Options Terminology

The vocabulary an options seller meets, defined once. Grouped by category; jump to the term you need. Each entry links to the page that teaches it in full, where one exists.

Contract basics

Call: a contract giving the buyer the right to buy 100 shares of the underlying at the strike, on or before expiration. The seller takes on the obligation to deliver those shares if the buyer exercises.

Put: a contract giving the buyer the right to sell 100 shares of the underlying at the strike, on or before expiration. The seller takes on the obligation to buy those shares if the buyer exercises.

Strike price: the fixed price at which the option’s shares change hands: the price the call buyer can buy at, or the put buyer can sell at, regardless of where the stock trades.

Expiration date: the date the contract ends. After it, an unexercised option no longer exists. Contracts trade with expirations ranging from days to more than a year out.

Premium: the cash the buyer pays and the seller collects for the contract, quoted per share. One contract covers 100 shares, so a premium quoted at $2.00 is $200 for the contract. The figure tracks time to expiration, distance to the strike, and implied volatility.

Underlying: the stock (or other asset) the option is a contract on. A covered call is sold against shares of the underlying you own and would be willing to sell at the strike.

Leg: one option position within a larger position made of several. A single covered call or cash-secured put is a one-legged position; spreads and other multi-leg structures combine two or more legs.

Assignment: when the option seller is required to fulfill the contract: deliver the shares (assigned call) or buy them (assigned put) at the strike. See when you get assigned.

Exercise: when the option buyer invokes the right the contract grants, buying or selling the shares at the strike. Exercise by the buyer is what triggers assignment for the seller.

Moneyness and value

Moneyness: where the strike sits relative to the current stock price: in, at, or out of the money.

In the money (ITM): a call whose strike is below the stock price, or a put whose strike is above it. An ITM option has intrinsic value.

At the money (ATM): a strike at or near the current stock price.

Out of the money (OTM): a call whose strike is above the stock price, or a put whose strike is below it. An OTM option has no intrinsic value; its premium is entirely extrinsic.

Intrinsic value: the portion of the premium backed by moneyness: how far the option is in the money. An option that is at or out of the money has zero intrinsic value.

Extrinsic value: the rest of the premium, beyond intrinsic value. It reflects the time left to expiration and the implied volatility, and it decays to zero by expiration. Also called time value.

Pricing inputs

Implied volatility (IV): the market’s expectation of how much the underlying will move, backed out of the option’s price. Higher IV means a higher premium, because larger expected moves make the option more valuable.

The Greeks: the set of measures for how an option’s price responds to its inputs: delta (price of the underlying), theta (passage of time), gamma (rate of change of delta), and vega (implied volatility). See the Greeks.

Delta: the approximate change in an option’s price per $1 move in the underlying. Often used as a rough proxy for the odds of the option finishing in the money, not a direct measure. See the Greeks.

Theta: the premium an option loses per day from time decay, all else equal. It works in the seller’s favor. See about time decay.

Gamma: the rate at which delta changes as the underlying moves. It is largest near the strike and near expiration.

Vega: the change in an option’s price per one-point change in implied volatility. Higher vega means the premium moves more when IV moves.

Black-Scholes: the standard model for pricing options, which combines the strike, the time to expiration, the stock price, interest rates, and volatility into a theoretical premium. It is the pricing context the Greeks are derived from. The model assumes European-style exercise, so it is an approximation for the American-style options traded on individual U.S. stocks.

Position terms

Covered call: selling a call against shares you own and would be willing to sell at the strike. The premium is income; assignment hands over the shares at the strike, capping upside above it. See how covered calls work.

Cash-secured put: selling a put while setting aside the cash to buy the shares if assigned. The premium is income; assignment buys the shares at the strike. See how cash-secured puts work.

Wheel: a routine of selling cash-secured puts on a ticker until assigned, then selling covered calls until called away, repeating on the same name. FITools treats covered calls and cash-secured puts as two independent decisions, each judged on its own merits, rather than as one mechanical loop.