Options Trading Glossary

When an option seller is required to fulfill the terms of the contract because the buyer has exercised. A covered call writer whose call is assigned must sell their shares at the strike price. A cash-secured put writer whose put is assigned must buy the shares at the strike price.

An option whose strike price is equal to (or very close to) the current price of the underlying stock. ATM options have the highest time value and a Delta near ±0.50.

A bearish options strategy that involves buying a put at a higher strike and selling a put at a lower strike, both with the same expiration. The sold put reduces the cost of the bought put but caps the maximum profit.

The mathematical formula used to calculate the theoretical price of a European-style call or put option. It takes five inputs — underlying price, strike price, time to expiration, implied volatility, and risk-free interest rate — and returns the theoretical option value and all five Greeks. OptionsVault's calculator is built on the Black-Scholes model.

The underlying stock price at which an options trade produces neither a profit nor a loss at expiration. For a long call, breakeven is strike price plus premium paid. For a long put, breakeven is strike price minus premium paid.

A bullish options strategy that involves buying a call at a lower strike and selling a call at a higher strike, both with the same expiration. The sold call reduces the cost of the bought call but caps the maximum profit.

A contract that gives the buyer the right — but not the obligation — to purchase 100 shares of the underlying stock at the strike price before expiration. Call buyers profit when the stock rises above the breakeven price.

An options strategy where the seller writes a put option and holds enough cash to buy the shares if assigned. The seller collects the premium and either keeps it (if the put expires worthless) or acquires the stock at the strike price minus premium paid.

An options strategy where an investor who owns at least 100 shares of a stock sells a call option against that position. The call premium generates income. If the stock rises above the strike, the shares may be called away. If the stock stays below the strike, the premium is kept in full.

An options spread where the premium received from the short leg exceeds the premium paid for the long leg, resulting in a net credit to the trader. Bull put spreads and bear call spreads are common examples.

An options spread where the premium paid for the long leg exceeds the premium received from the short leg, resulting in a net debit. Bull call spreads and bear put spreads are common examples.

The rate of change in an option's price for every $1 move in the underlying stock. Calls have positive Delta (0 to +1); puts have negative Delta (−1 to 0). An ATM option has a Delta near ±0.50. Delta also approximates the probability of expiring in the money. See Greeks Explained.

A program that automatically reinvests dividends paid by a stock into additional shares rather than paying cash. DRIP compounding significantly increases long-term returns on dividend-paying positions.

A schedule of upcoming quarterly earnings report dates for publicly traded companies. Critical for options traders because implied volatility typically inflates before earnings and collapses after — a pattern called the volatility crush. OptionsVault's earnings calendar covers US and Canadian stocks.

The act of an option holder invoking their right to buy (call) or sell (put) shares at the strike price. Most retail options expire or are sold before exercise.

The date on which an options contract expires and can no longer be traded. After expiration, an option is either exercised (if in the money) or expires worthless (if out of the money). Weekly, monthly, and quarterly expirations are common.

The portion of an option's price that exceeds its intrinsic value — also called time value or premium. Extrinsic value decays to zero at expiration. It is driven by time remaining and implied volatility.

The rate of change in Delta for every $1 move in the underlying stock. High Gamma means Delta shifts rapidly, amplifying both gains and losses. Gamma is highest for ATM options near expiration. See Greeks Explained.

A set of risk measures that describe how an option's price responds to changes in market conditions. The five main Greeks are Delta, Gamma, Theta, Vega, and Rho. OptionsVault calculates all five in real time.

A backward-looking measure of how much a stock's price actually moved over a given past period, expressed as an annualized percentage. Comparing HV to implied volatility helps traders assess whether options are cheap or expensive relative to realized price action.

The market's forward-looking expectation of future price movement embedded in an option's current price, expressed as an annualized percentage. It is derived by solving the Black-Scholes formula backward from the market price of an option. Higher IV means more expensive options. See Implied Volatility Explained.

An option with intrinsic value. A call is ITM when the stock price is above the strike price. A put is ITM when the stock price is below the strike price. ITM options have higher Deltas and are more expensive than OTM options.

