Introduction
Learning the basics of options trading is relatively straightforward, but once you become acquainted with more sophisticated aspects, it becomes a highly complex topic. Therefore, finding several terms and jargon you need to learn is common. We have made this comprehensive glossary of terms so anyone interested in trading options can use it as a reference.
Even if we have been trying to explain every terminology we use in the context of any given page or article, there may be times when we need help understanding a word. If you want an explanation of what the word or phrase means, then this glossary is for you.
What Is an Options Trading Glossary and Why It Is Important?
A complete definition of terms, definitions, and explanations related to options trading is provided in the Options Trading Glossary. It provides an excellent overview of the terminology, concepts and jargon commonly used by options traders as a reference for those who are new or experienced in options trading. The glossary intends to clarify complex concepts so traders can communicate, analyze, and execute their trading strategies efficiently.
Here is the importance of reading an options trading glossary before you start trading:
- Terminology Demystification: There is a unique vocabulary of words, such as “strike prices,” “expiration date,” “implied volatility”, and a variety of option strategies for the trading of options. These terms might appear to be a foreign language for the first time. To remove the ambiguity and help traders understand the meaning, the glossary breaks down each word into simple, concise explanations.
- Contextual Explanation: Not only are terms defined in a glossary, but they also give context. It explains how each term affects the options business, its role in trading strategy, and impacts on risk and profit potential. Understanding the context is essential to understanding what these terms mean in practice.
- Preventing Misunderstandings: The beginner might misunderstand information and make a wrong decision if they need to clearly understand the terms. For example, misunderstanding the concept of “in the money” and “out of the money” could lead to the execution of the wrong trade. A glossary is designed to ensure that traders understand terms well, thereby minimizing the risk of expensive errors.
- Laying a Strong Foundation: The beginner must have a solid base to build on when faced with options trading. The glossary provides this foundation as it systematically introduces and explains fundamental concepts. Gradually, the traders can explore more advanced topics as they become accustomed to their basic knowledge.
- Comprehensive Learning: The glossary gives a broad range of terminology, from the simplest to the most complex. This systematic approach will allow young people to move at their own pace, gradually learning and becoming familiar with options trading concepts.
- Interconnection of Concepts: There’s an overlap between many options trading terms. For example, when learning that “gamma” occurs due to underlying price fluctuations, understanding how the change in delta is made by changing option prices for an underlying asset is essential. This glossary will help first-time users understand these connections and how they work as a set of concepts.
- Enhanced Confidence: Beginners may be deterred from entering the options trading world by needing clarification. The glossary helps to reassure you by clarifying terms and concepts. Traders are encouraged to participate in discussions, make decisions and adopt strategies they have absolute conviction about.
- Practical Learning Resource: The glossary may be a reference for new learners’ studies. They may refer to a dictionary for short explanations as they encounter terminology in papers, books, or online discussions. This is an activity learning process that helps to reinforce your understanding.
- Minimized Overwhelm: The enormous volume of terms connected with options can be overwhelming for first-time readers. The glossary makes the learning experience less intimidating and more enjoyable by breaking complex concepts into manageable parts.
- Foster Learning Progression: They naturally progress to more advanced strategies and concepts as they develop their understanding and awareness of terms. The glossary is a stepping stone for traders to move through different stages of their learning journey.
- Effective Communication: Accurate communications are of fundamental importance in the trading community. During the strategy, position, and market analysis debate, traders must agree. A glossary shall ensure that all languages are used consistently.
- Enhanced Learning: The learning process can be accelerated by looking at the glossary as you learn about options trading. Your knowledge of the basic concepts will be quick, and you can go on to more complex topics.
- Confidence in Decision-Making: The belief in their ability to make the right decisions grows as traders become acquainted with options terminology. This will include choosing appropriate strategies, managing risks, and interpreting market data.
- Risk Management: Risk is inherent in options trading, and it can be helpful for market participants to understand the essential terms to better mitigate these risks. For example, to assess possible profits and losses, traders must be able to understand concepts such as “delta,” “theta”, or “vega.”
