📈 Options Trading Jargon

Master the language of options trading

⚡ Quick Reference: Call vs Put

CALL
Right to BUY at strike price
Bullish = bet price goes UP

PUT
Right to SELL at strike price
Bearish = bet price goes DOWN

ITM (In The Money)
Option has intrinsic value
Worth exercising immediately

OTM (Out of The Money)
Option has NO intrinsic value
Only has time value remaining

Core

Call Option

A contract giving the RIGHT (not obligation) to BUY the underlying asset at a specified price (strike) before expiration.

📌 You buy a call on AAPL 150 Strike
You can buy AAPL at $150 anytime before expiration
(Even if market price is $160)

Core

Put Option

A contract giving the RIGHT (not obligation) to SELL the underlying asset at a specified price (strike) before expiration.

📌 You buy a put on AAPL 150 Strike
You can sell AAPL at $150 anytime before expiration
(Even if market price drops to $130)

Core

Strike Price

The agreed-upon price at which the option holder can buy (call) or sell (put) the underlying asset. This price is fixed regardless of market movement.

📌 SPY Call, 500 Strike, expires Friday
= Right to buy SPY at $500
(No matter if SPY is at $510)

Core

Premium

The price you pay to buy an option or receive when you sell one. This is the total cost/income for the contract, not related to the strike price.

📌 You pay $3.50 premium for a call
Cost = $3.50 × 100 = $350
(Options typically control 100 shares)

Core

Expiration Date

The date when the option contract expires and can no longer be exercised. After this date, the contract becomes worthless (if OTM).

📌 Weekly options expire every Friday
Monthly options expire 3rd Friday of month
After expiration = option is dead

Core

Exercise / Assignment

Exercise = you use your right to buy/sell the underlying. Assignment = if you're short (sold), the buyer forces you to deliver shares at the strike price.

📌 You own a $500 call, stock at $510
→ Exercise: Buy 100 shares at $500

You sold a $500 call & it's ITM
→ Assignment: Forced to sell 100 @ $500

Core

Intrinsic Value

The real, immediate profit if you exercised right now. For calls: max(0, Stock Price - Strike). For puts: max(0, Strike - Stock Price).

📐 Call Intrinsic Value = Stock Price - Strike
📐 Put Intrinsic Value = Strike - Stock Price

📌 AAPL at $160, Call Strike $150
Intrinsic Value = $160 - $150 = $10

Core

Time Value

The extra premium above intrinsic value. This is the market's bet that the option could move further in your favor before expiration.

📐 Time Value = Total Premium - Intrinsic Value

📌 Call Premium = $15
Intrinsic Value = $10
Time Value = $5

Moneyness

In The Money (ITM)

An option with intrinsic value. It would make money if exercised immediately. For calls: stock > strike. For puts: stock < strike.

CALL ITM Example:
Stock: $160 | Strike: $150 | ITM by $10

✅ Call is ITM when: Stock Price > Strike
✅ Put is ITM when: Stock Price < Strike

Moneyness

Out Of The Money (OTM)

An option with NO intrinsic value. It would lose money if exercised immediately. Only has time value left. Dies worthless at expiration if stays OTM.

CALL OTM Example:
Stock: $140 | Strike: $150 | OTM by $10

❌ Call is OTM when: Stock Price < Strike
❌ Put is OTM when: Stock Price > Strike

Moneyness

At The Money (ATM)

An option where the strike price equals (or is very close to) the current stock price. It has pure time value, no intrinsic value.

ATM Example:
Stock: $150 | Strike: $150 | Exact Match

🎯 Stock Price ≈ Strike Price
All premium is time value

Moneyness

Deep ITM

An option far in the money. Very high intrinsic value. Acts almost like owning the stock directly (calls) or a short stock position (puts).

📌 Stock: $200 | Call Strike: $100
Intrinsic Value = $100 (extremely ITM)
Behaves like owning stock

Moneyness

Deep OTM

An option far out of the money. Very cheap premium, very low probability of profit. Dies worthless unless huge move happens.

📌 Stock: $100 | Call Strike: $150
Stock needs to move +50% to reach ITM
Very cheap but very risky

Moneyness

Parity

When an option's price equals its intrinsic value (no time value remaining). Happens when options are deep ITM or near expiration.

📌 Call with $10 intrinsic value
Trading at $10 (no time value)
= Parity (all intrinsic)

Time Decay

Theta (Θ) - Time Decay

Measures how much premium your option loses per day as expiration approaches. THIS is "decay." Theta is your enemy if you BUY options, your friend if you SELL them.

