Options Trading Terminology Cheat Sheet

Master the language of options trading with this comprehensive terminology guide. Understanding these terms is essential for successful options trading.

Basic Options Terms

Call Option

A contract that gives you the right to buy a stock at a specific price before expiration. Learn more: What is a Call Option?

Put Option

A contract that gives you the right to sell a stock at a specific price before expiration. Learn more: How Does a Put Option Work?

Strike Price

The predetermined price at which you can buy (call) or sell (put) the underlying stock.

Premium

The price you pay to buy an option contract. This is your maximum risk when buying options.

Options Expiry Date

The last day an option can be exercised. After this date, the option becomes worthless if not exercised.

In the Money vs Out of the Money Meaning

In the Money (ITM)

For Calls: Stock price is above the strike price

For Puts: Stock price is below the strike price

ITM options have intrinsic value and are more expensive.

At the Money (ATM)

When the stock price is equal to or very close to the strike price. ATM options have the highest time value.

Out of the Money (OTM)

For Calls: Stock price is below the strike price

For Puts: Stock price is above the strike price

OTM options have no intrinsic value, only time value.

Option Greeks for Beginners

Delta (Δ)

Measures how much an option's price changes for every $1 move in the underlying stock.

Range: 0 to 1 for calls, -1 to 0 for puts

Example: A delta of 0.50 means the option price moves $0.50 for every $1 stock move.

Gamma (Γ)

Measures the rate of change of delta. Shows how much delta will change with a $1 move in the stock.

Important: Highest for ATM options, increases as expiration approaches.

Theta (Θ)

Measures time decay - how much value the option loses each day as it approaches expiration.

Always negative for long positions: Time decay works against option buyers.

Example: Theta of -0.05 means you lose $5 per day per contract.

Vega (ν)

Measures sensitivity to volatility changes. Shows how much the option price changes with a 1% change in implied volatility.

Always positive: Higher volatility increases option values.

Rho (ρ)

Measures sensitivity to interest rate changes. Less important for short-term options.

For a deeper dive, see our comprehensive Option Greeks Guide.

How to Read an Options Chain

Bid Price

The highest price a buyer is willing to pay for the option. You receive this when selling.

Ask Price

The lowest price a seller is willing to accept. You pay this when buying.

Bid-Ask Spread

The difference between bid and ask. Narrower spreads indicate more liquid options.

Volume

Number of contracts traded today. Higher volume indicates more interest and liquidity.

Open Interest

Total number of outstanding option contracts. Shows overall market interest.

Implied Volatility (IV)

Market's forecast of likely movement. Higher IV = higher option premiums.

Position Types

Long Position

When you buy an option. You pay premium upfront. Limited risk, unlimited (or substantial) profit potential.

Short Position

When you sell an option. You collect premium upfront. Limited profit, potentially unlimited risk (if naked).

Covered

When you own the underlying stock (covered call) or have cash to buy it (cash-secured put).

Naked

When you sell an option without owning the underlying or having protection. High risk strategy.

Common Strategy Terms

Spread

A strategy involving buying one option and selling another. Reduces cost and risk compared to single options.

Vertical Spread

Options at different strike prices but same expiration. Examples: bull call spread, bear put spread.

Iron Condor

Selling both a call spread and put spread on the same stock. Profits from low volatility. Try Iron Condor Buddy!

Straddle

Buying a call and put at the same strike. Profits from big moves in either direction.

Strangle

Buying OTM call and put. Lower cost than straddle but requires larger moves to profit.

Order Types

Market Order

Executes immediately at current market price. Use carefully with options due to spreads.

Limit Order

Only executes at your specified price or better. Recommended for options trading.

Stop Loss Order

Automatically sells if the option reaches a certain price, limiting losses.

Additional Resources

Disclaimer: Options trading terminology can be complex. This guide is for educational purposes only. Always ensure you understand the terms and risks before trading.