- Strategy Implementation: Different strategies are frequently part of successful options trading. A glossary provides traders with a basis for understanding the principles and objectives of each method, allowing them to apply it effectively.
- Avoiding Pitfalls: It can lead to costly mistakes when options terminology needs to be understood or misused. By including correct definitions and context, the glossary aids traders in their avoidance of errors.
- Continuous Learning: The glossary can also be used by experienced traders. New concepts and strategies can be developed in the finance market, which is changing. The glossary will help to keep traders up to date and continue to improve their knowledge.
- Resource for Research: Traders researching or reading articles may encounter uncertainty about concepts. To explain these terms and increase their understanding, a glossary can be used quickly.
- Building a Strong Foundation: The glossary aims to provide the beginning trader with a basic understanding of options trading. The basis for more advanced learning and specialization is this knowledge.
- Precision in Communication: Communications with brokers, traders, and market professionals are essential for trading options. Miscommunication and misinterpretation of intentions can be caused by using incorrect terminology or interpreting it in the wrong way. The glossary helps ensure that commercial operators use accurate terminology, reducing the likelihood of misunderstandings leading to unexpected transactions or actions.
- Accurate Decision-Making: It is necessary to understand the terms of trade clearly to make informed business decisions. A slight misunderstanding will result in selecting the wrong strategy, entering a trade at an unfavorable moment, or overcompensating for possible outcomes. The glossary provides accurate definitions and context, allowing traders to make decisions based on a solid understanding.
- Proper Strategy Implementation: The strategies of options rely on exact execution. If traders need to understand terms such as credit spreads and debit spreads, they may adopt a strategy that does not fit their market outlook or risk tolerance. With a glossary, traders can properly execute the strategy and maximize their potential for profit and risk management.
- Risk Management: The use of various terms and concepts such as “delta,” “gamma”, or “theta” forms part of a wide range of option strategies that involve risk management. Misunderstanding such terms may lead to insufficient risk management for the trader, resulting in higher risks than anticipated. It describes the impacts of those terms on risk and guides traders in making sound risk management decisions.
- Position Monitoring: The position of traders must be constantly monitored, and adjustments made if necessary. Failure to understand the terms associated with position analysis, such as “breakeven point” and “profits potential,” can lead to a situation in which positions are not appropriately managed. This glossary ensures traders are well informed of their positions and make appropriate adjustments in due time.
- Trade Execution: Understanding the types of orders, for example, “limit” and “stop order,” is part of correctly executing trades. If these terms are not followed, a transaction may be completed at an unfavorable price, resulting in lost opportunities or unforeseen losses. This glossary is intended to clarify order types for traders so they can do their jobs more efficiently.
A
Albatross Spread: This advanced strategy can be applied to profit from an existing security’s neutrality.
All or None Order: This type of Order is often abbreviated as an AON, which must be entirely or partially filled in.
American Style Option: A contract that allows the holder to decide at any point in time when he purchases a contract before it expires if he would like to take advantage of his option is called American Style Option.
Arbitrage: To create a risk-Free Trade by exploiting price variations through the purchase and sale of goods.
Arbitrage Trading Strategies: Refers to strategies that involve using arbitrage.
Ask Price: The price which costs to buy an option contract.
Assignment: Assignment is used where the author of a contract has to perform his obligations under that contract, e.g., by buying and selling an underlying security or when he is making written requests or writing put calls, etc. In such cases, a notice of assignment shall be sent to the writer.
At the Money Option: An option in which the underlying security price is the same as the strike price.
Automatic Exercise: The process by which in-the-money options are automatically exercised if they are in the money at the expiration date point.
Auto Trading: A trading method that requires your broker to execute the transactions automatically from someone else.
B
Basket Option: An option based on a group of underlying assets rather than just one.
Barrier Option: The underlying security price is typically associated with an option that could arise or disappear from existence based on specific criteria.
Bear Butterfly Spread: This advanced options trading strategy can be used when your overall outlook of the underlying security is bearish.
