Glossary

Learn to speak options.

How fluent are you in the language of options? Here you'll find all those wacky terms you might be seeing on social media and the internet. There's no shame in looking up a word.

American Exercise: Refers to a style of an option that allows the option holder to exercise their contract rights at any time, before or on the expiration date. See also European Exercise and Exercise.
Ask Price: The price at which a market participant is offering to sell an asset (stock, ETF, option, etc.)
Asset Classes: Categories of investments that have similar characteristics and behaviors in the marketplace. Examples include equities, fixed income, cash and cash equivalents, real estate, commodities, and currencies.
Assign: To designate an option seller for fulfillment of his/her obligation to sell stock (call option writer) or buy stock (put option writer). The writer receives an assignment notice from the Options Clearing Corporation. See also Early Exercise.
Assignment Notice: The notice to an option seller that the option has been exercised. See Assign.
At-the-Money (ATM): A term that describes an option with an exercise price that is equal to the current market price/value of the underlying asset.

Backwardation: A scenario where the longer-dated futures contract price is below the spot price of the asset today. The term structure slopes downward when in backwardation. See Contango and Futures Term Structure.
Bearish: Describing an opinion or outlook that anticipates a decline in the price or value of the general market or a particular asset. See also Bullish.
Beta: A measure of how an underlying asset's price movement correlates to the movement of the entire market. The Beta of an asset is not the same as volatility. See also Standard Deviation and Volatility.
Bid Price: The price at which a market participant is willing to buy an asset (stock, ETF, option, etc.)
Black-Scholes Model: The most widely known and utilized mathematical formula for options pricing, which uses specific variables: stock price, strike price, volatility, time to expiration, dividends to be paid, and the current risk-free interest rate.
Blockchain: An open, distributed, immutable, digital ledger that can record transactions between two parties perpetually and in a verifiable way. The ledger itself can also be programmed to trigger actions, automatically, and conditionally. Blockchain technology is the foundation for cryptocurrencies like Bitcoin and Ethereum.
Bond: A debt security in which an investor loans money to an issuer, which may be a government, municipality, or a corporation, in exchange for regular interest payments and the return of the principal at maturity.
Break-Event Point: The stock price (or prices) at which a particular option strategy does not make nor lose money.
Broker: An agent or firm that facilitates transactions on behalf of buyers and sellers. See also Floor Broker.
Bullish: Describing an opinion or outlook that anticipates an increase in the price or value of the general market or a particular asset. See also Bearish.
Butterfly Spread: An option strategy that has both limited risk and limited profit potential, constructed by combining a bull spread and a bear spread. Three strike prices are involved, with the lower two being used in one spread and the higher two in the opposite spread. The strategy can be used with either puts or calls; there are four different ways of combining options to construct the same basic position. Typically described as a volatility strategy since the payout is maximized either when the stock price moves far away from the middle strike price or stays equal to the middle strike price.

