A working reference for intermediate-to-advanced US options traders. Definitions favor how each term is actually used at the desk over textbook phrasing, with formulas inline where they matter.
Educational content only. Nothing here is investment advice; options involve substantial risk of loss.
A
American exercise — Style of option that can be exercised on any business day up to and including expiration; nearly all US single-name equity and ETF options are American-style. (see also: European exercise, early assignment)
AM settlement — Settlement based on the opening prints of the components on expiration morning, common for traditional cash-settled index options (e.g., standard SPX, monthly). The settlement value (SET/SOQ) is not a price you can trade against, creating overnight gap risk. (see also: PM settlement, cash settlement)
Ask — The lowest price at which a market maker or trader is currently willing to sell a contract; buying at the ask means “paying up.” (see also: bid, mid, natural price)
Assignment — The obligation delivered to a short option holder when the long holder exercises: short calls deliver stock (or are sold short), short puts buy stock. Assignment is allocated to short holders, often randomly, by the OCC and your broker. (see also: exercise, early assignment, exercise-by-exception)
At-the-money (ATM) — An option whose strike is at or very near the current underlying price; ATM options carry the most extrinsic value and the highest gamma and vega per contract. (see also: ITM, OTM, moneyness)
B
Backspread — A ratio structure that is net long more options than it is short (e.g., sell 1 / buy 2 of a further OTM strike), designed to profit from a large directional move and often expanding volatility. Frequently put on for a small credit or near zero cost. (see also: ratio spread)
Backwardation — A term-structure state where near-dated implied volatility is higher than longer-dated IV, typical during stress or around a known near-term event; the VIX term structure inverts. (see also: contango, term structure)
Bear call spread — A short (credit) vertical: sell a lower-strike call, buy a higher-strike call in the same expiration. Bearish-to-neutral, defined risk, max profit is the net credit received. (see also: credit spread, vertical spread)
Bear put spread — A long (debit) vertical: buy a higher-strike put, sell a lower-strike put. Directionally bearish, defined risk; cost is the net debit. (see also: debit spread, vertical spread)
Beta — A measure of a stock’s price sensitivity to a benchmark (usually SPX); beta > 1 means it tends to move more than the index. Used to express portfolio directional risk in index-equivalent terms. (see also: beta-weighted delta)
Beta-weighted delta — Portfolio-level delta with each position’s delta scaled by its beta to a common benchmark, expressing total directional exposure as equivalent shares/deltas of that index (e.g., SPY-weighted delta). The standard way to see net account direction across mixed underlyings. (see also: delta, beta)
Bid — The highest price a buyer is currently willing to pay for a contract; selling at the bid means “hitting the bid.” (see also: ask, mid)
Bid-ask spread — The gap between bid and ask; wider spreads signal lower liquidity and higher round-trip transaction cost. (see also: liquidity, slippage, mid)
Body — The inner, higher-quantity strike(s) of a butterfly or ratio structure (the short strikes in a long fly), as opposed to the wings. (see also: wing, butterfly)
Breakeven — The underlying price at expiration where the trade neither makes nor loses money. Long call: strike + debit. Long put: strike − debit. Short put / CSP: strike − credit. Covered call: stock cost − credit. (see also: max profit, max loss)
Broken-wing butterfly — A butterfly with unequal wing widths, shifting risk to one side; often constructed to remove risk on one side entirely or to be placed for a credit. (see also: butterfly, wing)
Bull call spread — A long (debit) vertical: buy a lower-strike call, sell a higher-strike call. Bullish, defined risk; cost is the net debit, max profit is width − debit. (see also: debit spread, vertical spread)
Bull put spread — A short (credit) vertical: sell a higher-strike put, buy a lower-strike put. Bullish-to-neutral, defined risk; max profit is the net credit. (see also: credit spread, vertical spread)
Butterfly — A three-strike, defined-risk structure (buy 1 / sell 2 / buy 1, equal wing widths) that profits when the underlying pins near the short (body) strike; low cost, low probability, high payout near the center. (see also: iron butterfly, body, wing)
Buying power — The capital available in an account to open new positions, after existing margin requirements. (see also: buying power reduction, Reg-T margin, portfolio margin)
