Glossary

American options can be exercised early, European options only at expiry.

The underlying price is close to the strike.

Buy a higher-strike put and sell a lower-strike put to express a moderately bearish view.

A view that price is more likely to fall.

A pricing model that assumes the underlying can only move up or down at each step.

The BSM model, the continuous-time pricing formula for options.

The price at which profit moves from negative to positive.

Buy a lower-strike call and sell a higher-strike call to express a moderately bullish view.

A view that price is more likely to rise.

A three-strike structure that bets the underlying will finish near the middle strike.

The option type more commonly associated with bullish expression.

The upside cap created by the call strike.

A full workflow from market assessment to strategy choice to risk management.

Putting too much of the account into one idea or one direction.

The BSM assumption that you can rebalance the hedge continuously.

Long stock combined with a short call.

The change in option price when the underlying price moves by 1 unit.

Buying or selling the underlying so that the portfolio's net Delta becomes zero.

A hedged position whose net Delta is zero.

Your opinion on whether the underlying is bullish, bearish, or neutral.

Cash paid by the underlying during the life of the option.

The last time the contractual right is still valid.

The option's theoretical value from a pricing model.

The downside floor created by the protective put.

The amount Delta changes when the underlying moves by 1.

The risk created by Delta changing rapidly because of Gamma.

The combined picture of Delta, Gamma, Theta, and Vega for a position.

Volatility calculated from past price data.

Realized volatility computed from past prices.

The volatility backed out from the option's market price.

Expected volatility backed out from option market prices.

The option would be favorable if exercised immediately.

The market risk-free rate.

The value you would get from immediate exercise.

The payoff you would get if the option were exercised immediately.

A rapid drop in implied volatility, often after an event like earnings.

Measures that compare current IV against its own historical range.

Leverage magnifies gains, but also magnifies losses.

The buyer can lose at most the premium.

The distribution BSM assumes for stock prices.

You are the buyer and pay the premium first.

Buy a call option to express a bullish view by paying premium for upside opportunity.

Buy a put option to express a bearish view or protect an existing holding against downside risk.

Buy a call and a put at the same strike to bet on a large move.

Buy an OTM call and an OTM put at different strikes to bet on a large move with lower cost.

Profiting if volatility rises or realized movement exceeds what the market priced in.

The tendency of VIX to drift back toward a longer-term average over time.

A gap between market price and theoretical value.

The net cost or net income when opening the combination.

The pricing principle that markets do not allow risk-free profit out of nothing.

The total underlying value controlled by the option position.

Something you must do if the other side exercises.

A contract that gives you the choice of whether to act in the future.

The market price of an option, or what you pay to buy it.

The option would be unfavorable if exercised immediately.

How profit and loss change under different outcomes.

A graph showing profit and loss at different underlying prices.

How much capital you allocate to one trade.

A systematic process for deciding on a trade before it is placed.

The fee paid upfront to acquire the right.

The fee paid to acquire the right.

A protection strategy that combines long stock with a long put.

The option type more commonly associated with bearish expression.

The thought process that connects judgment to conclusion.

Adjusting the hedge dynamically to keep the portfolio Delta-neutral.

A combination of stock and cash that reproduces the option payoff.

Something you may choose to do, but do not have to do.

The cost you may face in the worst case.

The maximum loss allowed on one trade, often capped at 1-2% of the account.

The place where the decision can most easily go wrong.

How a position behaves under different market conditions.

A measure of skew, often defined as the IV difference between an OTM call and an OTM put.

The return on a nearly riskless asset, often approximated with short-term government bills.

The probability that makes the expected asset return equal the risk-free rate.

Pricing by assuming all assets earn the risk-free rate in expectation.

Closing the current option while opening a new one with a different strike or expiration.

A simulated market setup used for practice.

Choosing a strategy by reasoning through a concrete market setup.

Testing how a position performs under different market conditions.

You are the seller and receive the premium first.

Sell a call option to collect premium when you think the underlying will not rise too much.

Sell a put option to collect premium when you think the underlying will not fall too much.

Profiting if volatility falls or realized movement stays below what the market priced in.

A basic option strategy that uses only one option contract to express a view.

Closing a trade once loss reaches a preset level.

Testing the position under extreme conditions.

The agreed price used if the contract is exercised.

The contractual price used at exercise.

The risk of rare but extreme events.

Closing a trade once profit reaches a satisfactory level.

How IV changes across different expirations at the same strike.

The Greek letter measuring how much value an option loses per day.

How much option value changes per day, usually negative for the buyer.

The loss of option value as time passes.

How long remains until expiration.

The part of the option premium above intrinsic value, reflecting future possibility.

The part of an option's price above intrinsic value.

Improving one Greek often requires giving up something in another.

A pre-trade list of items that must be confirmed before entry.

The asset the option is written on.

The current market price of the underlying asset.

A seller can face losses without a strict upper bound in some positions.

The change in option price when IV moves by 1 percentage point. Vega is not actually a Greek letter, but traders call it a Greek.

The CBOE volatility index, based on SPX options and representing expected 30-day volatility.

How violently the underlying's price tends to move.

Combining IV, HV, skew, term structure, and VIX into one market judgment.

The tendency for IV to be higher than future realized volatility because buyers pay extra for protection.

A tilted IV curve where OTM puts usually have higher IV than OTM calls.

A curve where IV across strikes forms a smile shape.

The full distribution of IV across strike and expiration.

Your expectation that volatility will expand, shrink, or stay about the same.

The outer two strikes in the butterfly.