Calendar Spread: An option strategy in which a position is taken in a long-term option and an opposite position is taken in a short-term option, both having the same strike price. Either puts or calls can be used. This strategy is sometimes referred to as a time spread or horizontal spread.
Call: An option contract which gives the holder the right, but not the obligation, to buy the underlying asset at a certain price within a certain timeframe. See also Put.
Capital: Assets, typically cash or liquid assets, that confer value to the owner.
Capital Protection: A financial goal seeking to preserve and maintain capital.
Cash Settled: Referring to an option or future that is settled in cash when exercised or at expiration. No physical asset, like a stock or commodity, is received or delivered at expiration or upon exercise.
Certificate of Deposit (CD): A type of savings account offered by banks and credit unions that holds a fixed amount of money for a fixed period of time. When the CD matures, you can withdraw your original investment plus the interest earned.
Class: All options on the same underlying asset with the same unit of trading/multiplier. See Unit of Trading and Index Multiplier.
Combination: Any position involving both put and call options in the same class, typically one that creates a synthetic long or synthetic short position.
Compound Interest: Interest earned from the original principal plus accumulated interest.
Contango: A scenario where the longer-dated futures contract price is higher than the spot price of the asset today. The term structure will slope upward when in contango. See Backwardation and Futures Term Structure.
Cost of Carry: The cost of holding an asset over time (cost of insurance, storage, and interest on the investment). In futures trading depending on the type of future, it is often calculated as the difference between the futures price and the spot price.
Covered: A written (sold) option is considered covered if the writer also has an opposing market position equivalent to the number of shares of the underlying asset; that is, equal to the number of options contracts by the multiplier/unit of trading. A short call is covered if the underlying stock is owned, and a short put is covered (for margin purposes) if the underlying stock is also short in the account. In addition, a short call is covered if the account is also long another call on the same security, with a strike price equal to or less than the strike price of the short call. A short put is covered if there is also a long put in the account with a striking price equal to or greater than the strike price of the short put.
Covered Call: A strategy in which one writes call options and simultaneously owns an equivalent number of shares of the underlying asset equal to the number of options contracts by the multiplier/unit of trading.
Covered Put: A strategy in which one sells put options and, at the same time, is short an equivalent number of shares of the underlying asset equal to the number of options contracts by the multiplier/unit of trading.
Credit: Money received in an account. A credit transaction is one in which the net sale proceeds are larger than the net buy proceeds (cost), bringing money into the account. See also Debit.
Cryptocurrency: Cryptocurrency is a medium of exchange, created and stored electronically on a blockchain, using cryptographic techniques to verify the transfer of value and an algorithm to control the creation of monetary units
Currency: Refers to a generally accepted system of money, typically issued by a central authority. Currency can be defined as a medium of exchange, a store of value, and a unit of account for goods, services, and financial transactions.

Debit: An expense, or money paid out from an account. A debit transaction is one in which the net buy proceeds (cost) is greater than the net sale proceeds. See also Credit.
Default: A failure by a debtor to pay principal or interest when due, or to fulfill other obligations under a debt instrument. For example, lenders may deem a loan in default when the debtor hasn't made the minimum required debt payments for a certain number of months in a row, as detailed in the respective loan contract.
Defined Outcome Exchange Traded Products: An exchange-traded product that uses options to provide investors with a specified level of downside protection and upside potential over a set period, offering a defined return based on the performance of an underlying index or asset.
Delivery: The transfer of securities controlled by an options contract from an individual or firm and transfer them to another individual or firm. A call writer who is assigned must deliver stock to the call holder who exercised. A put holder who exercises must deliver stock to the put writer who is assigned. The process of delivery satisfies an equity call assignment or an equity put exercise. In either case, stock is delivered. For futures, it refers to the process of transferring the physical commodity from the seller of the futures contract to the buyer.
Delta: Measures the change in the option price given a $1 change in the price of the underlying asset. Call options have positive deltas, while put options have negative deltas.
Depository Trust and Clearing Corporation (DTCC): A corporation that facilitates clearing and settlement services for its members. A DTCC guarantees delivery of underlying securities if an assignment is made against securities held in the DTCC.
Discount: An option is trading at a discount if it is trading for less than its intrinsic value. A future is trading at a discount if it is trading at a price less than the cash price of its underlying index or commodity. See also Intrinsic Value and Parity.
Diversification: Investing capital across different financial instruments, industries, or other categories to meet investment and exposure goals
Dividend: A payment made by a company to its shareholders, typically in the form of cash or additional shares, as a distribution of profits.
Downside Protection: Refers to certain strategies that provide a buffer against a potential loss in the event of a price/value decline in an underlying asset. Can be expressed in terms of the amount the underlying asset could fall before the total position becomes a loss (an amount equal to the option premium), or as a percentage of the current price/value of the underlying asset. See also Covered Call.

Early Exercise/Assignment: The exercise or assignment of an option contract before its expiration date. See also Exercise.
Equity Option: An option that has a equity security (including stocks, ETFs, and ETNs) as its underlying asset. See also Non-Equity Option.
European Exercise: Refers to a style of an option that can only be exercised on its expiration date. There can be no early exercise or assignment with this type of option. See also American Exercise and Exercise.
Exchange Traded Fund: An SEC-registered investment company that professionally manages portfolios of assets like stocks, bonds, or commodities, providing the investor exposure to the portfolio through one product. Unlike mutual funds, ETF shares can be bought or sold on an exchange, similar to stock. Similar to mutual funds, ETFs charge annual operating expenses to shareholders, which may include management fees, distribution fees, and other expenses, which will affect the overall returns earned by shareholders.
Exercise: To invoke the right granted under the terms of an option contract. Call holders exercise to buy the underlying asset, while put holders exercise to sell the underlying asset. See also Early Exercise.
Exercise Price: Also the strike price. The price at which the option holder may buy or sell the underlying asset, as defined in the terms of the holder's option contract. It is the price at which the call holder may exercise to buy the underlying asset or the put holder may exercise to sell the underlying asset. See also Exercise.
Expiration Date: The day when an option contract terminates. An options holder generally must indicate their desire to exercise, if they wish to do so, on or by the expiration date. See also