Bear Call Spread: A simple strategy using call orders that can be used when the underlying security’s price is expected to decline.
Bearish: A mindset in which an option, or any financial instrument, is likely to decrease in price.
Bearish Trading Strategies: Strategies that are used to make a profit from a downward move in the price of a financial instrument.
Bear Market: When the overall market trend is downward, and the price declines.
Bear Put Ladder Spread: This advanced strategy can be used when the overall outlook on an underlying security’s price is bearish.
Bear Put Spread: A simple strategy using put orders that can be used when the overall expectation is that the underlying security’s price will decline.
Bear Ratio Spread: This strategy can be used when the overall outlook on an underlying security’s price chart is bearish (Downward).
Bear Spread: A spread that has been set up in the hopes of profiting from bearish movements.
Bear Trap: A potential market signal that remains unconfirmed and leads to an upward market movement.
Bid Price: The intrinsic value at which an option can be sold.
Bid Ask Spread: The difference between the bid and the asking price of an option contract, indicating liquidity, often referred to as the spread.
Binary Option: A trading type offers a fixed return if the trade expires in the money or nothing if it expires at or out of the money.
Binomial Options Pricing Model (BOPM): A pricing model, abbreviated as BOPM, developed by Cox, Ross, and Rubinstein in 1979.
Black Scholes Options Pricing Model: A model based on factors like strike price, underlying security price, time to expiration date, and volatility.
Box Spread: An advanced strategy utilizing arbitrage.
Break Even Point: The underlying security price where a strategy neither gains nor loses.
Breakout: When a security’s price moves beyond a resistance or support level, suggesting continued movement in that direction.
Broker: An entity executing buy and sell orders for financial instruments on behalf of clients.
Broker Commissions: Fees charged by brokers for order execution.
Bull Butterfly Spread: A strategy for a bullish market outlook.
Bull Call Ladder Spread: A strategy for a bullish market outlook.
Bull Call Spread: A simple call-based strategy for an anticipated price increase.
Bull Condor Spread: An advanced strategy for a bullish market outlook.
Bullish: Expecting a price increase in an option or other financial instrument.
Bullish Trading Strategies: Approaches to profit from upward price movements.
Bull Market: A rising overall fair and orderly market trend.
Bull Put Spread: A straightforward put-based strategy for an anticipated price increase.
Bull Spread: A spread strategy aiming to profit from upward movements.
Bull Trap: A potentially misleading bullish signal that reverses into a downward market move.
Butterfly Spread: An advanced neutral strategy for profit.
Buy to Close Order: An order to close a short position by purchasing previously written contracts.
Buy To Open Order: An order to initiate a new position by buying contracts.
C
Calendar Call Spread: A straightforward strategy to benefit from a neutral outlook on an underlying security. It is also known as a Time Call Spread.
Calendar Put Spread: A simple strategy to profit from an underlying security’s neutral movement. It is also referred to as a Time Put Spread.
Calendar Spread: An option spread involving contracts with varying expiration dates, also called a time spread.
Calendar Straddle: An advanced strategy to capitalize on an underlying security, remaining neutral.
Calendar Strangle: An advanced strategy to profit from an underlying security’s neutral movement.
Call: Refers to a Call Option, granting the holder the right, but not obligation, to buy an underlying security at an agreed-upon strike price.
Called Away: When the writer of call options is obligated to sell the underlying security at the agreed strike price.
Call Option: An option type allowing the holder to buy the underlying security at a predetermined strike price.
Call Ratio Backspread: An advanced strategy suitable for volatile markets with a bullish outlook.
Call Ratio Spread: An advanced strategy to profit from an underlying security’s neutral movement.
Carrying Cost: The implied expense of using capital to purchase financial instruments, accounting for interest from borrowing or lost interest from withdrawing from an interest-bearing account.
Cash Settled Option: An option type where profits upon exercise price or expiration date are paid in cash rather than through a security transaction.
Chain: Tabular displays showing various information about specific options.
Choose Option: An option type enabling the holder to select between a call or a put during the contract term.
