Options glossary

An American-style option can be exercised on any trading day up to and including expiration. Nearly all US single-stock and ETF options (AAPL, SPY, etc.) trade this way, which gives holders flexibility but exposes sellers to early-assignment risk at any point before expiry.

Assignment risk is the chance a short option gets exercised against you, forcing a trade at the strike. On American-style options it can happen any day, but it clusters around expiration, ex-dividend dates, and deep in-the-money contracts with almost no extrinsic value left to discourage the holder from exercising early.

The bid-ask spread is the gap between the highest price a buyer will pay (bid) and the lowest a seller will accept (ask). It's a hidden trading cost: buying at the ask and selling right back at the bid loses the full spread, which matters most on thin, illiquid contracts.

A call option gives its buyer the right to buy the underlying asset at the strike price before expiration. Traders buy calls when they expect the price to rise; the maximum loss is the premium paid, while the potential gain is theoretically unlimited as the underlying climbs.

Cash settlement means no shares change hands when an option is exercised - only the cash difference between the settlement price and the strike is paid. Broad index options like SPX and NDX settle this way, and they're also European-style, exercisable only at expiration.

A closing transaction exits an existing position and reduces open interest. Selling to close exits a long option; buying to close buys back an option that was previously written. Confusing a closing order with an opening one is a common and costly beginner mistake.

Contract size is the number of shares one option contract controls. For US equity options that's 100 shares. Corporate actions like special dividends, splits, or mergers can produce oddly sized "adjusted" contracts, so it's worth checking the deliverable before trading an unusual one.

Delta measures how much an option's price changes for a $1 move in the underlying. Calls range from 0 to +1 and puts from −1 to 0; it also works as a rough probability of finishing in-the-money, so a 0.20-delta option has roughly a 1-in-5 chance of doing so.

Early exercise is using an American-style option before its expiration date. It's rarely optimal, since exercising throws away any remaining extrinsic value - the main exception is a deep in-the-money call the day before an ex-dividend date, when the dividend exceeds the option's remaining time value.

A European-style option can only be exercised on its expiration day, never before. Most cash-settled index options - SPX, NDX, RUT - use this style, which means sellers never face early assignment and holders can't lock in value ahead of the settlement date.

Exercise is when an option holder uses their contractual right - buying the underlying at the strike for a call, or selling it for a put. US equity options are American-style, exercisable on any day before expiry, and brokers typically auto-exercise options that finish $0.01 or more in-the-money.

Gamma measures how much delta itself changes for a $1 move in the underlying - effectively delta's rate of acceleration. Gamma is highest for at-the-money options close to expiration, which is exactly when a small stock move can swing a position's risk the fastest.

Implied volatility (IV) is the volatility figure built into an option's current market price - the market's forward-looking forecast of movement, derived backward from what traders are actually paying. High IV means expensive options; low IV means cheap ones, and it usually spikes ahead of known events like earnings.

Intrinsic value is what an option would be worth if exercised right now - the amount it's in-the-money by. It's calculated as max(0, stock price − strike) for a call or max(0, strike − stock price) for a put, and it can never fall below zero.

IV crush is the sharp drop in implied volatility right after a known event, usually earnings, once the uncertainty that inflated it is resolved. It can turn a directionally correct trade into a loss, since the volatility premium built into the option evaporates even as the stock moves the "right" way.

IV Percentile shows the percentage of trading days over the past year when implied volatility was lower than it is today. Unlike IV Rank, a single outlier spike barely moves it, which is why many traders trust IV Percentile more in the year after a market crash.

Legging in means building a multi-leg spread one leg at a time instead of as a single combo order, and legging out closes the legs separately. It can capture a better net price if the underlying moves favorably between fills, but leaves a temporarily unhedged, fully directional position in between.

Leverage means controlling a large amount of the underlying with a small amount of cash. One option contract can control tens of thousands of dollars of stock for a fraction of that price - amplifying gains and losses in both directions, and cutting losses faster than owning the stock outright would.

Liquidity is how easily a position can be entered and exited without moving the price against you. Check it with three things: a tight bid-ask spread, healthy open interest (ideally 1,000+ contracts at the strike), and steady daily volume rather than a single stray print.

Margin requirements are the collateral a broker holds against a short option position, since a short option can lose far more than the premium collected. US Reg T rules set a formula per position type, and the requirement is recalculated daily, growing if the trade moves against the seller.

Max pain theory identifies the strike price at which the total value of all open options, calls and puts combined, is lowest at expiration - the price where option buyers as a group lose the most. Evidence for stocks actually drifting toward it is mixed, and the effect tends to vanish once real news hits.