Buying power reduction (BPR) — The amount of buying power a specific trade consumes when opened; for defined-risk trades it is roughly the max loss, for undefined-risk trades it is a margin formula. The key sizing input traders watch per position. (see also: buying power, naked/undefined risk)
C
Calendar spread — Sell a near-dated option and buy a longer-dated option at the same strike; long vega and profits from time decay differential and/or rising back-month IV, best near the strike. (see also: diagonal spread, double calendar, term structure)
Charm — The rate of change of delta with respect to time (delta decay); also called “delta bleed.” Matters most for near-expiration positions, where deltas drift quickly into expiration weekend. (see also: delta, theta)
Cash account — An account that requires full payment for positions and cannot borrow; not subject to the PDT rule but limited by cash settlement timing and unable to hold naked/undefined-risk short options. (see also: Reg-T margin, Pattern Day Trader rule)
Cash settlement — Settlement in cash for the in-the-money amount rather than delivery of shares, standard for index options (SPX, NDX, RUT). No assignment into stock, but pin and settlement-print risk remain. (see also: physical settlement, AM settlement, PM settlement)
Cash-secured put (CSP) — Selling a put while holding enough cash to buy the shares if assigned; a bullish/neutral income strategy and the entry leg of the Wheel. Breakeven = strike − credit. (see also: the Wheel, covered call)
Collar — Long stock combined with a long protective put and a short covered call, capping both downside and upside; often structured to be low- or zero-cost. (see also: protective put, covered call, put-spread collar)
Contango — A term-structure state where longer-dated implied volatility is higher than near-dated IV (the normal, calm-market shape); the VIX futures curve slopes upward. (see also: backwardation, term structure)
Contract multiplier — The shares (or dollar value) each contract controls; standard US equity/ETF options = 100 shares, so a $1.50 premium = $150 per contract. Index options use a $100 cash multiplier. (see also: notional)
Covered call — Selling a call against 100 long shares per contract to collect premium; caps upside at the strike in exchange for income and a small downside cushion. Breakeven = stock cost − credit. (see also: cash-secured put, the Wheel, poor man’s covered call)
Credit spread — Any spread opened for a net credit, where max profit is the credit and risk is defined by the long strike; includes bull put and bear call spreads. (see also: debit spread, vertical spread)
D
Debit spread — Any spread opened for a net debit, where cost equals max loss and max profit is width − debit; includes bull call and bear put spreads. (see also: credit spread, vertical spread)
Defined risk — A position whose maximum loss is known and capped at entry (e.g., spreads, condors, flies), requiring buying power roughly equal to that max loss. (see also: naked/undefined risk, buying power reduction)
Delta — The first-order sensitivity of option price to a $1 move in the underlying; also a rough proxy for the probability of finishing ITM and the equivalent share exposure (0.30 delta ≈ 30 shares per contract). (see also: gamma, beta-weighted delta)
Diagonal spread — A calendar-style spread using different strikes and different expirations, blending directional and time/vol exposure; the PMCC is a long diagonal. (see also: calendar spread, poor man’s covered call, double diagonal)
Dividend risk — The risk that a short ITM call is assigned the day before ex-dividend by a holder capturing the dividend, leaving you short stock and liable for the payout; acute when an option’s extrinsic value is less than the dividend. (see also: early assignment, ex-dividend)
Double calendar — Two calendar spreads at different strikes (typically one above and one below price), widening the profitable zone versus a single calendar; long vega. (see also: calendar spread, double diagonal)
Double diagonal — Two diagonal spreads (a put side and a call side) forming a wide, long-vega, income-oriented structure that benefits from time decay and rising back-month IV. (see also: diagonal spread, double calendar)
DTE (days to expiration) — Calendar days remaining until an option expires; a core management variable (e.g., entering ~45 DTE, managing at 21 DTE). (see also: 21-DTE management, theta decay)
E
Early assignment — Assignment of a short American-style option before expiration, most commonly on short calls before ex-dividend or on deep-ITM short puts; long options are rarely worth exercising early apart from those cases. (see also: assignment, dividend risk, ex-dividend)
European exercise — Style of option exercisable only at expiration; standard for cash-settled index options like SPX and NDX, which eliminates early-assignment risk. (see also: American exercise, cash settlement)
