Plain-English definitions for the terms you’ll run into trading options. Use your browser’s find function (Ctrl/Cmd+F) or the strategy links below to jump straight to a term. Where a term has its own deep-dive article, we’ve linked it.
A
Assignment
When the seller (writer) of an option is required to fulfill the contract — selling shares (short call) or buying shares (short put) at the strike price — because the option holder exercised their right. See options assignment risk for when this is likely to happen and how to manage it.
At-the-Money (ATM)
An option whose strike price is equal to (or very close to) the current price of the underlying stock. ATM options have the highest extrinsic value and the fastest time decay.
Ask Price
The lowest price a seller is currently willing to accept for an option. You buy at the ask.
B
Bear Put Spread
A debit spread that profits from a moderate decline in the underlying: buy a put at a higher strike, sell a put at a lower strike. See option-trading-101: bear put spread.
Bid Price
The highest price a buyer is currently willing to pay for an option. You sell at the bid.
Bid-Ask Spread
The gap between the bid and ask price. A wide spread signals low liquidity and higher trading cost; a narrow spread signals a liquid, efficiently priced option.
Breakeven Price
The underlying price at which a position neither gains nor loses money at expiration. Use the options profit calculator to find breakeven for any strategy instantly.
Bull Call Spread
A debit spread that profits from a moderate rise in the underlying: buy a call at a lower strike, sell a call at a higher strike. See option-trading-101: bull call spread.
C
Call Option
A contract giving the buyer the right, but not the obligation, to buy 100 shares of the underlying at the strike price on or before expiration.
Cash-Secured Put
Selling a put while holding enough cash to buy the shares if assigned. See option-trading-101: cash-secured put and how to calculate cash-secured put return and breakeven.
Collar
A protective strategy combining a covered call with a protective put on the same stock, capping both upside and downside. See option-trading-101: collar.
Contract
One options contract typically represents 100 shares of the underlying stock.
Covered Call
Selling a call option against 100 shares you already own, collecting premium in exchange for capping your upside at the strike. See covered call strategy explained and how to calculate covered call breakeven and return.
Credit Spread
A multi-leg strategy where you receive net premium upfront (e.g., bull put spread, bear call spread), with defined max profit and max loss. See credit spread vs debit spread.
D
Debit Spread
A multi-leg strategy where you pay net premium upfront (e.g., bull call spread, bear put spread), with defined max profit and max loss. See credit spread vs debit spread.
Delta
A Greek measuring how much an option’s price changes for a $1 move in the underlying. Calls range from 0 to 1; puts range from 0 to -1. Delta is also commonly used as a rough proxy for the probability an option finishes in-the-money.
Diagonal Spread
A spread combining options at different strikes and different expirations. See option-trading-101: diagonal spread.
Days to Expiration (DTE)
The number of calendar days remaining until an option contract expires. Shorter DTE means faster time decay (theta).
E
Early Assignment
Assignment that happens before expiration, most commonly on short calls right before a stock goes ex-dividend. See options assignment risk.
Exercise
When an option holder invokes their right to buy (call) or sell (put) the underlying at the strike price.
Expiration Date
The last date an option contract is valid. After this date, the option either gets exercised, assigned, or expires worthless.
Extrinsic Value
The portion of an option’s premium above its intrinsic value — driven by time remaining and implied volatility. Also called time value.
G
Gamma
A Greek measuring how much delta changes for a $1 move in the underlying. Gamma is highest for at-the-money options close to expiration.
Greeks
The collective term for delta, gamma, theta, vega, and rho — the sensitivities that describe how an option’s price responds to changes in the underlying, time, and volatility.
I
Implied Volatility (IV)
The market’s forecast of how much the underlying is likely to move, expressed as an annualized percentage and embedded in an option’s price. Higher IV means more expensive premiums.
In-the-Money (ITM)
A call with a strike below the current stock price, or a put with a strike above the current stock price. ITM options have intrinsic value.
Intrinsic Value
The amount an option would be worth if exercised right now: max(stock price − strike, 0) for calls, max(strike − stock price, 0) for puts.