Fair Value: Typically describes the actual worth of an option or futures contract (as determined by a mathematical model). Also, sometimes used to indicate intrinsic value. See also Intrinsic Value and Black-Scholes Model.
Floor Broker: A broker that is registered with an exchange for the purpose of facilitating transactions on behalf of buyers and sellers while on the exchange's trading floor. See also Broker.
Forward Contract: A cash transaction common in many industries, including commodity merchandising, in which a commercial buyer and seller agree upon delivery of a specified quality and quantity of goods at a specified future date.
Futures Contract: A standardized agreement to buy or sell of a specified quantity of a commodity at a specified date in the future.
Futures Term Structure: A representation of futures contract prices at different expirations, as of a point in time. This is often expressed in a graph format, with expirations plotted according to prices and expiration date(s).

Gamma: Measures the change in Delta for a $1 change in the price of the underlying asset.
Greeks: Measures that determine the sensitivity of an option's price to changes in certain variables, such as the price of the underlying asset, the rate of change in the price of the underlying asset, time decay, implied volatility, and interest rates.

Hedging: A transaction, or transactions, that aims to reduce a particular variable of exposure. For example, in the futures context, this could be accomplished by establishing simultaneous, opposite positions in the cash market and the futures market.
Holder: The owner of a security or an option.
Horizontal Spread: See Calendar Spread.

In The Money (ITM): A term describing any option that has intrinsic value. A call option is “in-the-money"" if the underlying asset price/value is higher than the strike price of the call. A put option is “in-the-money"" if the underlying asset price/value is below the strike price. See also Out-of-the-Money, At-the-Money, and Intrinsic Value.
Index: An indicator or measurement tool that tracks the performance of a group of assets or a basket of securities.
Index Option: An option whose underlying asset is an index. An Index Option is typically cash-settled because the index itself is not directly tradeable.
Intrinsic Value: The value of an option if it was to expire immediately. For call options, this is the difference between the price/value of the underlying asset and the strike price — if that difference is positive the call option has intrinsic value, otherwise it is zero. For put options it is the difference between the strike price and the price/value of the underlying asset, if that difference is positive the put option has intrinsic value, otherwise it is zero. See also In-the-Money and Parity.

Last Trading Day: The last day of open trading before an option's expiration date. Also a snazzy idea for the title of a movie.
Leaps: A term used to describe options with maturities longer than one year. LEAPS stands for Long-Term Equity Anticipation Securities.
Liquidity: Refers to the ease with which an asset can be bought or sold in the market without significantly affecting its price.
Listed Option: A put or call option that is traded on an options exchange. Listed options have strike prices and expiration dates set by listing options exchange. See also Over-the-Counter Option.
Long Position: A term used to describe either (1) an open position that is expected to benefit from a rise in the price/value of the underlying asset, like a long call, short put, or long stock, or (2) an open position resulting from an opening purchase transaction such as long call, long put, or long stock.

Margin: Cash, cash equivalents, and securities that an investor must deposit into a brokerage account as collateral in order to use borrowed funds from their broker to trade options. The margin requirement — the maximum percentage of the investment that can be loaned by a broker — is set by the Federal Reserve Board under Regulation T.
Market Maker: An exchange member that functions to “make markets” by actively quoting two-sided markets by providing bids and offers along with a market size for a particular security, option, or future. Market-Maker quotes create market liquidity and depth for the public to trade against.
Market Order: An order to buy or sell a security, option or future at the current best market price. The order will be filled as long as there is a market for the asset.
Market Place: A place that brings together buyers and sellers; a venue for trading products and for price discovery. See also Options Exchange.
Multiplier: The amount specified in a cash-settled option contract by which the current underlying interest value is multiplied to arrive at the value required to be delivered upon valid exercise of the cash-settled option contract.
Mutual Fund: An SEC-registered investment company that professionally manages portfolios of stocks, bonds, or other securities purchased with pooled investor capital. When an individual buys shares in a mutual fund, they gain exposure to all of the underlying assets the fund owns. Mutual funds charge annual operating expenses, which may include management fees, distribution fees, and other expenses, in addition to commissions, , which will affect the overall returns earned by shareholders.