Ex-dividend (ex-date) — The date on which a stock trades without the right to the upcoming dividend; the price typically drops by the dividend amount, and it is the trigger window for early assignment of short ITM calls. (see also: dividend risk, early assignment)
Exercise — The long holder’s act of invoking the option’s right: calls buy stock at the strike, puts sell stock at the strike. (see also: assignment, exercise-by-exception)
Exercise-by-exception — The OCC’s automatic exercise of options that are ITM by at least $0.01 at expiration, unless the holder files contrary instructions; the reason ITM longs are auto-exercised without action. (see also: exercise, pin risk)
Expected move — The market-implied one-standard-deviation range over a horizon. Approx: Price × IV × √(DTE/365); a quick same-period estimate is the ATM straddle price (≈ 85% of it for a tighter 1σ proxy). (see also: implied volatility, straddle)
Expiration — The date and time an option contract ceases to exist; US equity options technically expire the Saturday after the third Friday but stop trading at Friday’s close (PM) for most listed series. (see also: DTE, exercise-by-exception)
Extrinsic value (time value) — The portion of an option’s price beyond intrinsic value, reflecting time remaining and implied volatility; it decays to zero by expiration. Extrinsic = option price − intrinsic value. (see also: intrinsic value, theta, IV crush)
G
Gamma — The rate of change of delta per $1 move in the underlying; high gamma (near ATM, near expiration) means delta and P&L shift rapidly. The driver of “gamma risk” on short options into expiration. (see also: delta, gamma risk, speed)
Gamma risk — The risk that a short-option position’s delta accelerates against you near expiration, turning a small adverse move into an outsized loss; the main reason many traders close before the final days. (see also: gamma, 21-DTE management)
Going inverted — Rolling a tested credit spread or strangle so the call strike sits below the put strike (an inverted strangle), buying more room and credit when one side is breached; caps risk but locks in a guaranteed loss equal to the inversion width minus total credit. (see also: rolling, tested/untested side)
GTC order — “Good-’til-canceled”: an order that stays working across sessions until filled or canceled, commonly used to set a 50%-profit closing target. (see also: limit order, 50% profit rule)
H
Hard-to-borrow (HTB) — A stock with limited share supply for short selling, carrying high borrow fees; HTB names distort put-call parity, inflate put prices, and raise early-assignment and pin complications. (see also: marginable, dividend risk)
Historical (realized) volatility — The actual annualized standard deviation of the underlying’s past returns; compared against implied volatility to gauge whether options are rich or cheap. (see also: implied volatility, volatility risk premium)
I
Implied volatility (IV) — The volatility input that makes an option’s model price equal its market price; a forward-looking, market-consensus estimate of future movement and the primary lever of extrinsic value. (see also: historical volatility, IV Rank, vega)
In-the-money (ITM) — A call with strike below, or a put with strike above, the underlying price; ITM options carry intrinsic value. (see also: OTM, ATM, intrinsic value)
Intrinsic value — The immediately exercisable value of an option: max(0, underlying − strike) for calls, max(0, strike − underlying) for puts. (see also: extrinsic value, ITM)
Iron butterfly — An ATM short straddle wrapped with protective wings (sell ATM call + put, buy OTM call + put); higher credit and narrower profit zone than an iron condor, profiting from a pin near the center. (see also: butterfly, iron condor, short straddle)
Iron condor — A defined-risk, neutral structure: a short OTM put spread plus a short OTM call spread in the same expiration; collects credit and profits if price stays between the short strikes. Max profit = net credit. (see also: iron butterfly, credit spread, short strangle)
IV crush — The sharp collapse in implied volatility right after a scheduled event (earnings, FDA, Fed) resolves, deflating extrinsic value and often producing losses on long premium even when direction was right. (see also: implied volatility, extrinsic value)
IV Percentile — The percentage of days over the trailing year on which IV was below today’s reading; less distorted by single spikes than IV Rank because it counts days rather than range. (see also: IV Rank, implied volatility)
IV Rank (IVR) — Where current IV sits within its trailing-year high-low range: (current IV − 52wk low) / (52wk high − 52wk low) × 100. High IVR favors premium selling; low IVR favors buying. (see also: IV Percentile, implied volatility)
J
Jade lizard — A short OTM put combined with a short OTM call spread, structured so the total credit exceeds the call-spread width — eliminating upside risk while keeping downside (put) risk. A neutral-to-bullish premium-selling play. (see also: ratio spread, short strangle)