📐 Theta = Daily Premium Loss (in dollars)
Example: Theta = -0.05 means -$5/day for 100-share contract

❌ Buy 1 Call with Theta -$0.10
→ Lose $10/day just from time passing

✅ Sell 1 Call with Theta -$0.10
→ Gain $10/day from time decay

Time Decay

Time Decay Acceleration

Theta decay gets FASTER as expiration approaches. You lose a little every day in Month 1, lose much more per day in the final week.

60 days

30 days

7 days

EXPIRATION

📌 Week 1-4: Lose $1/day (Theta = -0.01)
📌 Week 5-8: Lose $2-3/day (Theta = -0.02)
📌 Final Week: Lose $10+/day (Theta = -0.10)

Time Decay

Theta Bleed

The gradual loss of time value every single day. ATM options bleed faster than ITM/OTM. Also called "time wasting away."

📌 Bought call on Day 1: $3.00 premium
📌 Day 2 (stock unchanged): $2.95 (bleed)
📌 Day 3 (stock unchanged): $2.88 (bleed)
📌 ...losses add up fast near expiration

Time Decay

Days to Expiration (DTE)

The number of days until the option contract expires. Critical for theta calculations. More DTE = more time value = slower decay.

📌 60 DTE: Slow decay, lots of time
📌 30 DTE: Moderate decay accelerating
📌 7 DTE: FAST decay, high urgency
📌 1 DTE: Extreme decay, use it or lose it

Time Decay

Whipsaw / Theta Bleed Trap

Buying an OTM option that looks cheap but has such low probability that theta decay destroys it faster than you can profit. The stock moves but the premium still dies.

❌ Deep OTM call at $0.50 (very cheap)
Theta = -$0.08/day
Stock moves UP but premium still drops to $0.35
Theta ate your move = you lose money

Time Decay

Selling Against Decay (Premium Collection)

Strategy: Sell options (especially OTM) to profit from theta decay. As days pass and stock stays flat, you keep the premium and time value erodes.

✅ Sell Call at $2.00 premium
Stock stays flat for 30 days
Buy to close at $0.50
Profit = $2.00 - $0.50 = $1.50

Greeks

Delta (Δ) - Directional Risk

Measures how much the option price changes when the stock moves $1. Ranges from 0 to 1 for calls, 0 to -1 for puts. Your exposure to stock direction.

📐 Delta = Premium change ÷ Stock price change
Example: Delta = 0.60 means option moves $0.60 for every $1 stock move

📌 Call Delta = +0.60
Stock up $1 → Call up ~$0.60

📌 Put Delta = -0.60
Stock up $1 → Put down ~$0.60

Greeks

Gamma (Γ) - Delta Change Rate

Measures how much delta changes when the stock moves $1. High gamma = delta swings wildly. OTM options have highest gamma risk.

📌 Call Delta = 0.50, Gamma = 0.05
Stock moves up $1
→ New Delta = 0.55
(Delta accelerated by gamma)

Greeks

Vega (ν) - Volatility Risk

Measures how much option premium changes when implied volatility (IV) changes by 1%. Both calls and puts GAIN value when IV rises.

📐 Vega = Premium change ÷ IV change
Example: Vega = 0.10 means premium up $0.10 if IV rises 1%

✅ IV rises 5% → Premium up 5 × $0.10 = $0.50
❌ IV falls 5% → Premium down 5 × $0.10 = $0.50

Greeks

Rho (ρ) - Interest Rate Risk

Measures how much option price changes when interest rates change by 1%. Usually smallest greek. More important for long-dated options.

📌 Rho usually < 0.05 impact
Most traders ignore this
Matters more for LEAPS (2+ year options)

Greeks

Greeks Portfolio Management

Professional traders monitor Greeks to manage risk. Delta = direction exposure, Theta = time decay, Vega = volatility exposure. Use Greeks to hedge.

📌 Portfolio Delta = +15 (bullish bias)
→ Sell calls to reduce delta

📌 Portfolio Theta = -$50/day (buying)
→ Sell more options to profit from decay

Volatility

Implied Volatility (IV)

The market's expectation of how much the stock will move before expiration (annualized %). HIGH IV = option is expensive. LOW IV = option is cheap.

📌 IV = 20% = expect 20% move for the year
IV = 100% = expect WILD swings

High IV → Expensive premiums
Low IV → Cheap premiums

Volatility

Realized Volatility

The actual historical volatility that the stock has shown in the past. Compare to IV to see if the market is over/underestimating future moves.

