Glossary

Every option has a strike. A $200 call lets you buy at $200; a $200 put lets you sell at $200. Picking strikes is most of the work in options trading.

On expiration, the option is either exercised, assigned, or worthless. Most retail-friendly options trades use expirations between 30 and 60 days out.

Buyers pay premium up front for the right embedded in the contract. Sellers collect premium and take on the obligation in return.

ATM means the strike equals the current price. ITM means exercising would already have value (a $190 call when the stock is $200). OTM means exercising would be worthless right now.

A call gains value when the stock rises. Buying a call is bullish. Selling a call is bearish or neutral, and obligates you to deliver shares if assigned.

A put gains value when the stock falls. Buying a put is bearish or protective. Selling a put is bullish, and obligates you to buy shares if assigned.

If you are short a call and the stock is above the strike at expiration, you will be assigned: you must deliver 100 shares per contract at the strike. Same idea for short puts in reverse.

Long calls and puts can be exercised. In practice almost no one exercises early; the option is usually worth more than the intrinsic value, so traders sell the option instead.

Delta is also a quick proxy for the probability the option finishes in the money. A 0.30 delta call behaves roughly like 30 shares of stock and has a rough 30% chance of expiring ITM.

High gamma means your P&L can swing quickly when the stock moves. Gamma spikes near expiration for at-the-money options; that is why short-dated trades feel jumpy.

Every day that passes, an option loses a little extrinsic value. Theta tells you how much per day. Sellers of options collect theta; buyers pay it.

Long options are long vega (they like rising IV). Short options are short vega (they like falling IV). After earnings, IV usually crushes, hurting long-vega trades.

How much the option price moves per 1% change in interest rates. Usually small enough to ignore unless the option is more than a year out.

IV is the volatility number that makes the option pricing model match the actual market price. Higher IV means options are more expensive. Traders compare IV to history to decide whether options are cheap or rich.

IV Rank of 0 means current IV is at the lowest point of the past year; 100 means the highest. Above 70 favors selling premium. Below 20 favors buying premium.

A close cousin of IV Rank. 80th percentile means current IV is higher than it was 80% of the time over the past year.

Positive put skew means the market is paying up for downside protection, often a setup for put-credit spreads. Negative skew (calls pricier) usually signals squeeze chasing.

Normally near-term IV is lower than long-term IV (contango). When the front month spikes above the back months it is "inverted" (backwardation), which usually flags fear or a known event.

Roughly the range the stock has about a 68% chance of staying inside over a given window. Calculated from IV. Useful for picking strikes outside the noise zone.

Computed from current IV and the trade's breakeven prices. Higher is better, but high-PoP trades usually have smaller maximum reward. Always read PoP and max reward together.

A credit trade pays you premium up front. Your max profit is usually the credit you collected. Credit trades typically profit from sideways or modestly favorable moves.

A debit trade requires premium up front. Your max loss is often the debit you paid. Debit trades typically need a directional move to profit.

For a multi-leg trade, the net credit is what hits your account when the order fills. Compare it to the max loss to judge whether the credit pays you enough for the risk.

For most defined-risk trades, max profit is reached only at expiration with the stock in a specific zone. You usually take the trade off well before then once you have most of the credit.

For defined-risk trades, this is a hard cap. For undefined-risk trades (naked short options), max loss can be large or unlimited and is for experienced traders only.

Any structure where every short leg is paired with a long leg of the same type is defined risk. This is the right starting point for almost everyone learning options.

Naked short calls have unlimited theoretical risk. Naked short puts have risk down to zero. Use sparingly, with cash or shares set aside, and never on names you do not understand.

Most multi-leg trades have two breakevens: one above and one below. Staying between them at expiration means a profit; moving outside means a loss.

Most defined-risk credit trades work best in the 30 to 60 DTE window. Closer than 21 DTE, gamma gets aggressive; further than 60 DTE, theta is too slow.