Close: The conclusion of a trading day when final prices are determined.
Closing Order: An order utilized to terminate an existing position.
Combination Order: An order combining multiple orders into one.
Commodity Option: An option involving a physical commodity or a commodity futures contract.
Compound: An option with another contract as the underlying asset.
Condor Spread: An advanced strategy to profit from a neutral outlook on an underlying asset.
Contingent Order: An order type with preset exit parameters.
Contract Neutral Hedging: A hedging technique involving buying options equivalent to owned units of the underlying asset.
Contract Range: The price range within which an option contract has been traded.
Contract Size: The quantity of the underlying asset covered by a contract. Typically, 100 units.
Conversion & Reversal Arbitrage: An advanced arbitrage strategy.
Covered Call: A simple strategy for profit from neutral stock holdings, protecting against short-term price drops. A “Covered Call” is a transaction in which an equivalent amount of the underlying security is held by investors who sell cover options. In this way, an investor who has a long position in one asset is selling call options on that asset for the purpose of generating income. The cover is the investor’s stake in the asset, meaning that if the buyer of a call option selects to exercise it, he will receive shares from the seller.
Covered Put: An advanced strategy used with short-selling stock to profit from neutral movement and guard against short-term price rises.
Credit: Funds received into a trading account.
Credit Spread: A spread generating cash as the credit received exceeds the cost of options.
Currency Option: An option type with a specific currency as the underlying asset.
D
Day Order: An Order type is automatically canceled if not executed by the end of the trading day.
Day Trader: A trader who opens and closes positions within one trading day, often holding them for a short period.
Day Trading: The Trading style involves opening and closing positions on the same day. You can read more about Day Trading by clicking Here.
Debit: Funds deducted from a trading account.
Debit Spread: A spread incurring more cost for buying involved options than received for writing them.
Delta Neutral Hedging: A strategy safeguarding an existing position against minor price shifts applicable to stocks or other instruments.
Delta Neutral Trading: A strategy to neutralize gains/losses for small underlying price changes, profiting on significant price movements.
Delta Value: A Greek measure indicating how option price changes with underlying asset price changes.
Derivative: A financial instrument deriving intrinsic value from another instrument, as in the case of options.
Diagonal Spread: Spread utilizing different expiration dates and strike prices for multiple contracts.
Directional Risk: The risk of loss due to the unfavorable price movement of a security.
Directional Outlook: An expectation about the direction (e.g., bullish) in which a security’s price will move.
Discount Broker: The broker offers low-cost transactions with limited additional services.
Discount Option: An option trading below its intrinsic value.
Dividend: A company’s payment to shareholders as a share of profits.
Dynamic Position: An adaptable position adjusted as needed to serve its purpose.
E
Early Assignment: The scenario where contract writers must fulfill their obligations before the contract’s expiration, which occurs when contracts are exercised ahead of schedule.
Early Exercise: Exercising an American-style option before its expiration date.
Employee Stock Options: Options based on a company’s stock are granted to employees as compensation, bonuses, or incentives.
European Style Option: It can only be exercised at its expiration and not earlier.
Exercise: Utilizing the right specified in a contract to buy or sell the underlying asset at the agreed strike price.
Exercise Limit: A maximum exercise quantity that can be imposed on the holder.
Exercise Price: Synonymous with Strike Price.
Expiration Date: The contract’s termination date, after which it becomes void. Options need to be exercised on or before the expiration date.
Expire Worthless: The state of a contract becoming valueless at expiration, either because it’s at or out of the money.
Expiry: Equivalent to Expiration Date.
Extrinsic Value: The part of a price influenced by factors apart from the strike price of the underlying security, such as the time until expiration.
Exotic Option: A binary option with unique or complex features beyond the standard call and put options.
F
Fiduciary Call: A strategy to cover a call option’s exercise price.
Fill or Kill Order (FOK): An order type that requires immediate execution or cancellation.
Financial Instrument: A tangible or virtual asset with intrinsic monetary value, capable of transferring value, such as stocks, options, currencies, commodities, etc.
