Options Basics: Glossary of Options Trading Terms

So many people ask how they can start out with options basics. Like most vocations or avocations, options trading has developed some of its own vernacular. To understand options trading, begin by ensuring that you understand the language.

To get started, simply browse this glossary to understand a handful of commonly used options trading terms.

Options Basics: The Glossary

The Basics

Option: A product that is derivative of an underlying stock. Typically, this refers to calls and puts.

Underlying stock: A stock in which an option is based.

Option Trading: The trading of options in order to speculate or hedge against a stock’s volatility.

Call Option: The right to buy shares of a stock at the strike price before its time expires. The seller of the call is forced to sell the stock if the buyer calls them to. The option buyer has the right to buy the underlying stock but not the obligation.

Put Option: The right to sell shares of a stock at the strike price before its time expires. The seller of the put is forced to buy the stock if the buyer calls them to. Again, the option buyer has the right to buy the underlying stock but not the obligation.

Expiration Date: Date when option can no longer be exercised.

Strike Price: AKA Exercise Price. The price in which stocks will change hands if an option is exercised.

Assignment: The receipt of a notice by the writer obligating him/her to sell the underlying stock in the case of a call, or buy the underlying stock in the case of a put at the strike price per share.

Holder: The owner of a call or a put.

Writer: The seller of a call or put that has not been previously purchased.

It’s All Greek To Me

Delta: The amount an option’s value changes corresponding to a one point change in the value of the underlying stock.

Gamma: The amount of an option’s Delta changes corresponding to a one point change in the value of the underlying stock.

Theta: The amount an option’s value changes per day.

Vega: The amount an option’s value changes corresponding to a one point change in the implied volatility of the underlying stock.

Vomma: The amount of an option’s Vega changes corresponding to point change in the implied volatility of the underlying stock.

Rho: The amount an option’s value changes corresponding to a one percent change in interest rates used to price the option contract.

Lambda: The amount of an option’s provided leverage corresponding to a change in its price.

Zomma: AKA D-gamma. The amount of an option’s Gamma changes corresponding to a one point change in Implied Volatility.

Value and Volatility

In-The-Money: A call option that’s strike price is less than the underlying stock’s current price, or a put option that’s strike price is greater than the underlying stock’s current price.

At-The-Money: A call or put option with a strike price that is equal to the underlying stock’s current price.

Out-Of-The-Money: A call option that’s strike price is greater than the underlying stock’s current price, or a put option that’s strike price is less than the underlying stock’s current price.

Intrinsic Value: The difference between the underlying stock’s price and the strike price for an In-The-Money option.

Volatility: The fluctuation, up or down, of the value of a stock. It can be calculated using Historical Volatility or Implied Volatility.

Historical Volatility: A measurement of a stock’s volatility based off its past volatility.

Implied Volatility: A prediction of a stock’s future volatility based off a pricing model.

The Long And Short Of It

Long Position: Buying a stock or option in the hope that they will increase in value over time.

Short Position: It is how an investor profits when a stock decreases in value by borrowing the stock and selling it, then buying it back and returning it (hopefully for less then it was sold for).

Covered Call: Selling calls when you already own enough of the underlying stock to sell if the call is called.

Naked Call: Selling calls when you don’t already own enough of the underlying stock to sell if the call is called.

Cash Secured Put: Having enough cash in an account to buy the underlying stock in case a put gets assigned

Why Buy Options?

Speculative Trading: Trading stock or options with a risk of financial loss in the hope of financial gain.

Hedging: The purchase of options to limit the losses from Speculative Trading.

Leverage: Investing using borrowed capital. examples including, naked calls and naked puts.

Evaluating An Option

Premium: The price a holder pays for an option, consists of Intrinsic Value and Time Value.

Intrinsic Value: The difference between the underlying stock’s current value and the strike price.

Time Value: The value gained from an option based on how long until its expiration date.

Ask: The price you are willing to get paid for an option.

Bid: The price you are willing to pay for an option.

One thought on “Options Basics: Glossary of Options Trading Terms

Leave a Reply