Options Glossary: Greeks, Exercise and Pricing Terms

AM settlement: AM settlement means a cash settled index option's final value is calculated from the opening prices of the index components on expiration day. Standard monthly SPX options are AM settled and stop trading the day before. Read the guide.
American style option: An American style option can be exercised on any business day up to and including expiration. All US listed stock and ETF options are American style, so short positions can be assigned early. Read the guide.
Ask: The ask is the lowest price a seller is currently willing to accept for an option, also called the offer. A market order to buy usually fills at or near the ask.
Assignment: Assignment is the notice that obligates an option seller to fulfill the contract after a holder exercises. A short call assignment means selling 100 shares per contract at the strike, and a short put assignment means buying them. Read the guide.
At the money (ATM): An option is at the money when its strike price equals, or is very close to, the current price of the underlying. At the money options carry the most time value and the highest gamma.
Barone Adesi Whaley model: The Barone Adesi Whaley model is a 1987 quadratic approximation for pricing American options. It adds an early exercise premium to the European price and is fast and accurate for short and medium maturities. Read the guide.
Bid: The bid is the highest price a buyer is currently willing to pay for an option. A market order to sell usually fills at or near the bid.
Bid ask spread: The bid ask spread is the difference between the ask and the bid. It is a trading cost you pay when you enter and exit, and a narrow spread usually signals a liquid option.
Binomial tree: A binomial tree is a pricing method that lets the stock move up or down at each time step and works backward from expiration to value an option. It handles early exercise naturally, which makes it the benchmark for American options. Read the guide.
Bjerksund Stensland model: The Bjerksund Stensland model is a closed form approximation for American option prices, first published in 1993 and improved in 2002. It is fast and accurate, gives a slight lower bound on the true value, and is the default model in CalcOptions. Read the guide.
Black Scholes model: The Black Scholes model is the 1973 formula for pricing European options from the stock price, strike, time, volatility, interest rate and dividend yield. It cannot value early exercise, so it can understate the price of American options. Read the guide.
Breakeven: A breakeven is the underlying price at which a position neither makes nor loses money at expiration. A long call breaks even at the strike plus the premium, and a long put at the strike minus the premium. Read the guide.
Buying power: Buying power is the amount your broker lets you use to open new positions, based on your cash, margin and existing positions. Short options and assignments can reduce it sharply.
Call option: A call option gives the buyer the right, but not the obligation, to buy 100 shares of the underlying at the strike price until expiration. The buyer profits at expiration when the stock is above the strike plus the premium paid. Open the long call calculator.
Cash settlement: Cash settlement means an exercised option pays its in the money amount in cash instead of delivering shares. Most broad index options, such as SPX, NDX and RUT, are cash settled. Read the guide.
Charm: Charm, also called delta decay, measures how an option's delta changes as time passes. It explains why out of the money deltas drift toward zero and in the money deltas toward 1 or negative 1 as expiration nears, all else equal. Read the guide.
Contract multiplier: The contract multiplier converts an option's quoted price into dollars. For standard US equity and ETF options it is 100, so the quoted premium is multiplied by 100 for each contract.
Cost of carry: Cost of carry is the net cost of holding the underlying, usually the risk free rate minus the dividend yield for a stock. Models such as Bjerksund Stensland use it, often written as b = r minus q. Read the guide.
Credit: A credit is the net premium you receive when you open a position that sells more option value than it buys. Credit trades profit if the options they sold lose value.
Credit spread: A credit spread sells one option and buys a further out of the money option of the same type and expiration for a net credit. Maximum profit is the credit, and maximum loss is the strike width minus the credit, times 100. Open the bull put spread calculator.
Days to expiration (DTE): Days to expiration is the number of calendar days left until an option expires. Time decay, gamma and vega all depend heavily on it.
Debit: A debit is the net premium you pay when you open a position that buys more option value than it sells. On a defined risk debit trade, the debit is usually the maximum loss.
Debit spread: A debit spread buys one option and sells a further out of the money option of the same type and expiration for a net debit. Maximum loss is the debit, and maximum profit is the strike width minus the debit, times 100. Open the bull call spread calculator.
Deep in the money: An option is deep in the money when its strike is far below the stock price for a call, or far above it for a put. Deep in the money options have deltas near 1 or negative 1, little time value and higher early assignment risk. Read the guide.