Neutral: Describes an opinion of the market that is neither bearish nor bullish. Neutral option strategies are generally designed to perform best if there is little or no net change in the price/value of the underlying asset. See also Bearish and Bullish.
Non-Equity Option: Non-Equity Option
Notional Value: The value of the underlying asset at the current price. For an option and futures contract, the notional value is the number of units of the underlying asset covered by the contract, multiplied by the current price of the underlying asset.

Option: A financial derivative based on the value of an underlying asset that gives buyers the right, but not the obligation, to buy or sell an underlying asset pursuant to the terms of the option contract (e.g., price, expiration date, exercise style and settlement type).
Options Clearing Corporation (OCC): Established in 1973, the OCC is the central clearing organization that clears and settles every listed options trade in the U.S. This means that it functions “as the buyer to every seller and the seller to every buyer” in the U.S. listed options market; that is, it acts as counterparty and guarantor to each listed options transaction. It plays a key role by promoting stability and financial integrity in the marketplaces, overseeing the exercise and settlement processes, and managing the risks involved in the clearing and settlement processes.
Options Exchange: A regulated financial institution that facilitates the buying and selling of option contracts between interested parties and exchange members. All U.S. Options Exchanges must register with the Securities and Exchange Commission (SEC) as a national securities exchange and a self-regulatory organization (SRO).
Out of The Money: A term describing an option that has no intrinsic value. A call option is out-of-the-money if the underlying asset price/value is below the strike price of the call, while a put option is out-of-the-money if the underlying asset price/value is higher than the strike price of the put. See also In-the-Money, At-the-Money, and Intrinsic Value.
Over-The-Counter Option: An option traded off-exchange, as opposed to a listed option. The OTC option has a direct link between buyer and seller, has no secondary market and has no standardization of strike prices and expiration dates. OTC options are typically traded through bilateral agreements or master agreements set forth by ISDA (International Swaps and Derivatives Association) See also Listed Option and Secondary Market.
Over-the-Counter (OTC): Refers to a market where financial instruments are traded directly between two parties, typically via a dealer network, without being listed on an exchange. See Over-the-Counter Option.

Parity: A term that describes how an option is trading as a function of its intrinsic value. It is worth noting that the equation that describes the relationship between the call price and the put price includes Parity, which is defined as (Underlying Asset Price/Value - Strike Price). An option that is trading “under parity” is a discount option. See also Discount and Intrinsic Value.
Payoff Diagram: A graphical representation of the potential outcomes of an options strategy. Dollars of profit or loss are graphed on the vertical y-axis, and various stock prices are graphed on the horizontal x-axis. Results may be depicted at any point in time, although the graph usually depicts the results at expiration of the options involved in the strategy. Payout diagrams at expiration are also called “Hockey Stick” diagrams because of their shapes.
Premium: The amount paid or received for an options contract. The sum of the intrinsic value and the time value premium (i.e., the amount by which an option's total premium exceeds its intrinsic value). For futures, the difference between the futures price and the cash price of the underlying index or commodity.
Protected Strategy: A position that has limited risk. For example, a protected short sale (short stock, long call) has limited risk, as does a protected straddle write (short straddle, long out-of-the-money combination).
Put: An option contract granting the holder the right to sell the underlying asset at a certain price for a specified period of time. See also Call.
Return (On Investment): The percentage profit that one makes, or might make, on their investment.

RHO: Measures the expected change in the option price for a 1% change in the risk-free interest rate.