Iron Butterfly
An iron condor with the short strikes set at the same price (typically at-the-money), collecting more premium but with a narrower profit zone. See option-trading-101: iron butterfly and iron condor vs iron butterfly.
Iron Condor
A four-leg, defined-risk strategy that sells a put spread and a call spread on the same underlying, profiting if the stock stays within a range. See iron condor strategy and how to calculate max loss and max profit on an iron condor.
L
LEAPS
Long-Term Equity Anticipation Securities — options with expirations more than a year out, used for longer-term directional or income strategies.
Long Call
Buying a call option outright. Max loss is limited to the premium paid; profit is theoretically unlimited. See option-trading-101: long call.
Long Put
Buying a put option outright, often used for downside speculation or portfolio protection. See option-trading-101: long put and protective put.
M
Max Loss
The most a position can lose. Defined for spreads, covered calls, and cash-secured puts (down to $0 for the latter two); theoretically unlimited for naked short calls. Calculate it for any strategy with the options profit calculator.
Max Profit
The most a position can make. Uncapped for long calls; defined for spreads, credit strategies, and covered calls.
Moneyness
Shorthand for whether an option is in-the-money, at-the-money, or out-of-the-money relative to the current stock price.
N
Naked Option
A short option sold without an offsetting position to cover it (e.g., a short call without owning the stock). Naked calls carry theoretically unlimited risk. See selling naked puts and covered call vs naked call.
O
Open Interest
The total number of outstanding contracts for a given option that have not been closed, exercised, or expired. Higher open interest generally means better liquidity.
Out-of-the-Money (OTM)
A call with a strike above the current stock price, or a put with a strike below it. OTM options have no intrinsic value — only extrinsic value.
P
Premium
The price of an options contract, quoted per share (multiply by 100 for the total cost of one contract).
Protective Put
Buying a put against stock you own to hedge downside risk, similar to insurance. See protective put strategy and protective put vs collar.
Put Option
A contract giving the buyer the right, but not the obligation, to sell 100 shares of the underlying at the strike price on or before expiration.
R
Rho
A Greek measuring how much an option’s price changes for a 1% move in interest rates. Usually the least impactful Greek for short-dated options.
Roll (Rolling)
Closing an existing option position and simultaneously opening a new one, typically at a different strike and/or expiration, to extend a trade or avoid assignment. See how to roll a covered call.
S
Short Call
Selling a call option, either covered (against owned stock) or naked (uncovered). See covered call and naked calls.
Short Put
Selling a put option, most commonly as a cash-secured put. See cash-secured put.
Straddle
Buying (or selling) a call and put at the same strike and expiration, betting on a large move (long) or low volatility (short). See option-trading-101: straddle.
Strangle
Like a straddle, but the call and put use different (typically OTM) strikes, lowering cost but requiring a bigger move to profit. See option-trading-101: strangle and short strangle strategy.
Strike Price
The fixed price at which an option can be exercised — to buy the underlying (call) or sell it (put).
T
Theta
A Greek measuring how much an option loses in value per day, all else equal — the rate of time decay. Theta accelerates as expiration approaches.
Time Decay
The erosion of an option’s extrinsic value as it approaches expiration, measured by theta.
Time Value
See extrinsic value.
U
Underlying Asset
The stock, ETF, or index that an option contract derives its value from.
V
Vega
A Greek measuring how much an option’s price changes for a 1-percentage-point change in implied volatility.
Vertical Spread
A spread using two options of the same type (both calls or both puts) and expiration, but different strikes — includes bull call spreads, bear put spreads, and credit spreads. See credit spread vs debit spread.
Volatility
A measure of how much a stock’s price fluctuates. See implied volatility above for the options-pricing-specific version.
W
Wheel Strategy
A cyclical income strategy: sell cash-secured puts until assigned, then sell covered calls on the resulting shares until they’re called away, then repeat. Combines the cash-secured put and covered call mechanics above.
Looking for the math behind these terms rather than just the definitions? Try the options profit calculator for max profit, max loss, and breakeven on any strategy above.