Defined-risk credit trades typically tie up the max loss minus the credit collected. Use this to size positions: a 1 to 2% of account risk-per-trade rule keeps you in the game.

Lets you compare trades of different sizes. A $50 credit on $250 of capital (20% ROC) often beats a $200 credit on $2,000 of capital (10% ROC) once you account for portfolio efficiency.

A 5% return collected in 30 days annualizes to roughly 60%. This is the right way to compare a 30-day trade to a 90-day trade head to head.

A clean way to rank credit trades on the same risk basis. 0.30 means you collect $30 of credit per $100 you have at risk. Higher is better, all else equal.

Combines open interest, daily volume, and bid-ask spread. Always prefer liquid options. Wide spreads quietly eat your edge on every trade.

Weighted toward high PoP and defined risk so the calmest trades surface first. Use it to rank, not to decide. Always read the underlying numbers before placing.

Scales each position's delta by how much it moves relative to SPY. Answers the question "if SPY drops 1%, how much does my whole book drop?"

Tuned correctly, it collects a net credit with risk defined to a single direction (typically the upside). The structural max loss only fires on a sharp move into the narrow wing. Path-dependent intraday marks can still swing while the trade is open. One of the more efficient credit structures available to retail.

Sized so the credit exceeds the call-spread width, the structural max loss on the upside is zero or a small profit. Downside risk runs to the short put strike, same as any cash-secured put. Tends to work best in elevated IV with rich put skew.

A capital-efficient stand-in for a covered call. Same directional exposure for a fraction of the cash. Best on names you want to own for at least a year.

On a standard 1:1 PMCC, the short-call delta accelerates faster than the LEAPS delta on the way up. Once the underlying breaks the short strike, the position can flip net short delta and lose money on further upside (the "negative-delta trap"). The asymmetric variant sells `floor(LEAPS_delta × LEAPS_count)` short calls instead — typically 7 shorts against 10 LEAPS at 0.70 delta. Less premium per cycle, but you stay net long and the uncovered LEAPS keep paying on a runaway rally.

Caps both downside and upside. The call premium pays for the put, so protection is free, but you give up some upside in exchange.

Cuts your effective breakeven roughly in half without adding new downside risk. Best on stocks 5 to 15% underwater where a partial rebound is more likely than a full one.

You collect call premium in exchange for capping the upside at the strike. The single highest-leverage habit a stock holder can pick up.

You collect put premium and accept the obligation to buy the stock at the strike. A patient way to enter a stock you want to own anyway, at a price you set.

The starting point for defined-risk trading. A bull put spread (sell higher put, buy lower put) is bullish for credit; a bear call spread is bearish for credit; debit verticals work the other direction.

Profits if the stock stays between the short strikes. Defined risk on both sides. Loved for sideways markets; hated when a trend shows up.

Profits from time passing on the short option faster than the long option. Likes flat or modestly trending markets; vega-positive, so it benefits from rising IV.

Combines the time-decay edge of a calendar with a directional lean. PMCC is the most common diagonal in retail land.

A 1×2 ratio sells more options than it buys. Often credit, often with embedded directional risk. Used carefully, sized small.

A wide spread is a hidden tax. On illiquid options it can swallow your entire credit. Always work the order between bid and ask, never market.

A liquidity proxy. High OI plus high daily volume means tight spreads and easy fills. Low OI is where stops get gapped.

Like open interest but for the current session. Today's volume divided by yesterday's OI gives you a sense of fresh attention on the strike.

Right at the strike, it is unclear whether the option will be assigned. You can wake up Monday holding (or short) shares you did not expect. Close anything within $0.50 of the strike before the close.

Most often used on covered calls or short puts that are getting tested. Rolling up and out buys time and a better strike, usually for a small additional credit.

IV inflates leading into earnings and almost always crushes after. Short-vol structures benefit from the crush; long-vol structures get punished. Most disciplined traders close before the print.