Options Trading Glossary: Your Go-To Guide
/“I placed a market order for a call on SPY, targeting an ITM strike price, while keeping an eye on the IV and OI, hoping to capitalize on the upcoming earnings report before my stop-loss triggered.”
Make sense? No? Having an options trading glossary on hand is the game changer between trading options like a seasoned pro and just spinning the roulette wheel, praying the ball slots on a winning bet.
Introduction to the Options Glossary
Industries have their own lingo, and Wall Street is no exception — it's a secret code that makes communicating easier. Before you start blasting in the dark, get familiar with the terms you'll see on every trade.
Key Terms for Beginners
Options: Contracts that give the holder the right, but not the obligation, to buy or sell a certain amount (typically 100 shares) of an underlying asset at a specified price within a certain time period
Underlying Asset: The financial instrument (such as stocks, bonds, commodities, or indices) on which an options contract is based, determining the contract's value
Strike Price: The price at which the underlying asset can be bought or sold as specified in the options contract
Expiration Date: The last date on which the option can be exercised or traded
Exercise: The act of using the right to buy or sell the underlying asset as specified in the options contract
Premium: The price paid for purchasing an option, typically quoted on a per-share basis
Call: An option that gives the buyer the right to purchase an underlying asset at a predetermined strike price before expiration
Put: An option that gives the buyer the right to sell an underlying asset at a predetermined strike price before expiration
In the Money (ITM): For call options, when the underlying asset’s price is above the strike price; for put options, when the asset’s price is below the strike price
Out of the Money (OTM): For call options, when the underlying asset’s price is below the strike price; for put options, when the asset’s price is above the strike price
At the Money (ATM): When the underlying asset’s price is equal or very close to the strike price
Advanced Terminology for Experienced Traders
Volatility: A measure of the price fluctuations of the underlying asset, which affects option pricing
Implied Volatility (IV): A forecast of a likely movement in an asset's price based on the market's expectations, often derived from option prices
Open Interest (OI): The total number of outstanding options contracts, indicating market activity
Volume: The number of shares or contracts traded in a security or market during a given period
Liquidity: The ease with which an option can be bought or sold in the market without affecting its price
Bid-Ask Spread: The difference between the highest price a buyer is willing to pay (bid) and the lowest price a seller is willing to accept (ask) for an option
The Greeks
Delta: The rate of change of the price of the options relevant to changes in the asset's price; it indicates how much an option's price is expected to move per $1 change in the asset
Gamma: The rate of change of delta concerning changes in the underlying asset’s price, indicating the stability of delta
Theta: Also known as time or theta decay, the rate at which an option’s price decreases as it approaches expiration
Vega: Refers to how senstive an option's price is to the volatility of the underlying asset; it indicates how much the price of an option is expected to change with a 1% change in volatility
Rho: Measures how sensitive is an option is to changes in interest rates, indicating how much the option's price is expected to change for a 1% change in the risk-free interest rate
Commonly Used Acronyms in Options Trading
ROI: Return on Investment – A measure used to evaluate the efficiency of an investment, calculated as the profit or loss relative to the initial investment amount
DTE: Days to Expiration – The number of days remaining until the option expires
ETF: Exchange-Traded Fund – An investment fund traded on stock exchanges that holds a diversified portfolio of assets
LEAPS: Long-Term Equity Anticipation Securities – Options with expiration dates that are longer than one year, allowing investors to take longer-term positions in an underlying asset
VIX: CBOE Volatility Index – A popular measure of market expectations often referred to as the fear gauge
SPX: S&P 500 Index – A stock market index that measures the stock performance of 500 large companies listed on stock exchanges in the United States, often used as a benchmark for options trading strategies
Trading Lingo and Slang
Bull Market: A market characterized by rising prices and investor optimism
Bear Market: A market marked by declining prices and pessimism among investors
Market Order: An order to buy or sell a stock immediately at the current market price
Limit Order: An order to buy or sell a stock at a specified price or better
Stop-Loss Order: An order to sell a stock when it reaches a certain price to limit potential losses
Take Profit Order: An order to sell a stock once it reaches a specified price to lock in profits
Market Capitalization (Market Cap): The total market value of a company's shares outstanding, calculated by multiplying the share price by the total number of shares
Penny Stock: Low-priced stocks, typically trading below $5, often with high volatility
Bagholder: An investor holding onto a losing position, hoping for a rebound
Choppy Market: A market with frequent price fluctuations and lack of clear direction
HODL: A misspelling of hold, meaning to keep an asset rather than sell it, often associated with long-term investment strategies
Paper Hands: Investors who sell their positions at the first sign of trouble or volatility, lacking conviction
Diamond Hands: Investors who hold onto their assets despite significant market volatility or pressure to sell, demonstrating resolve
How To Use the Glossary in Real-Time Trading
Think of this glossary as a ticket to navigating the chaos of options trading. Start by getting cozy with basic terms like calls, puts, and strike price. Then, when you’re deep in the trading trenches, whip it out to decode the lingo flying around in news articles or chat rooms.
As you dive into option chains, keep the glossary within reach to clarify the bid-ask spread and theta decay. Plus, knowing the jargon will make you one of the cool kids when you’re bantering in trading forums.
Know Your Stuff With This Options Trading Glossary
Until you’re fluent in Wall Street slang, hang onto this options trading glossary. Speaking the language is your edge, so don’t go in blind!