Glossary
Short, precise definitions with links to related terms. Every jargon word used in the lessons lives here.
A
B
- BackwardationA futures curve where near-dated contracts price above longer-dated ones.
- Bid–ask spreadThe gap between the highest price buyers will pay (bid) and the lowest price sellers will accept (ask).
- BreakevenThe underlying price at expiration where a strategy’s profit and loss equals zero.
- Buying powerThe capital a brokerage account has available to open new positions after existing requirements.
C
- Calendar spreadSelling a near-dated option and buying a longer-dated option at the same strike.
- Call optionA contract giving its buyer the right, but not the obligation, to buy 100 shares of the underlying stock at the strike price on or before expiration.
- Cash-secured putSelling a put while holding enough cash to buy 100 shares at the strike if assigned.
- ContangoA futures curve where longer-dated contracts price above shorter-dated ones.
- Contract multiplierThe number of shares one option contract controls — 100 for standard US equity options.
- Covered callOwning at least 100 shares and selling a call against them.
- Credit spreadA vertical spread sold for a net premium: the option sold is worth more than the one bought as protection.
D
E
- ExerciseThe act of using an option’s right: a call holder buys shares at the strike, a put holder sells shares at the strike.
- Expiration dateThe date after which an option ceases to exist.
- Extrinsic valueThe portion of an option’s premium above intrinsic value — the market’s price for time and uncertainty.
G
H
I
- Implied volatility (IV)The volatility number that, plugged into an option pricing model, reproduces the option’s market price.
- In the money (ITM)An option with positive intrinsic value: a call whose strike is below the current stock price, or a put whose strike is above it.
- Intrinsic valueThe value an option would have if exercised immediately: max(0, stock − strike) for calls, max(0, strike − stock) for puts.
- Iron condorA four-leg, defined-risk structure: an out-of-the-money bull put spread plus an out-of-the-money bear call spread, sold together for a credit.
- IV rankWhere current implied volatility sits within its own past year’s range, from 0 (at the low) to 100 (at the high).
L
M
O
- Open interestThe number of option contracts currently outstanding at a given strike and expiration — positions opened and not yet closed, exercised, or expired.
- Option chainThe table of all listed options on an underlying, organized by expiration and strike, showing bids, asks, volume, open interest, and implied volatility for each contract.
- Out of the money (OTM)An option with no intrinsic value: a call whose strike is above the current stock price, or a put whose strike is below it.
P
R
S
- SkewThe pattern of implied volatility varying across strikes at one expiration.
- StraddleA call and a put at the same strike and expiration, usually at the money.
- StrangleA call and a put at the same expiration but different out-of-the-money strikes.
- Strike priceThe fixed price at which an option can be exercised: the price where a call buyer may buy, or a put buyer may sell, the underlying shares.
T
V
- VegaThe change in an option’s price per one-point change in implied volatility.
- Vertical spreadBuying one option and selling another of the same type and expiration at a different strike.
- VIXCBOE’s index of 30-day implied volatility on the S&P 500, computed from a strip of SPX option prices across strikes.
- Volatility risk premium (VRP)The persistent tendency of implied volatility to exceed subsequently realized volatility.
- Volatility term structureHow implied volatility varies across expirations for the same underlying.
- VolumeThe number of option contracts traded during the current session at a strike and expiration.