Fundamental Analysis: An analytical approach assessing a financial instrument’s value by examining specific factors related to its true worth. For stocks, this may involve studying company financial reports.
Futures Option: An option type with a futures contract as its strike price of the underlying asset.
Full-Service Broker: A broker offering comprehensive services, including expert advice, alongside executing trades, often associated with higher fees.
G
Gamma Neutral Hedging: A hedging method that minimizes overall gamma value, maintaining constant delta value for positions irrespective of the strike price of the underlying asset shifts.
Gamma Value: A Greek measure indicating how an option’s delta value changes with the strike price of the underlying asset adjustments.
Going Long: Assuming a long position on a financial instrument, expecting its strike price to rise. Purchasing an option is an example of going long.
Going Short: Taking a short position on a financial instrument, anticipating its strike price to decline. Writing an option is an instance of going short.
Good Until Cancelled (GTC): An order type remaining active until executed or canceled.
Greeks: A set of intrinsic values quantifying an option’s sensitivity to market changes, reflecting how specific factors (e.g., strike price of the underlying asset, volatility, time until expiry) affect its price.
H
Hedge / Hedging: An investment strategy to mitigate the risk of holding a particular investment, often using options to protect existing positions or positions in other financial instruments like stocks.
Historical Volatility: Measuring the past strike price volatility of a financial instrument over a specified timeframe, typically abbreviated as HV.
Holder: The individual owning options contracts.
I
Horizontal Spread: A spread created using multiple contracts with the same strike price but different expiration dates.
Immediate or Cancel Order (IOC): An order type must be executed immediately or canceled, even if only partially filled.
Implied Volatility: Represented by IV, it quantifies a financial instrument’s estimated strike price volatility at the present moment.
Index Option: An option with an index, like the S&P 500, as its underlying asset.
In the Money Option: An option with favorable underlying asset pricing relative to its same strike price, having intrinsic value.
Intrinsic Value: The strike price component is influenced by built-in profit when an option is in the money.
Iron Albatross Spread: An advanced strategy for profiting from neutral underlying assets.
Iron Butterfly Spread: An advanced neutral strategy for profit.
Iron Condor Spread: An advanced neutral strategy for profit.
L
LEAPS: Abbreviation for Long Term Equity Anticipation Securities, long-duration option contracts.
Leg: Each position is within a multi-legged options strategy.
Legging: Executing each position individually in a multi-legged options strategy.
Level II Quotes: Real-time exchange-provided quotes detailing bid-ask spreads used by active traders to optimize prices.
Leverage: Using financial instruments like options to amplify returns or borrow capital for potentially higher profits.
Limit Order: An order specifying the maximum (buy) or minimum (sell) strike price for executing a trade.
Limit Stop Order: An order to close a position at a specified strike price if the execution is within a defined limit.
Liquidity: The ease of trading or converting a financial instrument without affecting its strike price.
Listed Option: An exchange-traded option with fixed strike prices and expiration dates.
Long: Having ownership or potential profit from an instrument’s price increase.
Long Call: A bullish strategy using a call option. A long call option simply means that the buyer has the right, but not the obligation, to buy the stock at a strike price in the future. For example, to anticipate an event such as the company’s earnings announcement, you could buy long call options. The losses are limited to premiums, although a total return on the Long Call option can be achieved. Take a look at the picture below to see the graph for a Long Call Option.
Long Gut: A strategy for volatile markets with uncertain direction.
Long Position: Holding ownership of a financial instrument.
Long Put: A bearish strategy using a put option.
Long Straddle: A strategy for volatile markets. You can find” All You Need to Know About the Long Straddle Strategy and How to Use It Effectively” by clicking Here.
Long Strangle: A strategy for uncertain, significant strike price movement in a volatile market. A “Long Strangle” strategy is the same as a long straddle, where you buy both call options and place calls with differing strike values. It’s benefiting from a sharp price change, but at a lesser initial cost than it would be if the straddle had been used. The picture below is a “long Strangle” strategy.