Delta: Delta measures how much an option's price changes for a one dollar move in the underlying. Call deltas range from 0 to 1 and put deltas from 0 to negative 1, and delta is often used as a rough probability of finishing in the money. Read the guide.
Delta neutral: A position is delta neutral when its total delta is close to zero, so small moves in the underlying barely change its value. Traders use delta neutral positions to focus on time decay or volatility rather than direction. Open the iron condor calculator.
Dividend risk: Dividend risk is the chance that a short in the money call is assigned early just before an ex dividend date. If you are short the stock on the ex date, you owe the dividend. Read the guide.
Dividend yield: Dividend yield is the annual dividend divided by the stock price. Option models usually treat it as a continuous yield, which lowers call prices and raises put prices. Read the guide.
Early exercise: Early exercise is exercising an American style option before its expiration date. It is rarely optimal because it gives up time value, and the main exceptions are calls just before an ex dividend date and deep in the money puts. Read the guide.
Early exercise boundary: The early exercise boundary is the stock price at which exercising an American option becomes better than holding it. For a put it lies below the strike and rises toward the strike as expiration approaches. Read the guide.
Early exercise premium: The early exercise premium is the extra value an American option has over an otherwise identical European option. It is zero for calls on stocks that pay no dividend and positive for most puts when interest rates are above zero. Read the guide.
European style option: A European style option can be exercised only at expiration. Most broad index options, including SPX, NDX and RUT, are European style and cash settled. Read the guide.
Ex dividend date: The ex dividend date is the first day a stock trades without the right to its next dividend. Call holders who want the dividend must exercise before this date, which raises early assignment risk for short calls. Read the guide.
Exercise: Exercise is the holder's use of the right to buy (call) or sell (put) the underlying at the strike price. Exercising captures only intrinsic value, so selling the option is usually better while time value remains. Read the guide.
Exercise by exception: Exercise by exception is the OCC process that automatically exercises expiring equity options that are at least one cent in the money. Holders can submit contrary instructions before the exercise deadline. Read the guide.
Expected move: The expected move is the price range the options market implies for a stock by a given date. A common one standard deviation estimate is stock price × implied volatility × square root of (days to expiration / 365). Read the guide.
Expiration date: The expiration date is the last day an option can be traded or exercised. Standard monthly options expire on the third Friday of the month, and many products also have weekly or daily expirations. Read the guide.
Extrinsic value: Extrinsic value is the part of an option's price above its intrinsic value, also called time value. It reflects time remaining, implied volatility, interest and dividends, and it decays to zero by expiration.
Gamma: Gamma measures how much delta changes for a one dollar move in the underlying. It is highest for at the money options near expiration, and short options carry negative gamma. Read the guide.
Greeks: The Greeks measure how an option's price responds to changes in its inputs: delta for price, gamma for delta, theta for time, vega for volatility and rho for interest rates. Position Greeks add up across all legs. Read the guide.
Historical volatility (HV): Historical volatility is the annualized standard deviation of a stock's past returns over a chosen window. It looks backward, while implied volatility looks forward. Read the guide.
Implied volatility (IV): Implied volatility is the volatility that makes a pricing model match an option's market price. It is quoted as an annual percentage and is the main driver of option premiums. Read the guide.
In the money (ITM): An option is in the money when it has intrinsic value: a call whose strike is below the stock price, or a put whose strike is above it. Expiring equity options that are at least one cent in the money are exercised automatically.
Intrinsic value: Intrinsic value is the amount an option is in the money: stock price minus strike for a call, or strike minus stock price for a put, and never less than zero. It is what the option would be worth if exercised immediately.
IV crush: IV crush is the sharp drop in implied volatility after a scheduled event such as earnings. It can make long options lose value even when the stock moves in the expected direction. Read the guide.
IV percentile: IV percentile is the percentage of trading days over the past year when implied volatility was lower than it is today. It shows how unusual current IV is for that particular stock. Read the guide.
IV rank: IV rank shows where current implied volatility sits within its 52 week range: (current IV minus 52 week low) / (52 week high minus 52 week low) × 100. A single spike can distort it, so many traders check IV percentile as well. Read the guide.