The amount by which an option is in the money. For a call, intrinsic value is stock price minus strike price (when positive). For a put, it is strike price minus stock price (when positive). Out-of-the-money options have zero intrinsic value.

A neutral options strategy combining a bull put spread and a bear call spread on the same stock with the same expiration. The trader collects a net credit and profits if the stock stays within a defined range. Maximum loss is limited; maximum gain is the net credit received.

Long-term Equity AnticiPation Securities — options contracts with expirations of more than one year. LEAPS behave similarly to short-dated options but with significantly less Theta decay and greater sensitivity to interest rates (Rho).

Buying a call option with the expectation that the underlying stock will rise above the breakeven price before expiration. Maximum loss is limited to the premium paid. Maximum gain is theoretically unlimited.

Buying a put option with the expectation that the underlying stock will fall below the breakeven price before expiration. Maximum loss is limited to the premium paid. Maximum gain is the strike price minus premium paid (since a stock can only fall to zero).

The relationship between an option's strike price and the current price of the underlying stock. Options are described as in-the-money (ITM), at-the-money (ATM), or out-of-the-money (OTM).

The total number of outstanding options contracts that have not been settled or expired. High open interest generally indicates better liquidity and tighter bid-ask spreads at that strike.

An option with no intrinsic value. A call is OTM when the stock price is below the strike price. A put is OTM when the stock price is above the strike price. OTM options are cheaper and have lower Deltas than ITM options.

A profit and loss chart that visualizes the potential gain or loss of an options position across a range of underlying stock prices at expiration. OptionsVault generates interactive P&L charts that update in real time as you adjust inputs.

The price paid by the option buyer and received by the option seller for an options contract. Premium is the total cost to enter a long option position, and the maximum profit for a short option position (if the option expires worthless).

A contract that gives the buyer the right — but not the obligation — to sell 100 shares of the underlying stock at the strike price before expiration. Put buyers profit when the stock falls below the breakeven price.

A fundamental pricing relationship that links the price of a call, a put, the underlying stock, and a risk-free bond. It ensures no arbitrage exists between equivalent positions constructed with options versus stock.

The change in an option's price for every 1% change in the risk-free interest rate. Calls have positive Rho (benefit from rising rates); puts have negative Rho. Rho has the most impact on long-dated options like LEAPS. See Greeks Explained.

The theoretical return of an investment with zero risk, typically represented by the yield on short-term government bonds (e.g., the US 3-month T-bill). It is one of the five inputs to the Black-Scholes formula.

The price at which an options contract gives the holder the right to buy (call) or sell (put) the underlying stock. Also called the exercise price. The relationship between the strike and the current stock price determines whether the option is ITM, ATM, or OTM.

The daily time decay of an option's value — how much value the option loses each day as expiration approaches, all else being equal. Theta is negative for option buyers and positive for option sellers. Decay accelerates in the final 30 days before expiration. See Greeks Explained.

See Extrinsic Value. The portion of an option's premium that reflects time remaining and implied volatility, not intrinsic value. It decays to zero at expiration.

The stock or asset on which an options contract is based. When you trade an AAPL call option, AAPL stock is the underlying.

The change in an option's price for every 1% change in implied volatility. Both calls and puts have positive Vega — higher IV means higher option prices. Vega is highest for ATM options with the most time remaining. See Greeks Explained.

The rapid collapse in implied volatility that occurs immediately after a known event — typically an earnings announcement. IV inflates in anticipation of the event and collapses once the uncertainty is resolved. Option buyers entering before earnings face the risk that the IV crush offsets gains from a stock move.

The pattern of differing implied volatilities across strikes at the same expiration. Out-of-the-money puts typically carry higher IV than OTM calls (put skew), reflecting demand for downside protection. Understanding skew helps traders evaluate whether OTM puts or calls are relatively cheap or expensive.

A systematic income strategy that combines cash-secured puts and covered calls. The trader sells a cash-secured put on a stock they want to own. If assigned, they then sell covered calls against the shares until called away, then starts again with a new put. The "wheel" refers to this repeating cycle.