L
LEAPS — Long-term Equity AnticiPation Securities: listed options with expirations beyond roughly one year, used for long-horizon directional exposure and as the long leg of a PMCC. (see also: poor man’s covered call, DTE)
Leg / legging in — An individual option within a multi-leg position; “legging in” means entering legs separately to seek better fills, accepting execution risk if the market moves between fills. (see also: fill, spread)
Limit order — An order to buy or sell only at a specified price or better; the default for options to control fill quality given wide spreads. (see also: market order, mid-price order, natural price)
Liquidity — The ease of entering/exiting at a fair price, judged by tight bid-ask spreads, high volume, and high open interest; thin liquidity means costly slippage. (see also: open interest, volume, slippage)
M
Margin call — A broker demand to deposit funds or reduce positions when account equity falls below maintenance requirements; unmet calls lead to forced liquidation. (see also: Reg-T margin, buying power)
Marginable — A security eligible to be bought on margin or to count as collateral; non-marginable securities require full cash and provide no borrowing power. (see also: hard-to-borrow, Reg-T margin)
Mark — The broker’s official valuation price for a position (often the mid or a model price), used for P&L and margin; may differ from where you can actually trade. (see also: mid, natural price)
Market order — An order to execute immediately at the best available price; risky in options because wide or thin markets can fill far from the mid. (see also: limit order, slippage)
Max loss — The largest possible loss on a position. Defined-risk: capped and known at entry (e.g., spread width − credit). Undefined-risk: theoretically large or unlimited (short naked calls). (see also: max profit, defined risk, naked/undefined risk)
Max profit — The largest possible gain on a position; for credit strategies it equals the net credit, for debit verticals it equals width − debit. (see also: max loss, breakeven)
Mid — The midpoint between bid and ask, the theoretical fair value and common starting point for limit pricing. Mid = (bid + ask) / 2. (see also: mark, mid-price order, natural price)
Mid-price order — A limit order placed at (or pegged to) the bid-ask midpoint, seeking a fair fill without crossing the full spread. (see also: mid, limit order, natural price)
Moneyness — An option’s strike relative to the underlying price, classifying it as ITM, ATM, or OTM. (see also: ITM, ATM, OTM)
N
Natural price — The price that guarantees an immediate fill: the ask when buying, the bid when selling (i.e., paying the full spread). (see also: mid, ask, bid)
Naked / undefined risk — A short option with no offsetting long protecting it (naked call/put), exposing the trader to large or unlimited loss and high margin; permitted only in margin accounts with appropriate approval. (see also: defined risk, buying power reduction, Reg-T margin)
Net credit — The premium received when the sold legs of a position exceed the bought legs; defines max profit on credit structures. (see also: net debit, credit spread)
Net debit — The premium paid when bought legs exceed sold legs; defines max loss/cost on debit structures. (see also: net credit, debit spread)
Notional — The total dollar value of the underlying an option controls: strike (or price) × 100 × contracts; the true economic exposure behind a small premium. (see also: contract multiplier, beta-weighted delta)
O
Open interest (OI) — The number of outstanding (not-yet-closed) contracts for a strike/expiration; a key liquidity indicator and a clue to where dealer/positioning concentration sits. (see also: volume, liquidity)
Out-of-the-money (OTM) — A call with strike above, or a put with strike below, the underlying price; OTM options have zero intrinsic value and are pure extrinsic. (see also: ITM, ATM, extrinsic value)
P
Pattern Day Trader (PDT) rule — A FINRA rule requiring a minimum $25,000 equity in a margin account for traders making four or more day trades within five business days; accounts under the threshold get restricted. (see also: cash account, Reg-T margin)
Physical settlement — Settlement by actual delivery of shares on exercise/assignment, standard for US single-name equity and ETF options. (see also: cash settlement, assignment)
Pin risk — The uncertainty when the underlying closes exactly at a short strike at expiration, leaving the trader unsure whether they’ll be assigned and thus holding an unexpected stock position over the weekend. (see also: assignment, exercise-by-exception)
PM settlement — Settlement based on the closing prices on expiration day, standard for equity options and for weekly/end-of-month index products (e.g., SPXW); removes the overnight gap of AM-settled series. (see also: AM settlement, cash settlement)