Look Back Option: An option allowing exercise price at the best strike price reached during the option’s lifespan.
M
Margin: Margin has varying meanings based on context. Stock buying involves borrowing broker capital. For options trading, it’s the cash needed in an account for writing contracts.
Market Makers: High-volume traders ensuring market liquidity and efficiency, often affiliated with financial institutions.
Market on Close Order (MOC): An order executed at a trading day’s end.
Market Order: An order to buy or sell instruments at the current market strike price, always fulfilled if a matching buyer/seller exists.
Market Stop Order: An order to close a position at a market price upon reaching a specific price.
Married Puts: A hedging method employing stocks and options. A Married Put Spread is when you buy an option with a higher strike price and sell it at a lower strike price. Traders use it when they expect the value of their own assets to decline moderately. Check the “Married Put” below.
Max Pain / Max Option Pain: See Option Pain.
Model: See Pricing Model.
Moneyness: Comparing option strike price to the current price of the underlying asset.
Morphing: Converting one position into another with a single order, especially for synthetic positions.
N
Naked Option: The writer lacks a corresponding underlying asset position, exposing it to unfavorable price shifts.
Near The Money Option: The option’s underlying asset price is close to its strike price.
Neutral Market: Market stability, either bullish or bearish.
Neutral Outlook: Anticipating stability or slight market/financial instrument price movement.
Neutral Trading Strategies: Profiting from minimal strike price changes.
O
One-Sided Market: Imbalanced buyer/seller ratio.
One Cancel Other Order (OCO): One order cancels upon the other’s fulfillment.
One Trigger Other Order (OTO): One order triggers another’s execution.
Online Broker: Enables order placement via an online trading platform.
Opening Order: Initiates a new position.
Open Interest: Total open positions for a specific option.
Optionable Stock: Stock with associated options.
Option / Options Contract: Right to buy/sell a specified underlying asset at a fixed strike price within a defined period.
Option Pain: Theoretical strike price leading to maximum losses for traders with out-of-the-money options. Also referred to as Max Pain.
Options Broker: Executes options contracts on behalf of clients.
Options Trader: Buys and sells options contracts.
Options Trading: Buying/selling options for investment, short-term profit, or hedging.
Options Symbol: Identifies an option, denoting specific option contract details.
Out of the Money Option: When the Option lacks intrinsic value due to an unfavorable underlying asset position relative to the strike price.
Outlook: Prediction on market or underlying asset price movement.
Counter Option: Customized options sold over the counter, not on public exchanges.
P
Physical Option: An option backed by a tangible asset, excluding stocks and futures option contracts.
Physically Settled Option: When exercising, the underlying asset is transferred between the option holder and the writer.
Portfolio: The collection of owned financial instruments.
Position Trader: A trader capitalizing on options’ time decay and volatility.
Position Trading: Exploiting options mechanics for profit, especially suited for experienced traders.
Premium: Refers to an option’s total price or intrinsic value.
Premium Value: Equates to intrinsic Value.
Pricing Model: Mathematical formula valuing an option based on specific factors.
Pricer: Displays primary Greeks and standard data in a chain.
Protective Call: Strategy shielding short-stock position profits.
Protective Put: Strategy safeguarding long stock position profits.
Put Option: granting the holder the right to sell an underlying asset at an agreed price.
Put Call Parity: Ensures similar intrinsic value for related calls and puts to prevent arbitrage.
Put Ratio Backspread: Advanced bearish strategy for volatile markets.
Put Ratio Spread: Advanced neutral strategy for the underlying asset.
Q
Quadruple Witching: High-volume trading on the third Friday of March, June, September, and December due to multiple expiring options and futures.
Quarterly Option: Option with a quarterly expiration cycle.
R
Ratio Spread: Spread using multiple options contracts of differing amounts, involving writing more options than buying, or vice versa.
Realize a Profit: When closing a position, taking profits differs from the unrealized gain in open positions.
Realize a Loss: Incurring losses when closing a position, distinct from unrealized losses in open positions.
