Glossary of options terms
American-style option: An option contract that can be exercised at any stage before
its expiration date.
Ask: The price that a trader buys at, i.e. the price at which market makers and floor brokers are
prepared to sell.
ATM (at the money): When the option exercise price is equal to the asset price.
Backspread: A spread where more options (puts or calls) are purchased
Bear call spread: A net credit spread consisting solely of call options where the trader obtains a
higher strike call and simultaneously sells a lower strike call.
Bear put spread: A net debit spread solely using put options where the trader purchases a
higher strike put and at the same time sells a lower strike put.
Bid: The price the trader is able to sell at, i.e. the price at which the market makers and floor
traders will be willing to buy.
Bid–ask spread: The difference between the bid price and the ask price.
Bull call spread: A debit spread utilising only call options where the trader purchases a
lower Strike call and sells a higher Strike call.
Bull market: A market that has been rising over a period of time.
Bull put spread: A credit spread utilising only put options where the trader purchases a
lower strike put and sells a higher strike put.
Butterfly spread: A popular 3-legged options strategy.
Buy on close: An options order requesting to purchase a security at the close of the
day’s trading session.
Buy on open: An options order requesting to purchase a security at the opening of the day’s
Buy stop: A purchase order which the price specified is higher than the
existing asset price.
Calendar spread: A 2-legged options strategy where the trader purchases longer-term options
and at the same time sells shorter-term options.
Call option: The right, but not the obligation, to purchase an underlying asset at a fixed price
before a specified date.
Call premium: The value of a call option.
Condor: A 4-legged options strategy using only call options or put options.
Covered call: An income-producing options strategy involving the simultaneous buying of
an asset and the selling of call options.
Covered put: A high-risk options strategy involving the simultaneous shorting of an asset and the
buying of put options.
Credit spread: Simultaneously buying and selling options to create a net credit into a trader’s
Day trade: The buying and selling of financial assets during the same day.
Debit spread: Simultaneously buying and selling options in such a way that it results in a net
debit against a trader’s account.
Deep In the Money (DITM) calls: where the strike price is much lower than the price of the
underlying asset. Puts: where the strike price is much higher than the price of the underlying
Delta: The sum by which an option premium moves divided for every one dollar movement in the
price of the underlying asset.
Delta neutral: A trade where the positive and negatives Deltas cancel out each other.
Derivative: A trading instrument whose value is based on, i.e. ‘derived’ in part from the value of
an underlying asset.
Divergence: Where two or more indicators give conflicting signals.
Equity options: Also called stock options.
European-style options: Options that can’t be exercised before their expiration date.
Exercise: The activation of the right to buy or sell an underlying asset.
Exercise (strike) price: The price at which the underlying asset can be purchased or sold by the
owner of a call or put option.
Expiration date: This refers to the final day an option can be exercised.
Extrinsic value (time value): The price of an option minus its intrinsic value. OTM options only
have extrinsic value, because their intrinsic value equals zero.
Fundamental analysis: Analysis that takes into account ‘real’ issues such as inflation, PE ratios,
unemployment and interest rates.
Gamma: The percentage by which options Delta changes compared with the percentage change
in the price of the underlying asset.
Guts spread: An expensive strategy where a trader purchases OTM call options and put options
to simulate the risk profile of a strangle.
Hedge: To reduce the risk of one position by simultaneously entering other positions with futures,
other options or other derivatives.
Historic (statistical) volatility: A measure of the price fluctuation of a trading asset during a
certain period of time.
Index options: Options on the indexes of shares or other securities.
In the Money (ITM) options: Where the current asset price is higher than the strike price of a call
option or lower than the strike price of a put option.
Intrinsic value: Refers to the amount an option is In the Money.
Iron butterfly: A 4-legged options strategy normally involving calls and puts together.
Japanese candlesticks: A well known method of visually illustrating price bars where the open,
high, low, close are shown.
Leg: One side or component of an options spread.
Leg in: Legging into a spread comprises the completion of just one leg of a spread with the
intention of completing the other leg at a better price later on.