Poor man’s covered call (PMCC) — A long-call diagonal that mimics a covered call: buy a deep-ITM LEAPS call as a stock substitute and sell shorter-dated OTM calls against it for income, with far less capital. (see also: covered call, diagonal spread, LEAPS)
Portfolio margin (PM) — A risk-based margining system (typically $100k+ minimum) that sets requirements on net portfolio risk across correlated positions rather than per-position Reg-T rules, often greatly increasing buying power and leverage. (see also: Reg-T margin, buying power)
Probability of profit (POP) — The model-estimated chance a position is profitable at expiration; for a short premium trade it rises with the credit collected and the distance of short strikes from price. (see also: probability of touch, delta)
Probability of touch — The estimated chance the underlying trades through a given strike at any point before expiration; roughly twice the probability of expiring beyond that strike. Higher than POP, and what matters for getting tested/managed. (see also: probability of profit, tested/untested side)
Protective put — A long put bought against long stock to cap downside, functioning as portfolio insurance; cost is the premium, which drags on returns. (see also: collar, put-spread collar)
Put-spread collar — A collar variant where the downside protection is a put debit spread (rather than a single long put), reducing hedge cost in exchange for protection only down to the lower put strike. (see also: collar, protective put)
R
Ratio — The proportion of long to short contracts in a structure (e.g., 1×2), defining where extra naked risk or leverage sits. (see also: ratio spread, backspread)
Ratio spread — A spread with unequal leg quantities (commonly sell more than you buy, e.g., buy 1 / sell 2), typically opened for a credit and carrying naked risk beyond the short strikes. (see also: backspread, ratio, jade lizard)
Reg-T margin — The Federal Reserve’s standard rules-based margin framework defining initial and maintenance requirements per position; more conservative and less capital-efficient than portfolio margin. (see also: portfolio margin, buying power, margin call)
Rho — Sensitivity of option price to a 1% change in interest rates; generally the least impactful Greek for short-dated options but relevant for LEAPS and deep-ITM positions. (see also: vega, theta)
Risk reversal — Simultaneously selling an OTM put and buying an OTM call (bullish) or the reverse (bearish); a low/zero-cost synthetic directional bet that also expresses a view on skew. (see also: synthetic long/short, skew, collar)
Rolling — Closing an existing option/position and reopening it at a different strike and/or expiration, used to manage tested positions, extend duration, or harvest profit. (see also: rolling for a credit, going inverted)
Rolling for a credit — Rolling a position such that the new position collects more premium than it costs to close the old one, improving breakeven and reducing cost basis without adding net debit; the preferred way to defend a tested trade. (see also: rolling, going inverted, tested/untested side)
S
Section 1256 — A US tax category for broad-based index options (e.g., SPX, NDX) and certain other contracts, taxed 60% long-term / 40% short-term regardless of holding period and marked-to-market at year-end. A meaningful tax edge over equity options. (see also: cash settlement, European exercise)
Skew — The pattern of differing IV across strikes at one expiration, typically with OTM puts richer than OTM calls in equities (reflecting crash-fear demand); the shape traders exploit in spreads and risk reversals. (see also: smile, volatility surface, risk reversal)
Slippage — The difference between expected and actual execution price, worsened by wide spreads, thin liquidity, and market orders. (see also: liquidity, bid-ask spread, natural price)
Smile — A volatility-curve shape where both OTM puts and OTM calls carry higher IV than ATM, forming a U; more typical of indices/FX, while equities often show a one-sided skew. (see also: skew, volatility surface)
Speed — The third-order Greek: the rate of change of gamma with respect to the underlying price; relevant to large or near-expiration books where gamma itself moves quickly. (see also: gamma, charm, vomma)
Spread width — The dollar distance between the long and short strikes of a vertical or the wings of a fly/condor; sets the maximum risk and payoff scale of defined-risk trades. (see also: wing, vertical spread, max loss)
Stop order — An order that becomes a market (or stop-limit) order once a trigger price trades; used cautiously in options because thin markets can trigger and fill poorly. (see also: market order, limit order)