Resistance Level: Price point not exceeded by a financial instrument over time.
Return On Investment: Percentage profit from an investment, often abbreviated as ROI.
Reverse Iron Albatross Spread: Advanced strategy profiting from market volatility.
Reverse Iron Butterfly Spread: Advanced strategy profiting from market volatility.
Reverse Iron Condor Spread: Advanced strategy profiting from market volatility.
Rho Value: One of the Greeks, measuring option price change due to interest rate shifts.
Risk Graph: Illustrates position risk-reward ratio.
Risk Reversal: Simple hedging strategy.
Risk to Reward Ratio: Measures position risk relative to potential rewards.
ROI: Abbreviation for Return on Investment.
Rolling Down: Simultaneous closing and reopening of a comparable position at a lower strike price.
Rolling Forward: Closing and reopening a similar position with an extended expiry.
Rolling: Closing and reopening a position with slight adjustments.
Rolling Up: Closing and reopening a similar position with a higher strike price.
S
Sell To Close Order: An order to close an existing long position by selling a previously purchased option contract. Learn more about the Sell to Close Order.
Sell To Open Order: An order is placed to open a new position by writing a new option contract.
Settlement: The process of resolving option contract terms upon exercise. Short: Holding a temporary position if you’ve short-sold a financial instrument or stand to gain from its price decrease.
Short Albatross Spread: It is an advanced strategy for volatile markets.
Short Bear Ratio Spread: It is an advanced bearish strategy.
Short Bull Ratio Spread: It is an advanced bullish strategy.
Short Butterfly Spread: It is an advanced strategy for volatile markets.
Short Calendar Straddle: It is an advanced strategy for volatile markets.
Short Calendar Strangle: It is an advanced strategy for volatile markets.
Short Call: A strategy used for bearish outlooks. A short call option is the opposite of the long call option, as described in its name. In this strategy, the seller promises that in the future, he will dispose of his asset at a specified price. Short call options for covered calls and contracts where the seller has an equity interest in them are mainly used by option sellers. The call helps ensure that they do not suffer losses if the trade does not work out as planned. For example, if they uncovered the call order, their losses would double, i.e., they didn’t own the underlying asset for their orders, and the value of the asset would be significantly reduced. Look at the below picture to understand a Short Call better.
Short Call Calendar Spread: It is an advanced strategy for volatile markets.
Short Condor Spread: It is an advanced strategy for volatile markets.
Short Gut: A simple strategy for neutral positions.
Short Position: Being short on a financial instrument, often through writing option contracts.
Short Put: A strategy used for bullish outlooks. Learn how to use a “Short Put”.
Short Put Calendar Spread: An advanced strategy for volatile markets.
Short Selling: Selling a financial instrument not owned, expecting to repurchase it at a lower price.
Short Straddle: A simple strategy for neutral positions. You can read about the Short Straddle strategy by clicking Here.
Short Strangle: A simple strategy for neutral positions.
Spread: Creating a position by buying/selling different contracts on the same underlying asset. You can see which brokers offer the lowest spreads by clicking Here.
Spread Order: An order to create a spread through simultaneous transactions.
Stock Option: Option with stock in a publicly listed company as the underlying asset.
Stock Repair Strategy: Recovering losses from a devalued stock.
Stock Replacement Strategy: Using deep-in-the-money call options instead of the same underlying stock prices to reduce premium paid requirements.
Stop Limit Order: Please check Limit Stop Order.
Stop Market Order: Please check Market Stop Order.
Stop Order: Automatically closes a position at a specified price.
Strap Straddle: A simple bullish strategy for volatile markets.
Strap Strangle: A simple bullish strategy for volatile markets.
Strike Arbitrage: Advanced strategy involving arbitrage.
Strike Price: Price specified in an option contract to exercise an option.
Strip Straddle: A simple bearish strategy for volatile markets.
Strip Strangle: A simple bearish strategy for volatile markets.
Support Level: A price point lower than the instrument’s current price has not fallen below over a specified period.
Swing Trader: A trader profiting from short-term price swings.