Open interest is the total number of option contracts still open - not yet closed, exercised, or expired. Unlike volume, it updates once per day and accumulates over time. High open interest at a strike usually means a crowd has positions there and spreads tend to be tighter.

An opening transaction creates or adds to a position and increases open interest. Buying to open starts a long position; selling to open writes an option and starts a short position. It's the first leg of any new options trade.

Option pricing models turn stock price, strike, time, rates, dividends, and volatility into a theoretical premium. Black-Scholes is a fast closed-form formula for European options; the Binomial model checks for early exercise at each step, making it the standard choice for American-style stock options.

Physical delivery means actual shares change hands when an option is exercised - exercising one $340 call moves $34,000 out of the buyer's account in exchange for 100 shares. All US single-stock and ETF options settle this way, which is why an auto-exercised option can leave an unplanned stock position.

Pin risk occurs when a stock closes right at or very near a short option's strike on expiration day, leaving uncertainty about whether it will be assigned. After-hours price moves can still trigger exercise decisions, turning a seemingly expired option into a surprise stock position over the weekend.

Portfolio margin calculates collateral requirements from the actual risk of an entire account, stress-testing it across a range of price moves, instead of applying fixed Reg T percentages per position. It can free up significant capital for hedged positions but requires a larger minimum account and can jump sharply in a volatility spike.

A put option gives its buyer the right to sell the underlying asset at the strike price before expiration. Traders buy puts when they expect the price to fall, or to hedge shares they already own, much like insurance. Loss is capped at the premium paid.

Put-call parity is the no-arbitrage relationship linking a European call and put with the same strike and expiration: their price difference equals the underlying's price minus the discounted strike. It explains why calls and puts share one implied volatility at a given strike and underpins synthetic stock positions.

Realized volatility is the volatility a stock actually delivers over the life of a trade, measured from its daily price changes. Option selling as a business rests on implied volatility tending to run higher than realized volatility over time - sellers collect that gap as a premium, and give it back during sharp moves.

Rho measures how much an option's price changes when interest rates move by one percentage point. Calls gain value as rates rise and puts lose value; it matters little for short-dated contracts but becomes more relevant on long-dated options such as LEAPS.

A short position means you sold (wrote) an option you didn't already own. You collect the premium immediately but take on an obligation - to sell shares if a call is assigned, or buy them if a put is assigned - with risk that can exceed the premium received.

Skew risk is the risk that the shape of the volatility curve across strikes moves against a position even when at-the-money IV stays flat. It hits risk reversals and ratio spreads especially hard, since a crash can spike out-of-the-money put IV far more than the ATM IV a hedge relies on.

Slippage is the gap between the price a trader expected and the price actually filled at, caused by wide spreads, thin order books, or fast-moving markets. It quietly erodes returns on illiquid contracts; using limit orders near the midpoint is the standard way to control it.

Term structure of volatility compares implied volatility across different expirations at the same strike. Rising IV further out (contango) is typical in calm markets; near-term IV spiking above longer-dated IV (backwardation) usually signals a known event, like earnings, sitting inside that near-term window.

The Greeks are a set of sensitivity measures - delta, gamma, theta, vega, and rho - that each show how an option's price reacts to one specific change: the stock moving, time passing, volatility shifting, or interest rates changing. Traders read them together, the way a pilot reads a full instrument panel.

Theta (time decay) measures how much value an option loses each day, all else held equal. It works against option buyers and for option sellers, and it accelerates sharply in the final two to three weeks before expiration, which is where long options bleed value the fastest.

Vega measures how much an option's price changes when implied volatility moves by one percentage point. Longer-dated options carry more vega than short-dated ones, which is why they're, above all, a bet on how volatility itself will move rather than just on the stock's direction.

The VIX (CBOE Volatility Index) is the market's 30-day implied volatility for the S&P 500, calculated from SPX option prices, and it's often called the "fear gauge." A quick shortcut, the Rule of 16, divides the VIX by 16 to estimate the S&P 500's expected daily move.

Volatility measures how far and how fast an underlying's price swings, expressed as an annualized percentage. A stock with 25% volatility has a roughly ±25% expected range over a year. For option buyers, volatility is fuel for a bigger payoff; for sellers, it's the risk they're paid a premium to carry.

Volatility skew is the difference in implied volatility across strikes within the same expiration. On stocks and indices, out-of-the-money puts almost always carry higher IV than out-of-the-money calls, because investors are willing to pay up for crash protection - a pattern traders call the "smirk."