Options Trading Glossary: 89 Terms in Plain English

Draw Lines Make Money · price action, no indicators · October 15, 2026 · Tools

An options glossary is a reference list of the words used when trading options, each explained in plain language. This page defines 89 terms in alphabetical order, from assignment and breakeven to theta, vega, and the pattern day trader rule. Where a term has a formula, such as breakeven or intrinsic value, the formula is included.

Every definition describes how the term works in general. Contract details can differ by product and broker, so check the contract specifications and your broker’s rules before relying on any detail. Trading involves risk of loss.

Terms 0 to C

Term	Plain-English meaning
0DTE	Zero days to expiration, meaning an option that expires the same day. Time decay and gamma are both very fast.
American-style option	An option that can be exercised any time up to and including expiration. Most single-stock options are American style.
Ask	The lowest price at which a seller is currently willing to sell. Buying at market usually fills at the ask.
Assignment	The notice that a seller of an option must fulfill the contract after the buyer exercises. A short call assignment means selling shares at the strike, and a short put assignment means buying shares at the strike.
At the money (ATM)	An option whose strike price is at or very near the current price of the underlying. Its intrinsic value is zero or close to it.
Bid	The highest price at which a buyer is currently willing to buy. Selling at market usually fills at the bid.
Bid-ask spread	The gap between the bid and the ask, calculated as ask minus bid. A wide spread raises the cost of getting in and out.
Black-Scholes	A well-known mathematical model used to estimate the theoretical price of a European-style option. It takes the underlying price, strike, time, interest rate, and volatility as inputs.
Breakeven	The underlying price at which a position makes no profit and no loss at expiration. For a long call it is strike plus premium paid, and for a long put it is strike minus premium paid.
Buy to close	An order that buys back an option you previously sold, ending the short position. It is how a seller exits before expiration.
Buy to open	An order that opens a new long option position. It creates a position that you own.
Call option	A contract giving the buyer the right, not the obligation, to buy 100 shares of the underlying at the strike price before expiration. Buyers generally use it when expecting the price to rise.
Cash-secured put	A short put backed by enough cash to buy the shares if assigned, which is strike times 100 per contract. The seller collects premium and accepts the obligation to buy at the strike.
Collar	Owning shares, buying a put, and selling a call against them. The put limits the downside while the call caps the upside.
Commission	A fee a broker may charge for trading options, often per contract. Check your broker’s fee schedule.
Contract multiplier	The number of shares one standard option contract controls, normally 100. Multiply the quoted premium by 100 to get the dollar cost.
Covered call	Owning 100 shares and selling one call against them. The seller collects premium but gives up gains above the strike.
Credit	Money received into your account when you open a position, such as when you sell an option or a spread. The opposite of a debit.
Credit spread	A spread opened for a net credit, where the option sold is worth more than the option bought. The most you can lose is the width of the strikes minus the credit.
Cycle	The schedule of expiration months an underlying has listed. Many popular products also list weekly expirations.

Terms D to G

Term	Plain-English meaning
Debit	Money paid out of your account when you open a position. The most a long option buyer can lose is the debit paid.
Debit spread	A spread opened for a net debit, where the option bought costs more than the option sold. The most you can lose is the debit paid.
Delta	How much an option’s price is expected to change for a one-dollar move in the underlying. Calls have positive delta, puts have negative delta, and values range from 0 to 1 in absolute terms.
Derivative	A financial contract whose value comes from another asset, called the underlying. Options are derivatives.
Early exercise	Exercising an American-style option before expiration. It is uncommon for options that still carry meaningful time value.
European-style option	An option that can be exercised only at expiration. Many index options are European style, so check the contract specifications.
Exercise	Using the right in an option contract. Exercising a call buys 100 shares at the strike, and exercising a put sells 100 shares at the strike.
Exercise price	Another name for the strike price. It is the fixed price at which the underlying changes hands on exercise.
Expiration date	The last day an option contract exists. After it, the option is exercised or expires worthless depending on where it finished.
Extrinsic value	The part of an option’s price above its intrinsic value, also called time value. Extrinsic value = option price minus intrinsic value.
Gamma	The rate at which delta changes for a one-dollar move in the underlying. It is usually highest for at-the-money options near expiration.
Greeks	The set of measures that describe how an option’s price responds to changes in price, time, volatility, and interest rates. The main ones are delta, gamma, theta, vega, and rho.

Terms H to M

Term	Plain-English meaning
Hedge	A position taken to reduce the risk of another position. A protective put on owned shares is a common example.
Implied volatility (IV)	The market’s expectation of future movement, backed out of current option prices. Higher implied volatility means richer option premiums.
In the money (ITM)	A call is in the money when the underlying is above the strike, and a put is in the money when the underlying is below the strike. In-the-money options have intrinsic value.
Intrinsic value	The amount an option would be worth if exercised right now. For a call it is the larger of underlying minus strike or zero, and for a put it is the larger of strike minus underlying or zero.
Iron butterfly	A four-leg strategy that sells an at-the-money call and put and buys wings further out. It has defined risk and a narrow profit zone.
Iron condor	A four-leg strategy that sells an out-of-the-money put spread and an out-of-the-money call spread. It has defined risk and is designed for a price that stays inside a range.
IV crush	A sharp drop in implied volatility, often right after a known event such as earnings. Option prices can fall even when the underlying moves in the expected direction.
IV percentile	The share of days over a past period when implied volatility was lower than it is now. It differs from IV rank because it counts days instead of using the high-low range.
IV rank	A measure of where current implied volatility sits within its own range over a past period, often one year. Formula: (current IV minus low) divided by (high minus low), shown as a percentage.
LEAPS	Long-term options with expirations more than a year away. They carry more time value and decay more slowly than short-dated options.
Leg	One individual option or stock position within a multi-part strategy. A vertical spread has two legs.
Limit order	An order to buy or sell at a specific price or better. It controls the price but a fill is not certain.
Liquidity	How easily a position can be entered or exited without moving the price. Tight spreads, high volume, and high open interest point to good liquidity.
Long	Owning a position, such as buying a call or a put. A long option buyer’s maximum loss is the premium paid.
Margin	Borrowed funds or collateral held by the broker to support positions with risk beyond the cash paid. Requirements vary by broker and strategy.
Margin call	A demand from the broker to add funds or reduce positions when account equity falls below the required level. The broker may close positions if it is not met.
Market maker	A firm that continuously quotes bids and asks, providing liquidity. Market makers earn the spread and manage their own risk.
Market order	An order to buy or sell immediately at the best available price. It prioritizes speed over price, so wide spreads can hurt.
Moneyness	A description of where the strike sits relative to the underlying price. The three categories are in the money, at the money, and out of the money.