Swing Trading: Trading style capitalizing on short-term price swings.
Synthetic Long Call: A synthetic position resembling owning calls, using puts and underlying assets.
Synthetic Long Put: A synthetic position resembling owning puts, using calls, and short-selling the underlying asset.
Synthetic Long Stock: A synthetic position resembling owning stocks, involving calls and puts on the relevant stock.
Synthetic Position: Position created using a combination of stocks and options to mimic another position.
Synthetic Short Call: A synthetic position resembling short call options involving short-selling stock and writing put options.
Synthetic Short Put: A synthetic position resembling short put options involving buying stock and writing call options.
Synthetic Short Straddle: Synthetic strategy replicating the Short Straddle.
Synthetic Short Stock: A synthetic position resembling shorting stock, involving writing call options and buying put options.
Synthetic Straddle: Synthetic strategy replicating the Long Straddle.
T
Technical Analysis: An analytical approach to predicting future price movements using historical data like volume and price. This involves studying charts and graphs to identify patterns and trends.
Theoretical Value: The calculated intrinsic value of an option or position using pricing models or mathematical formulas.
Theta Value: One of the Greeks, theta measures an option’s theoretical time decay rate. It is also known as Options Theta.
Time Decay: The reduction of extrinsic value as option expiration approaches.
Time Call Spread: Please check Calendar Call Spread.
Time Put Spread: Please check Calendar Put Spread.
Time Spread: Check known as Calendar Spread.
Time Value: See Extrinsic Value.
Trading Plan: A comprehensive strategy outlining a trader’s approach, objectives, risk management, and selected methods.
Trailing Stop Order: An order with a stop price based on a percentage or fixed change from the best price.
Trading Levels: Designations by brokers indicating a trader’s permissible risk exposure based on capital and experience. It is also called approval levels.
Trading Style: The method and approach a trader adopts, with various specific styles.
Trend: An identifiable and continuous market or financial instrument price movement.
U
Uncovered Option: See Naked Option.
Underlying Asset: See Underlying asset.
Underlying Security: The asset, security, or financial instrument upon which an option is based.
Underlying Financial Instrument: See Underlying asset.
V
Vega Value: One of the Greeks, vega measures an option’s theoretical sensitivity to changes in implied volatility of the underlying asset. Also referred to as Options Vega.
Vertical Spread: A spread created using multiple options contracts with differing strike prices but the exact expiration date. Learn more about Vertical Spreads.
Volatile: Describes a financial instrument or market that experiences unexpected and significant price movements.
Volatile Market: A market characterized by frequent and substantial price fluctuations, exhibiting high price instability.
Volatile Trading Strategies: Strategies used to profit from volatile markets or financial instruments.
Volatility: A measure of a financial instrument’s expected price fluctuation over a specified time frame.
Volatility Crunch: A notable decrease in implied volatility.
Volatility Skew: A skewed curve on a graph depicting implied volatility across options of the same underlying asset but different strike prices.
Volatility Smile: A concave curve resembling a smile on a graph representing implied volatility across options of the same underlying asset but different strike prices.
Volume: The number of transactions involving a specific financial instrument, such as an option. High volume indicates heavy trading activity.
W
Weekly Option: An option with a weekly expiration cycle. To Understand Weekly Options Trading and the Useful Strategies, you can click Here.
Writer: The individual or entity creating and selling a new option contract.
Writing an Option: The process of generating and selling a new option contract.
Y
Yield Curve: A graphical representation of the relationship between the interest rates and the time to maturity of binary options.
Z
Zero-Coupon Binary Option: A binary option that pays out a fixed amount at expiration, similar to a zero-coupon bond paying a fixed amount at maturity.
Conclusion
An Options Trading glossary ensures that traders can make well-informed decisions, execute strategies effectively, manage risk prudently, and adapt to evolving market conditions by offering accurate definitions, context, and explanations. It also empowers traders to communicate seamlessly with brokers, colleagues, and professionals, facilitating meaningful discussions and collaborations within the trading community.
