to exist. After expiration, the option has no value.

A Greek measuring the rate of change of Delta for a one-dollar move in the underlying. High Gamma means Delta can change rapidly.

The market's expectation of future volatility of the underlying asset, derived from the current market price of an option using a pricing model.

An option that has intrinsic value. Calls are ITM when the stock price is above the strike; puts are ITM when the stock price is below the strike.

Long-Term Equity Anticipation Securities, which are options with expiration dates more than one year in the future, allowing for longer-term strategies.

The ease with which an option can be bought or sold at a fair price. Highly liquid options have tight bid-ask spreads and high open interest.

An option sold without holding a corresponding position in the underlying asset or an offsetting option. Naked calls have theoretically unlimited risk.

The total number of outstanding option contracts that have not been closed, exercised, or expired. A measure of market activity and liquidity.

A listing of all available option contracts for a given underlying asset, displaying strikes, expirations, premiums, volume, and open interest.

A Greek measuring the rate of decline in an option's value due to the passage of time, also known as time decay. Expressed as a daily dollar amount.

A Greek measuring the sensitivity of an option's price to a one-percentage-point change in implied volatility of the underlying asset.