LEAPS: LEAPS, short for Long Term Equity Anticipation Securities, are listed options with more than a year until expiration, up to about three years. They have slow time decay and high vega, and traders often use them as stock substitutes. Open the poor man's covered call calculator.
Leg: A leg is one component of a multi leg options position, such as the short put in a bull put spread. Each leg has its own type, strike, expiration and quantity.
Lognormal distribution: A lognormal distribution is one in which the logarithm of the value is normally distributed, so prices cannot fall below zero. Black Scholes and most probability of profit calculations assume stock prices are lognormal at expiration. Read the guide.
Margin: Margin is the collateral a broker requires to hold positions with risk beyond the cash paid, such as short options or borrowed stock. Requirements depend on the strategy and can rise quickly when markets are volatile.
Max pain: Max pain is the strike price at which the total value of open options would be lowest at expiration, meaning option holders as a group would lose the most. It is a popular idea, but it is not a reliable forecast of where a stock will close. Read the guide.
Maximum loss: Maximum loss is the largest amount a position can lose, usually measured at expiration. It is limited for long options and spreads and can be unlimited for short calls. Read the guide.
Maximum profit: Maximum profit is the largest amount a position can make. It equals the net credit for a credit spread, the strike width minus the debit for a debit spread, and it is unlimited for a long call. Read the guide.
Mid price: The mid price is the midpoint between the bid and the ask, (bid + ask) / 2, often called the mark. CalcOptions solves implied volatility from the mid price because it is a fairer estimate of value than the last trade. Read the guide.
Moneyness: Moneyness describes where an option's strike sits relative to the underlying price: in the money, at the money or out of the money. It drives delta, time value and early exercise risk.
Naked option: A naked option, or uncovered option, is a short option without an offsetting stock or option position. A naked call has unlimited risk, and naked positions require higher approval levels and more margin. Open the short call calculator.
OCC (Options Clearing Corporation): The Options Clearing Corporation (OCC) is the central clearinghouse for all US listed options. It guarantees every contract, processes exercises and assigns them at random to clearing firms. Read the guide.
Open interest: Open interest is the total number of option contracts in a series that are still open. Unlike volume, it counts outstanding positions rather than trades, and higher open interest usually means better liquidity.
OPRA: OPRA, the Options Price Reporting Authority, consolidates quotes and trades from all US options exchanges into a single data feed. Option chains and calculators rely on OPRA data for bids, asks and volume.
Option chain: An option chain is the list of all available strikes and expirations for an underlying. It shows bids, asks, volume and open interest, and often implied volatility and Greeks.
Out of the money (OTM): An option is out of the money when it has no intrinsic value: a call whose strike is above the stock price, or a put whose strike is below it. Its entire price is time value.
Payoff diagram: A payoff diagram plots a position's profit or loss against the underlying price, usually at expiration. It shows the maximum profit, maximum loss and breakevens at a glance. Read the guide.
Physical settlement: Physical settlement means exercise or assignment delivers the actual shares. US stock and ETF options are physically settled, 100 shares per standard contract. Read the guide.
Pin risk: Pin risk is the uncertainty an option seller faces when the stock closes at or very near a short strike at expiration. You cannot be sure whether you will be assigned, so you may end up with an unexpected stock position. Read the guide.
PM settlement: PM settlement means a cash settled index option's final value is based on the closing index value on expiration day. SPX weekly and daily options are PM settled. Read the guide.
Premium: Premium is the price of an option, quoted per share. The buyer pays it and the seller receives it, and one standard contract costs the premium times 100.
Probability ITM: Probability ITM is the model estimated chance that an option finishes in the money at expiration. In Black Scholes it equals N(d2) for a call, and delta is a common rough proxy. Read the guide.
Probability of profit (POP): Probability of profit is the estimated chance that a position makes money at expiration, based on its breakevens and a lognormal price distribution. CalcOptions calculates it using the position's implied volatility. Read the guide.
Probability of touch: Probability of touch is the estimated chance that the underlying trades at a given price at any time before expiration. Under simple model assumptions it is roughly twice the probability of finishing beyond that price. Read the guide.
Put call parity: Put call parity is the relationship C minus P = S minus K × e^(minus r × T) between European calls and puts with the same strike and expiration. For American options it becomes a range rather than an exact equation. Read the guide.