Secondary Market: Any market in which securities can be readily bought and sold after their initial issuance (i.e., in the Primary Market). Cboe Exchange, Inc. (“Cboe Options”) , a U.S.-listed option exchange, was the first to provide a secondary market in equity options.
Series: A process where the terms of the derivatives contract are executed and cash and/or securities change hands between buyers and sellers.
Settlement: A process where the terms of the derivatives contract are executed and cash and/or securities change hands between buyers and sellers.
Short Option Position: The position of an option writer which represents an obligation to meet the terms of the option if assigned.
Specialist: An exchange member whose function it is to both make two-sided markets as well as keep the book of public orders. Most equity exchanges, and some option exchanges, utilize the specialist system of trading.
Spread Order: An order to simultaneously transact two or more option trades. Typically, one option would be bought while another would be sold. Spread orders can be limit orders, not held orders, or orders with discretion. However, they cannot be stop orders.
Spread Strategy: Any option position having both long options and short options of the same class and type (i.e., puts or calls).
Standard Deviation: A measure of the volatility of an asset. It is a statistical quantity measuring the magnitude of the price changes of that asset for a specific unit of time. Measures can be calculated at a variety of intervals including daily, monthly, yearly, 5-minutes, etc.
Stock: A security that represents partial ownership (measured in shares) of a company. Options contracts on single-name stocks derive their value from the price of the underlying shares.
Straddle: The purchase or sale of an equal number of puts and calls having the same terms.
Strike Price: The price at which an option holder may buy or sell the underlying security, as defined in the terms of the option contract. It is the price at which the call holder may exercise to buy the underlying asset or the put holder may exercise to sell the underlying asset. See Exercise Price.
Swap: A financial contract in which two parties agree to exchange cash flows or other financial instruments over a specified period, typically based on different variables such as interest rates, currencies, or commodities.

Theta: Measures the change in the option price as time to expiration decreases. Also known as time decay. Since both puts and calls are susceptible to time decay, theta is always expressed as a negative number.
Trading Limit: The exchange-imposed maximum daily price change for a security. Trading Limits exist to help maintain orderly and fair markets during times of high volatility. When a limit is reached, the market is referred to as “locked” or “limit up” (if the upper price change is reached) or “limit down” (if the lower price change is reached).
Type: The designation of an option as either a put or call option.

Uncovered Option: A written option is considered to be uncovered if the investor does not have an offsetting position in the underlying asset. Also commonly described as a “naked” option. See also Covered.
Underlying Asset: The asset, performance or interest on which one has the right to buy or sell via the terms of a listed option contract. For options listed on Cboe Options Exchange, all underlying assets are equity securities or indexes.
Unit of Trading: Represents the number of underlying shares (i.e., units) controlled by an physical delivery option contract. For most equity options, one contract controls one hundred shares of the underlying. The unit of trading in this case is 100 shares.

Variance: The sum of all the prices moves in an asset over a fixed period of time. Mathematically, variance equals volatility squared.
Vega: Measures the change in the option price for a 1% change in the implied volatility of the underlying asset. See also Volatility.
Vertical Spread: Any option spread strategy using options of the same class that have the same expiration dates, but different strike prices.
Volatility: A measure of the amount by which an underlying asset is expected to fluctuate in a given period of time. Generally measured by the annual standard deviation of the daily price changes in the asset. It is worth mentioning that there are two types of volatility: historical and implied. Historical volatility is calculated using past, or historical, prices of the stock. Implied volatility is a forward-looking measure that is calculated using an options pricing model and the current option price as an input to “imply” the future volatility of the stock.
Volume: A measurement of the total number of shares, contracts, or units of a particular asset that are traded during a specific period of time in a market. It can be an indicator of the activity level and liquidity of that asset.

Write: To sell an option. The investor who sells is called the writer.

Disclaimer: This Glossary is to be used for informational purposes only and intended to assist the public in understanding some of the specialized words and phrases used in the derivatives industry since many of these terms are not found in standard reference works. This Glossary is not inclusive, and if you cannot find the term you are looking for or have any other comments, please let us know. Definitions are not intended to state or suggest the views of Cboe concerning the legal significance or meaning of any word or term and no definition is intended to state or suggest Cboe’s views concerning any trading strategy or economic theory. Cboe assumes no responsibility for errors and omissions. All matters pertaining to rules and specifications are made subject to and superseded by official rules of the relevant Cboe exchanges.

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