Mastering Options Terminology 

Our mission at Masters in Trading is to demystify the far-too-often overcomplicated world of options trading. Every industry has its own unique language, and the world of options trading is no exception. We understand that decoding this specialized vocabulary can sometimes feel like learning a completely new language, but don’t worry – we’re here to help bridge that gap. 

Whether you’ve been trading for a few years or a few weeks, we want to provide you with the tools and resources necessary to accomplish your trading goals. Below you’ll find a list of commonly used options terms and concepts. This glossary is your go-to resource for leveling the playing field and unlocking the potential of the options market. 

 
Glossary  

• Ask Price: The highest price a buyer has paid for the contract.  
• At-the-money: An option is said to be at the money if the current stock price is equal to the strike price.  
• Bid Price: The lowest price a seller has agreed to receive for the contract. 
• Buy/Long/Hold/Debit: These terms can be used interchangeably to describe the action taken when buying a contract (e.g., buy calls, long calls, hold calls, debit calls). 
• Call Option: A call option gives the contract buyer the right (but not the obligation) to buy 100 shares of the underlying stock at the agreed upon strike price before the expiration date. 
• Contract Name (also referred to as Ticker Symbol or Options Chain): The unique identifier indicating the details of the contract.  
• Credit: Money received in an account. A credit transaction is one in which the net sale proceeds are larger than the net buy proceeds (cost), thereby bringing money into the account.  
• Debit: An expense, or money paid out from an account. A debit transaction is one in which the net cost is greater than the net sale proceeds.  
• Expiration Date: The date the contract expires.  
• Expire Worthless: When an option enters expiration out of the money and expires without any remaining value.  
• Extrinsic Value: The amount of premium above the intrinsic value. 
• Options Greeks: The purely theoretical numbers that offer a way to measure how sensitive an option’s price is to a variety of more quantifiable factors.   
  • Delta: The total amount the option price is expected to move based on a $1 change in the underlying security. Call options have a positive delta and put options have a negative delta.  
  • Gamma: Measures the rate of change in the delta for each one-point increase in the underlying asset. Gamma is always positive for both calls and puts and will be larger for at-the-money (ATM) options, dropping lower as the price of the underlying stock moves away, in either direction, from the ATM range.  
  • Theta: Measures the dollar amount an option will lose each day due to the passage of time. The further out you go for expiration, the smaller the theta will be. If you are buying an option, it’s better to buy long-term contracts to minimize loss due to theta. If you’re selling an option and want to profit from theta, you’ll want to look at short-term contracts. 
  • Vega: Measures how sensitive the price of an option is to changes in volatility. An increase in volatility will mean an increase in the options contract price. A decrease in volatility will mean a decrease in the options contract price.  
  • Beta: Measures the volatility of a stock compared to the entire market. A stock with a beta of 1.0 moves with the market. A stock with a beta of more than 1.0 is more volatile than the broad market, while a stock with a beta of less than 1.0 is less volatile. So, if a stock has a beta of 1.5 in relation to the S&P 500, it would be expected to move at a rate of 150% of the fluctuation of the S&P 500.  
  • Rho: Measures the expected change in an option’s price per one percentage point change in interest rates.  
• Implied Volatility (IV): A measurement of how much the price of an option’s underlying stock is expected to fluctuate over the life of the options contract (non-directional).  
• Implied Volatility Percentile: A measurement that indicates the percentage of days in the past 52 weeks in which the IV was lower than the current IV. (Also referred to as “IV Percentile.”)  
• Implied Volatility Rank (IVR): A measurement calculated by ranking the current implied volatility relative to the highest and lowest IV levels over the past 52 weeks. It is a good indicator to determine what the current IV is compared to the IV range the option experiences. (Also referred to as “IV Rank” and “IVR.”)  
• Intrinsic value: The difference between the underlying stock’s price and the strike price.  
• In-the-money (ITM): An ITM option is one with a strike price that has already been surpassed by the current stock price. ITM options have intrinsic value and are priced higher than out-of-the-money (OTM) options in the same chain because they can be immediately exercised.  
• Last Price: The price that was paid or received the last time the option was traded.  
• Open Interest: The number of contracts that are active or unsettled (haven’t been filled) on that specific option.  
• Option Type: Call option or put option.  
• Out-of-the-money (OTM): An out-of-the-money option is one that has a strike price that the current stock price has yet to reach, meaning the option has no intrinsic value.  
• Position Type (Trade Type): Defines if you are buying or selling the contract.  
• Premium (Option Price): The price per share you pay or receive for opening or closing an options contract. (If the cost of the contract is $1.50, your total credit/debit would be $150 — to account for the 100 shares represented by the contract. This is also referred to as “Option Price.”)  
• Put Option: A put option gives the contract buyer the right (but not the obligation) to sell 100 shares of the underlying stock at the strike price before the expiration date.  
• Sell/Short/Write/Credit: These terms also can be used interchangeably to describe the action taken when selling a contract (e.g., sell puts, short puts, write puts, credit puts).  
• Spread Strategy: Any option position having both long options and short options of the same type on the same underlying security. 
  • Straddle: A spread strategy involving buying both a call option and a put option with the same strike price and expiration date on the same underlying asset, anticipating significant price movement in either direction. 
  • Strangle: A spread strategy involving the purchase of both a call option and a put option on the same underlying asset with different strike prices, anticipating significant price movement in either direction. 
• Strike Price (Exercise Price): The price the buyer will pay, or at which the seller will sell the underlying stock, if the contract is exercised. (Also referred to as the “Exercise Price.”)  
• Technical Analysis: The method of predicting future stock price movements based on observation of historical stock price movements. This is subjective; traders should not risk money purely on technical analysis. 
• Underlying Stock: The stock that the options contract is written for.  
• Volatility: The measurement of how the underlying stock normally swings.   
• Volume: How many contracts have been bought or sold in a given time frame (if not specified, it normally refers to the trading-day volume).