A
AssignmentWhen the buyer of an option exercises it and you have to fulfil your side. For a short put, you buy 100 shares at the strike. For a short call, you sell your 100 shares at the strike.
At the money (ATM)An option whose strike is at or very near the current share price.
B
Bid-ask spreadThe gap between the highest price a buyer will pay (bid) and the lowest a seller will accept (ask). A wide spread costs you money, so I prefer options with narrow spreads.
C
Call optionA contract giving its buyer the right to buy 100 shares at the strike price before expiry. When you sell one against shares you own, it's a covered call.
Cash-secured putA put you sell while holding enough cash to buy the shares if assigned.
CollateralThe cash or shares set aside to back an option you've sold.
Cost basisWhat your shares really cost you. Subtract the premium you've collected from the price you paid. See my cost basis tracker.
Covered callA call you sell against 100 shares you already own.
D
DeltaAn estimate of how much an option's price moves for a $1 move in the share price. Traders often use it as a rough guide to the chance of an option finishing in the money. It's a guide, not a promise.
DTE (days to expiration)How many days are left until an option expires.
E
Early assignmentBeing assigned before the expiry date. It's possible with US equity options.
Effective purchase priceThe strike price minus the premium you received. It's what you've paid for the shares if assigned.
ExerciseUsing the right an option gives you. Option buyers exercise, sellers are assigned.
Expiration (expiry)The date an option contract ends.
I
Implied volatility (IV)The market's estimate of how much a share price is likely to move, shown in option prices. Higher IV means higher premiums, and usually higher risk.
In the money (ITM)A put with a strike above the share price, or a call with a strike below it.
Intrinsic valueThe part of an option's price that's real, the amount by which it's in the money.
L
LiquidityHow easily you can buy or sell. Liquid options have lots of trading and narrow spreads.
N
Net creditWhat you receive after combining the cost of closing an old option with the premium from a new one. I only roll for a net credit. See rolling options.
O
Open interestThe number of option contracts currently open. It's a rough guide to liquidity.
Out of the money (OTM)A put with a strike below the share price, or a call with a strike above it.
P
PremiumThe price paid for an option. As the seller, it's what you receive.
Put optionA contract giving its buyer the right to sell 100 shares at the strike price before expiry.
R
RollClosing an option and opening another one on the same stock at a different strike or date, usually to move it further out in time. See rolling options.
S
Strike priceThe price at which the shares would be bought or sold if the option is exercised.
T
Theta (time decay)How much an option loses in value as time passes. It works for the seller.
Time valueThe part of an option's price that isn't intrinsic value. It falls to zero at expiry.
U
UnderlyingThe stock the option is based on.
W
WheelThe strategy of selling cash-secured puts, taking assignment if it happens, then selling covered calls until the shares are called away, and repeating.