Liquidity: Describes the ease and speed that an asset can be traded. Cash is the most liquid of
all assets, whereas real estate is among the most illiquid assets.
Long: If you are a buyer of a trading asset you are trading long, e.g. an option.
MACD: A technical indicator which measures the difference between 2 moving averages. Its
convergence or divergence provides a measure of momentum.
Margin: An amount deposited by the trader which the brokerage will retain against non-cash or
high risk investments, or where the trader has borrowed funds for the trade from the broker, i.e.
Margin call: Where the brokerage requests the trader to pay more funds into his or her account
to maintain the trade. This often happens with naked calls and naked puts.
Market order: Trading an instrument immediately at the best market price for guaranteed
Momentum indicators: Technical analysis indicators utilising volume and price movement to
determine market direction.
Moving average: The average of an asset’s prices for a specific period of time (for example 30
Naked: Refers to put options or sold call contract without a hedge position in place.
Offer: The lowest price at which the market-maker is prepared to sell a security.
Option: A financial derivative where the owner has the right, but is not obligated to purchase
(call) or sell (put) an underlying asset at an agreed price before a specified date.
Option premium: The price that has to be paid for an option.
Option writer: The seller of a naked option.
Out of the Money (OTM): Where the option does not have any intrinsic value, i.e. it cannot be
exercised at a profit.
Position delta: The sum of all negative and positive deltas within a hedged trading position.
Put option: The right, without the obligation, to sell an underlying asset at an agreed price before
a specified date.
Ratio backspread: A strategy utilising only puts or only calls whereby the trader purchases OTM
options in a ratio of 3:2 or 2:1 to the ITM options he or she sells. Creates a net long position.
Ratio call spread: A bearish options strategy which involves the trader being short in more,
higher strike calls than those lower strike calls he or she is long in, at a ratio of 3:2 or 2:1.
Ratio put spread: A bullish strategy involving the trader being short in more, lower strike puts
than those higher strike puts he or she is long in, at a ratio of 3:2 or 2:1.
Resistance: A ceiling on a price chart which is expected to be difficult for the price to break
through because of past price behaviour.
Security: An instrument that can be traded (for example, stocks, bonds, et cetera.
Shares: Units of ownership in an organisation or company; stocks.
Short (short selling): Selling a security which the trader does not actually own.
Spread: The gap between the bid and ask of a trading asset.
Also: A trading strategy that incorporates more than one leg to create.
Also: A price spread, which is the margin between the high and the low of a price bar.
Stochastic: A technical indicator that consists of an oscillator based on the relationship between
the opening, high, low, and closing prices.
Stocks: See shares.
Stop orders: Buy stops: when the order price is above the current value of the security.
Sell stops: where the order price is below the current value of the security.
Straddle: A neutral options trade which allows traders to simultaneously buy a call and put at the
same strike price and with the same expiration date.
Strangle: A neutral options trade that involves simultaneously buying an OTM call and an OTM
Strike price (exercise price): The price at which a trading asset can be purchased or sold by the
owner of a put or call option.
Support: A floor on a price chart considered to be difficult for the price to fall down through as a
result of past price behaviour.
Technical analysis: Combining charts and statistical indicators e.g. prices, moving averages,
stochastics, volume, etc. to evaluate future likely price movements.
Theoretical value (options): The Fair value calculation of an option price utilising a pricing
model such as the Black-Scholes options pricing model.
Theta (decay): The relative change of an option price in reaction to the variable of time to
Time value (extrinsic value): The price of an option minus its intrinsic value. OTM options are
entirely made up of extrinsic (or time) value.
Uncovered option: A short options position when the issuer does not own the underlying
Vega: The amount of change of an option price in response to a change in volatility.
Volatility: A measure of the change in the price movement in a security over a period of time.
Volatility is one of the most crucial components in determining the theoretical value of an
Volatility skew: When deep OTM options have higher implied volatilities than ATM options.
Whipsaw: A sudden, significant price swing that usually results in a losing scenario for both sides
of a position.
Writer: A trader or market maker who sells an option.
Zeta: A measure of an option price’s sensitivity to implied volatility.