📌 Stock's historical vol = 30%
IV (expected) = 20%
→ IV is LOW, premiums underpriced
→ BUY options (bet on bigger moves)

Volatility

IV Rank / IV Percentile

Shows how high/low current IV is compared to the past 52 weeks. IV Rank 90 = near 52-week HIGH (premiums expensive). IV Rank 10 = near 52-week LOW (premiums cheap).

📌 IV Rank = 85 → Very expensive
SELL premiums (odds favor you)

📌 IV Rank = 15 → Very cheap
BUY premiums (good deal)

Volatility

IV Crush / IV Expansion

IV Crush = IV collapses after earnings, killing option premiums (bad for buyers, good for sellers). IV Expansion = IV rises, boosting premiums (good for buyers, bad for sellers).

❌ Buy call before earnings
Stock up 5% but IV crushes
→ Call still loses money

✅ Sell call before earnings
Stock flat but IV crushes
→ Profit from collapse

Volatility

Volatility Smile / Skew

Options far from the current stock price (OTM) have higher IV than ATM options. Makes distant strikes more expensive than theory predicts.

📌 ATM Call: IV = 25%
📌 OTM Call (deeper): IV = 35%
(OTM more expensive relative to delta)

Volatility

Mean Reversion / Volatility Cycles

IV tends to revert to its average over time. When IV is extremely high, it usually falls. When extremely low, it usually rises. Exploit with vol strategies.

📌 IV at 52-week high (80%)
Historically reverts to average (40%)
→ Short options to profit from reversion
→ IV falls, premiums collapse, keep profit

Strategy

Long Call / Bull Call

Buy a call expecting the stock to move UP. You profit if stock rises above (strike + premium paid). Max loss = premium paid. Unlimited profit potential.

✅ Bullish trade
Max Loss = $300 (premium)
Max Profit = Unlimited
Breakeven = Strike + Premium

Strategy

Long Put / Bear Put

Buy a put expecting the stock to move DOWN. You profit if stock falls below (strike - premium paid). Max loss = premium paid. Max profit = strike - premium.

✅ Bearish trade
Max Loss = $300 (premium)
Max Profit = Strike - Premium Paid
Breakeven = Strike - Premium

Strategy

Short Call / Call Selling

Sell a call expecting stock to stay flat or drop. You profit from theta decay + any price drop. But unlimited loss if stock rockets up. Must have capital (or stock to deliver).

⚠️ Risky if not covered
Max Profit = Premium Collected
Max Loss = UNLIMITED
Use covered calls for safety

Strategy

Short Put / Put Selling

Sell a put expecting stock to stay flat or rise. You profit from theta decay. If stock crashes below strike, you're forced to buy shares. Max loss = strike × 100 - premium.

📌 Collect premium upfront
Max Profit = Premium Collected
Max Loss = Strike × 100 - Premium
Requires cash to buy 100 shares

Strategy

Spread (Bull/Bear/Credit/Debit)

Buy one option and sell another to reduce cost/risk. Spreads limit both profit AND loss. Lower cost than naked options. Used to define risk clearly.

📌 Bull Call Spread:
Buy 150 Call, Sell 160 Call
Max Profit = 10 - (net debit paid)
Max Loss = Net Debit Paid

Strategy

Iron Condor

Sell a call spread AND a put spread on same stock. Profits if stock stays within the "condor" range. Premium collection + theta decay + defined risk.

📌 SPY at $450
Sell 455 Call / Buy 460 Call
Sell 445 Put / Buy 440 Put
Profit if SPY stays 445-455

Strategy

Straddle / Strangle

Buy (or sell) both a call AND put at same strike (straddle) or different strikes (strangle). Profits from big moves in EITHER direction, or (if selling) decays while stock stays flat.

📌 Long Straddle (buy call + put)
Profit from big move UP or DOWN
Risk: Premium × 2
Used before earnings (vol expected)

Strategy

Covered Call

Own 100 shares + sell a call against them. Collect premium, cap your upside. Safe because you own the shares to deliver if assigned.

✅ Own 100 AAPL @ $150
Sell $155 call for $3 premium
Best case: Keep shares + $3
Worst case: Shares called away at $155 + $3

Strategy

Protective Put (Insurance)

Own stock + buy a put as insurance. Limits downside losses. You pay premium for the protection, but stock can still rise unlimited.

📌 Own 100 AAPL @ $150
Buy $145 put for $2 insurance
If crashes to $120: Put worth $25
Loss limited to $5 - $2 = $3/share