14d • General discussion
50 of the most important options trading terms
Core Options Basics
1. Call OptionA call option gives the buyer the right, but not the obligation, to buy a stock at a specific price before a certain date. Traders buy calls when they believe the price of the underlying asset will rise.
2. Put Option A put option gives the buyer the right, but not the obligation, to sell a stock at a specific price before expiration. Traders buy puts when they believe the stock price will fall.
3. Strike Price The strike price is the predetermined price at which the stock can be bought or sold when exercising an option. It is the most important reference price in an options contract.
4. Expiration Date The expiration date is the last day the option contract is valid. After this date, the option becomes worthless if it has not been exercised or sold.
5. Premium The premium is the price paid to buy an options contract. This is the maximum amount the buyer can lose on the trade.
Option Pricing & Value
6. Intrinsic Value Intrinsic value is the real value an option has if exercised immediately. It is the difference between the stock price and the strike price when the option is in-the-money.
7. Extrinsic Value (Time Value)Extrinsic value is the portion of the option price based on time remaining and volatility. It represents the possibility that the option may become profitable before expiration.
8. In-The-Money (ITM)An option is in-the-money when exercising it would produce a profit. For calls this means the stock price is above the strike, and for puts it means the stock price is below the strike.
9. At-The-Money (ATM)An option is at-the-money when the strike price is roughly equal to the current stock price. These options usually have the most time value.
10. Out-Of-The-Money (OTM)An option is out-of-the-money when exercising it would not be profitable. These contracts have no intrinsic value but may still have time value.
Greeks (Risk Measurements)
11. DeltaDelta measures how much the option price changes for every $1 move in the stock. It also represents the approximate probability of the option expiring in the money.
12. GammaGamma measures how fast delta changes as the stock price moves. It shows how sensitive an option is to price movement.
13. ThetaTheta measures time decay in an option’s price. It shows how much value an option loses each day as expiration approaches.
14. VegaVega measures how much an option price changes with changes in volatility. Higher volatility usually increases option premiums.
15. RhoRho measures how option prices change with interest rate changes. It typically affects long-term options more than short-term ones.
Trading Mechanics
16. Open Interest Open interest represents the total number of outstanding option contracts currently active in the market. It helps traders gauge liquidity and participation.
17. VolumeVolume shows how many contracts traded during a specific time period. High volume often indicates strong interest in that option.
18. Bid Price The bid price is the highest price a buyer is willing to pay for an option. It represents the demand side of the market.
19. Ask Price The ask price is the lowest price a seller is willing to accept for an option. It represents the supply side of the market.
20. Bid-Ask Spread The bid-ask spread is the difference between the bid and ask prices. Narrow spreads typically indicate high liquidity.
Contract Structure
21. Underlying Asset The underlying asset is the stock, ETF, or commodity that the option contract is based on. The option’s value depends on the price of this asset.
22. Contract Size A standard options contract represents 100 shares of stock. This means each option controls 100 shares of the underlying.
23. ExerciseExercising an option means using the contract to buy or sell the underlying shares. This usually occurs when the option is in-the-money.
24. AssignmentAssignment occurs when an option seller must fulfill the contract obligation. This means selling or buying shares depending on the option type.
25. American Option An American option can be exercised anytime before expiration. Most stock options in the United States use this style.
Volatility Concepts
26. Implied Volatility (IV)Implied volatility reflects the market’s expectation of future price movement. Higher IV leads to higher option premiums.
27. Historical Volatility Historical volatility measures how much the stock price has moved in the past. It is calculated using past price data.
28. Volatility Crush Volatility crush occurs when implied volatility drops sharply after an event like earnings. This often causes option prices to fall quickly.
29. IV Rank IV Rank compares current implied volatility to its historical range. Traders use it to determine whether options are cheap or expensive.
30. IV PercentileIV percentile shows how often implied volatility has been lower than its current level over a certain period. It helps traders judge volatility conditions.
Options Strategies
31. Covered Call A covered call involves owning a stock and selling a call option against it. Traders use it to generate income from stocks they already own.
32. Cash-Secured Put A cash-secured put is when a trader sells a put while holding enough cash to buy the shares if assigned. It is commonly used to acquire stocks at a discount.
33. Protective Put A protective put involves buying a put option while owning the stock. It acts like insurance against a decline in price.
34. Bull Call Spread A bull call spread involves buying one call and selling another at a higher strike price. It reduces cost but limits potential profit.
35. Bear Put Spread A bear put spread involves buying a put and selling another at a lower strike. Traders use it when they expect a moderate decline.
Advanced Strategies
36. Iron Condor An iron condor combines two credit spreads to profit from low volatility. Traders make money if the stock stays within a certain price range.
37. Straddle A straddle involves buying both a call and put at the same strike and expiration. It profits from large moves in either direction.
38. Strangle A strangle is similar to a straddle but uses different strike prices. It costs less but requires a bigger move to profit.
39. Butterfly Spread A butterfly spread uses three strike prices to create a limited risk, limited reward trade. It benefits when a stock finishes near a specific price.
40. Calendar Spread A calendar spread involves selling a short-term option and buying a longer-term option at the same strike. Traders use it to benefit from time decay differences.
Risk & Trade Management
41. Margin Margin is borrowed capital used to open certain option positions. Some strategies require margin approval from a broker.
42. Probability of Profit (POP) Probability of profit estimates the likelihood that a trade will be profitable at expiration. It is often calculated using option pricing models.
43. Max Profit Max profit is the highest possible gain from a specific options strategy. Some strategies have unlimited upside while others are capped.
44. Max Loss Max loss is the largest possible loss a trader could incur on the trade. Understanding this is critical before entering any position.
45. Break-Even Price The break-even price is where the trade neither gains nor loses money. It factors in the premium paid or received.
Market Behavior Concepts
46. Liquidity Liquidity refers to how easily options can be bought or sold without affecting price. High liquidity leads to tighter spreads and easier trade execution.
47. Early Assignment Risk Early assignment risk occurs when an option seller is assigned before expiration. This is more common with in-the-money options near dividend dates.
48. Market Maker Market makers provide liquidity by continuously quoting bid and ask prices. They help keep the options market functioning smoothly.
49. Rolling an Option Rolling means closing an existing option and opening another with a different expiration or strike. Traders do this to extend trades or manage risk.
50. Options Chain An options chain lists all available options for a stock across different strike prices and expiration dates. Traders use it to analyze possible trades.
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50 of the most important options trading terms
skool.com/oil-option-trading-101-1282
How to use options to reduce risk in a portfolio. You can use this for all stocks and commodities but we going to trade Crude oil and oil options.
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