Put option: A put option gives the buyer the right, but not the obligation, to sell 100 shares of the underlying at the strike price until expiration. The buyer profits at expiration when the stock is below the strike minus the premium paid. Open the long put calculator.
Rho: Rho measures how much an option's price changes for a one percentage point change in the risk free rate. Calls have positive rho and puts negative rho, and the effect is largest for long dated options. Read the guide.
Risk free rate: The risk free rate is the interest rate on a riskless investment, used in option models to discount the strike and set the cost of carry. CalcOptions uses the 13 week Treasury bill rate as its default. Read the guide.
Risk neutral probability: A risk neutral probability is the probability used for pricing, under which every asset is expected to earn the risk free rate. It makes option prices consistent with hedging but is not a forecast of real outcomes. Read the guide.
Rolling: Rolling means closing an existing option and opening a similar one with a different strike, expiration or both, usually as a single order. Traders roll to extend time, adjust strikes or reduce assignment risk.
Settlement: Settlement is how an exercised or assigned option is fulfilled, either by delivering shares (physical settlement) or by paying cash (cash settlement). Stock and ETF options settle physically, and most broad index options settle in cash. Read the guide.
Spread: A spread is a position that combines two or more options on the same underlying, such as a vertical, calendar or butterfly. The word also refers to the bid ask spread, the gap between the bid and the ask. Read the guide.
Straddle: A straddle combines a call and a put at the same strike and expiration. A long straddle profits from a large move in either direction, and a short straddle profits if the stock stays near the strike. Open the long straddle calculator.
Strangle: A strangle combines an out of the money call and an out of the money put with the same expiration. A long strangle costs less than a straddle but needs a larger move to profit. Open the long strangle calculator.
Strike price: The strike price is the price at which an option holder can buy (call) or sell (put) the underlying. It is fixed when the contract is listed, apart from adjustments for corporate actions such as splits.
Synthetic position: A synthetic position uses options, or options and stock, to replicate the payoff of another position. A long call plus a short put at the same strike and expiration creates synthetic long stock. Open the synthetic long stock calculator.
Theta: Theta measures how much an option's price changes as one day passes, all else equal. Long options usually have negative theta and short options positive theta. Read the guide.
Theta decay: Theta decay is the loss of an option's time value as expiration approaches. It accelerates for at the money options in the final weeks, which helps option sellers and hurts buyers. Read the guide.
Time value: Time value is another name for extrinsic value: the part of an option's premium above its intrinsic value. It shrinks as expiration approaches and reaches zero at expiration.
Underlying: The underlying is the asset an option is based on, such as a stock, ETF or index. Its price is the main driver of the option's value.
Vanna: Vanna measures how an option's delta changes when implied volatility changes, or equivalently how vega changes when the underlying moves. It matters most for out of the money options and large volatility shifts. Read the guide.
Vega: Vega measures how much an option's price changes for a one percentage point change in implied volatility. It is highest for at the money and longer dated options, and long options have positive vega. Read the guide.
Vertical spread: A vertical spread buys and sells options of the same type and expiration at different strikes. It can be a debit spread or a credit spread, and both its profit and its loss are capped. Open the bull call spread calculator.
Volatility skew: Volatility skew is the pattern of implied volatility across strikes for the same expiration. Stock index options usually show higher implied volatility on lower strikes because investors pay up for downside protection. Read the guide.
Volatility smile: A volatility smile is a skew pattern in which implied volatility is higher for both low and high strikes than for at the money strikes. It shows up in some individual stocks, especially around events. Read the guide.
Volatility term structure: Volatility term structure is the pattern of implied volatility across expirations for the same underlying. It often slopes upward in calm markets and can invert during selloffs or before earnings. Read the guide.
Volume: Volume is the number of option contracts traded in a series during the current session. It resets each day, unlike open interest, and shows how actively a contract is trading.
Vomma: Vomma, also called volga, measures how an option's vega changes when implied volatility changes. Out of the money options tend to have more vomma than at the money options. Read the guide.
Weeklys: Weeklys are options that expire on Fridays other than the standard third Friday, giving traders short dated expirations every week. Many large ETFs and indexes also list expirations on other weekdays. Read the guide.
Zero days to expiration (0DTE): Zero days to expiration (0DTE) options are contracts traded on their expiration day. They have very high gamma and fast time decay, so small moves in the underlying cause large swings in value. Read the guide.