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Options Glossary
Call Option
A contract that gives the buyer the right to buy the underlying asset at a specific strike price.
Example:
A trader may buy a call if they expect the underlying to rise.
Put Option
A contract that gives the buyer the right to sell the underlying asset at a specific strike price.
Example:
A trader may buy a put if they expect the underlying to fall.
Strike Price
The price at which the option can be exercised.
Example:
A $100 call has a $100 strike price.
Expiration Date
The date when the option contract expires.
Example:
A weekly option may expire on Friday.
Premium
The price of the option contract.
Example:
An option priced at $1.50 usually equals $150 per contract before commissions and fees.
Credit Spread
A spread where the trader collects more premium from the option sold than they pay for the option purchased.
Example:
Sell one option for $2.00 and buy another for $1.00. The net credit is $1.00.
Debit Spread
A spread where the trader pays more premium for the option purchased than they collect from the option sold.
Example:
Buy one option for $3.00 and sell another for $1.00. The net debit is $2.00.
Max Loss
The most a trader can lose on a defined-risk trade, before commissions and fees.
Example:
For a $5-wide credit spread opened for $1.00, max loss is $4.00 per share, or $400 per contract.
Breakeven Price
The price where the trade neither makes nor loses money at expiration, before commissions and fees.
Example:
For a put credit spread with a $100 short put and a $1.00 credit, the breakeven is $99.
Time Decay
The reduction in an option’s value as expiration approaches, assuming other factors remain unchanged.
Example:
An option may lose value over time if the underlying price does not move enough.
Implied Volatility
A measure of expected future price movement based on option prices.
Example:
Higher implied volatility usually means options are more expensive.
Assignment
Assignment happens when an option seller is required to fulfill the obligation of the option contract.
Example:
A trader who sold a put may be assigned and required to buy shares at the strike price.