Options Glossary: Key Terms to Know

Assignment

Being "assigned" as an options writer (seller) means you must fulfill your obligation to buy or sell the underlying stock at the strike price. That goes for both calls and puts.

If you are short an options contract (you're the seller/writer) and the option is in-the-money, it's highly likely that the buyer would exercise and you'd be assigned. You would then be obligated to either sell or buy the underlying stock, even when that's undesirable.

If you are short an options contract and the option is out-of-the-money, it's unlikely that the buyer would exercise and you'd likely not be assigned. Generally, assignments can occur at any time, but are likely to happen when an option is expiring in-the-money

AT/IN/OUT-OF-THE-MONEY

At-the-money

This means that the strike price of an options contract and the stock price are the same.

Covered call writing

Covered call writing means selling a call option on a stock you own. The strategy is to generate income by writing (selling) a call and collecting the premium; however, this strategy might limit your upside if the stock price increases beyond the strike price. This is generally used by investors who don’t anticipate much price movement in the stock price over the short term.

Delta

Among the four main measures used to analyze options risk, delta is a ratio (also called hedge ratio) estimating the change in the options price relative to a $1 change in the price of the underlying.

Exercise

This means exercising your right in an options contract (for a long option holder). If the contract is American-style, you can exercise your options any time up to and including the expiry date. If it is European-style, you can exercise your options only on the expiration date.

Expiry date, or expiration date

Unlike purchasing stock, buying an options contract is generally a shorter-term investment. When you buy or sell an options contract, you must agree to an expiration date for that contract.

As the buyer or seller of an option, you can choose which expiration cycle you would like to invest in. For most stock options, there are typically quarterly, monthly and weekly cycles.

Gamma

Among the four main measures used to analyze options risk, measures the change rate of an option's delta for each $1 change in the price of the underlying (see delta above).

In-the-money

In-the-money relates to the extent your options contract is profitable — the underlying stock price is either above the contract's strike price (call option) or below the strike price (put option).

Intrinsic value

The difference between the strike price and the price of the underlying asset. An option that is in-the-money has intrinsic value, whereas an option that is out-of-the-money does not.

Long

You are said to be "long" an options contract when you are a buyer. For instance, if you buy a call, you are long a call or you have a long position in a call.

Naked option

More suitable for advanced traders, a naked option involves selling a call or put contract without holding a position (long or short) in the underlying asset. It is a risky strategy, as the investor is unprotected, or "naked," from potentially unlimited loss.

Opening and closing positions

When trading options contracts, you are said to be opening a position if you are entering an options contract by buying or selling (going long or short, respectively). If you subsequently sell or buy the same contract, you are said to be closing your position (essentially, you are getting out of the options contract).

Out-of-the-money

Out-of-the-money relates to an options contract with no intrinsic value (definition above) — the contract’s strike price is either above the stock price (call option) or below the stock price (put option).

Premium

This is the price of an options contract. An option's premium is determined by several factors, including the underlying security price, strike price, volatility and time remaining until expiration.

Protective put

A protective put can be thought of as a risk-management strategy or an insurance policy against potential losses on a particular stock or other asset you own. By buying a put option, you pay for the right to sell your shares at a strike price that is higher than the prevailing market price. You're basically limiting your potential losses if the price declines. Meanwhile, if the stock goes up, you get the potential for unlimited gain (reduced by the cost of the put).

Short

You are said to be "short" an option contract when you are a seller/writer. For instance, if you sell a call, you are short a call or you have a short position in a call.

Strike price or exercise price

This is the price at which an options contract can be exercised/assigned.

Theta

Among the four main measures used to analyze options risk, theta, or time decay, reflects the amount by which an option's value will decrease every day. If all other factors remain the same, the value of an option decreases with time, and the rate of decrease accelerates the closer an option comes to its maturity date.

Time value

An option's time value is equal to its price minus its intrinsic value (the difference between the strike price and the price of the underlying asset – or the in-the-money portion of the option's premium). As a general rule, if all else is  equal, the more time that remains until expiration, the greater the time value of the option.

Vega

Among the four main measures used to analyze options risk, vega measures the value of an option's price as measured against the implied volatility of the underlying asset.

Writer

A person who sells (or "writes") an option contract.