Terms N to R

Term	Plain-English meaning
Naked option	A short option with no offsetting position or collateral to cover it. A naked short call has theoretically unlimited risk.
Net debit or credit	The total cash flow of a multi-leg order after combining all legs. Debits are paid and credits are received.
Notional value	The total value of the underlying controlled by a contract. For one standard contract it is the underlying price times 100.
Open interest	The total number of option contracts that are open and not yet closed or exercised. It is updated once per day.
OPEX	Short for options expiration, usually the day monthly options expire. Trading activity can be heavier around it.
Option chain	A table listing all available strikes and expirations for an underlying along with prices and other data. It is where contracts are chosen.
Out of the money (OTM)	A call is out of the money when the underlying is below the strike, and a put is out of the money when the underlying is above the strike. Its entire price is extrinsic value.
Pattern day trader (PDT) rule	A US regulation that applies to margin accounts with under 25,000 dollars in equity that make four or more day trades within five business days. Check your broker’s rules for the details and how it counts trades.
Pin risk	The uncertainty at expiration when the underlying closes very near a short strike. The seller may or may not be assigned, which can leave an unexpected position.
Position size	How many contracts or shares a trade involves. It is a main driver of how much a single trade can lose.
Premium	The price of an option, quoted per share. The total cost is the premium times 100 for a standard contract.
Probability of profit (POP)	An estimate, often derived from delta or a pricing model, of the chance a trade finishes with a gain. It is a model output, not a promise.
Protective put	A put bought against shares you own to limit downside below the strike. The put’s premium is the cost of that protection.
Put option	A contract giving the buyer the right, not the obligation, to sell 100 shares of the underlying at the strike price before expiration. Buyers generally use it when expecting the price to fall.
Put-call parity	A relationship that links the prices of a call and a put with the same strike and expiration for European-style options. It helps keep option prices consistent with one another.
Rho	How much an option’s price is expected to change for a one-percentage-point change in interest rates. It matters most for long-dated options.
Risk graph	A chart showing the profit or loss of a position at different underlying prices. It is also called a payoff diagram.
Rolling	Closing an existing option and opening another in a later expiration, a different strike, or both. It is done as one order or two.

Terms S to Z

Term	Plain-English meaning
Sell to close	An order that sells an option you own, ending the long position. It is how a buyer exits before expiration.
Sell to open	An order that opens a new short option position. It creates an obligation that can lead to assignment.
Settlement	The completion of a trade or exercise, when cash or shares actually change hands. Index options typically settle in cash, and stock options settle in shares.
Short	Having sold an option or stock first, creating an obligation. Short options can lose more than the premium collected.
Slippage	The difference between the price you expected and the price you got. It is larger in thin markets and fast moves.
Spread	A position built from two or more options on the same underlying, such as a vertical spread. The word can also mean the bid-ask spread.
Stop order	An order that becomes a market order once a trigger price trades. Option stops can fill poorly when spreads are wide.
Straddle	Buying or selling both a call and a put at the same strike and expiration. A long straddle benefits from a large move in either direction.
Strangle	Buying or selling a call and a put at different strikes with the same expiration. It usually costs less than a straddle but needs a bigger move to pay off.
Strike price	The fixed price at which the underlying can be bought or sold if the option is exercised. It is set when the contract is listed.
Theta	How much an option’s price is expected to fall each day from the passage of time, all else equal. Long options have negative theta and short options have positive theta.
Time decay	The gradual loss of an option’s extrinsic value as expiration approaches. It tends to speed up in the final weeks.
Time value	Another name for extrinsic value. It reflects the time left and the volatility expected.
Underlying	The asset an option is based on, such as a stock, exchange-traded fund, or index. The option’s value follows the underlying.
Vega	How much an option’s price is expected to change for a one-percentage-point change in implied volatility. Long options have positive vega.
Vertical spread	A spread that buys and sells options of the same type and expiration at different strikes. Both the maximum gain and the maximum loss are defined.
Volatility	How much and how fast a price moves. Historical volatility looks backward and implied volatility looks forward.
Volume	The number of option contracts traded during the current session. It resets each day.
Wing	The outer, protective long options in a multi-leg strategy such as an iron condor. Wider wings allow more risk and more premium.
Worthless expiration	When an out-of-the-money option reaches expiration with no value. The buyer loses the premium and the seller keeps it.

How the pieces fit together

An option price is the sum of intrinsic value and extrinsic value. Intrinsic value comes from the strike relative to the underlying, while extrinsic value comes from time left and implied volatility. The Greeks then describe how that price shifts as the underlying, time, and volatility change.

Summary

Options vocabulary is easier once strike, premium, expiration, and moneyness are clear, because most other terms build on them. Use this page as a reference while reading about spreads, the Greeks, and assignment. Trading involves risk of loss, and nothing here is a recommendation.

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