Straddle — Buying (long) or selling (short) a call and a put at the same strike and expiration; long profits from a big move either way, short profits from low realized movement. ATM straddle price ≈ the expected move. (see also: strangle, expected move)
Strangle — A call and a put at different OTM strikes, same expiration; cheaper and wider than a straddle, used long for big moves or short for range-bound, high-IV premium collection. (see also: short strangle, straddle)
Strike — The fixed price at which an option’s underlying can be bought (call) or sold (put) upon exercise. (see also: moneyness, expiration)
Short straddle — Selling an ATM call and put together; maximum premium and theta but undefined risk on both sides, profiting if the underlying stays near the strike. (see also: straddle, iron butterfly)
Short strangle — Selling an OTM call and an OTM put; high-probability, undefined-risk premium collection that profits while price stays between the strikes. (see also: strangle, iron condor, short straddle)
Synthetic long / short — A stock-equivalent position built from options: synthetic long = long call + short put at the same strike/expiry; synthetic short = short call + long put. Same payoff as ±100 shares with different capital and margin. (see also: risk reversal, delta)
T
Term structure — The curve of implied volatility across expirations for one underlying; its slope (contango vs backwardation) guides calendar/diagonal trades and event positioning. (see also: contango, backwardation, calendar spread)
Tested / untested side — In a two-sided position, the “tested” side is the one price has moved toward (now nearer/through its short strike); the “untested” side is the other. Rolling the untested side toward price is a common defense. (see also: rolling for a credit, going inverted)
Theta — The Greek measuring how much an option loses in value per day from time decay, all else equal; positive (collected) for net sellers, negative (paid) for net buyers. (see also: theta decay, extrinsic value, charm)
Theta decay — The erosion of extrinsic value as expiration nears; non-linear, accelerating in the final weeks for ATM options, which underpins premium-selling strategies. (see also: theta, extrinsic value, DTE)
The Wheel — A cyclical income strategy: sell cash-secured puts until assigned shares, then sell covered calls on those shares until called away, and repeat. (see also: cash-secured put, covered call)
21-DTE management — A mechanical rule (popularized by tastytrade) to close or roll short-premium positions around 21 days to expiration, sidestepping the steep rise in gamma risk late in the cycle. (see also: gamma risk, DTE, 50% profit rule)
50% profit rule — A management guideline to close short-premium trades once roughly half the initial credit is captured, improving win rate and capital turnover versus holding to expiration. (see also: GTC order, 21-DTE management)
V
Vanna — The second-order Greek capturing how delta changes as implied volatility changes (equivalently, how vega changes with spot); central to dealer-hedging “vanna flows” that can drive index moves. (see also: delta, vega, charm)
Vega — Sensitivity of option price to a 1-point change in implied volatility; long options are long vega (helped by rising IV), short options are short vega. (see also: implied volatility, vomma, vanna)
Vertical spread — Two same-type options (both calls or both puts), same expiration, different strikes; the building-block defined-risk directional trade, either debit or credit. (see also: credit spread, debit spread, spread width)
VIX — The Cboe Volatility Index, the market’s expected 30-day SPX implied volatility derived from a strip of SPX options; the headline “fear gauge” and basis for VIX derivatives. (see also: implied volatility, term structure)
Volatility risk premium (VRP) — The persistent tendency of implied volatility to exceed subsequently realized volatility, the structural edge that compensates option sellers for bearing risk. (see also: implied volatility, historical volatility)
Volatility smile — See smile. (see also: skew, volatility surface)
Volatility surface — The full three-dimensional map of implied volatility across both strike and expiration; combines skew (across strikes) and term structure (across time). (see also: skew, term structure)
Volume — The number of contracts traded in a session for a strike/expiration; a real-time liquidity and interest signal, distinct from cumulative open interest. (see also: open interest, liquidity)
Vomma — The second-order Greek measuring how vega changes as implied volatility changes (the convexity of vega to vol); matters for long-vol positions that gain accelerating vega as IV rises. (see also: vega, vanna, speed)
W
Wing — An outer, lower-quantity strike of a butterfly, condor, or ratio structure (the long protective strikes), as opposed to the body. (see also: body, butterfly, broken-wing butterfly)
Power and Pelf 