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Options Trading Fundamentals

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Options Chain

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A list of all available option contracts for a particular security, typically presented with their respective strike prices, expiration dates, and premium prices.

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Iron Condor

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An advanced options strategy involving four different contracts. It is designed to profit from low volatility in the underlying asset, with limited risk.

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Option Writer

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The seller of an options contract who receives the premium from the buyer but also assumes the risk of being obligated to buy or sell the underlying asset if the option is exercised.

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Call Option

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A financial contract giving the buyer the right, but not the obligation, to buy an underlying asset at a predetermined price within a specified time frame.

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Implied Volatility (IV)

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A metric that reflects the market's view of the likelihood of changes in a given security's price. Higher IV means that the market expects greater price variability.

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Covered Call

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An options strategy where an investor holds a long position in an asset and sells call options on that same asset to generate premium income.

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Put Option

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A financial contract giving the buyer the right, but not the obligation, to sell an underlying asset at a predetermined price within a specified time frame.

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Out-of-the-Money (OTM)

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Describes an options contract that would not make money if it were exercised immediately because the underlying price is not favorable in comparison to the strike price. A call option is OTM if the underlying price is below the strike price and a put is OTM when the underlying price is above the strike price.

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At-the-Money (ATM)

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A situation where an option's strike price is identical to the price of the underlying asset. Both call and put options can be ATM.

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Strike Price

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The fixed price at which the owner of an option can buy (in the case of a call) or sell (in the case of a put) the underlying security or commodity.

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European Options

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Options that can only be exercised at the expiration date, not before, which can result in different pricing compared to American options.

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Option Premium

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The price the buyer pays to the seller for an options contract, which fluctuates based on factors such as stock price, strike price, time to expiration, and volatility.

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Time Decay (Theta)

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The rate at which the value of an option diminishes as the expiration date approaches, with all other factors remaining constant.

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Protective Put

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An options strategy where an investor purchases a put option for an asset that they currently own to hedge against a potential decrease in the asset's value.

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In-the-Money (ITM)

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Describes an options contract with intrinsic value. A call option is ITM if the underlying asset's current price is above the strike price; a put option is ITM if the current price is below the strike price.

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American Options

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Options that can be exercised any time before the expiration date, providing more flexibility to the holder compared to European options.

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Naked Options

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Describes a high-risk strategy where the investor writes (sells) call or put options without owning the underlying asset or holding a position to cover the option's exercise.

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Delta

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A measurement of an option's sensitivity to changes in the price of the underlying asset. It is represented as the change in the option's price for a one-unit change in the price of the underlying asset.

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Volatility Skew

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A phenomenon where individual options on the same underlying with different strike prices and expiration dates may have different implied volatilities, often indicating a higher demand for OTM puts due to protective or speculative trading.

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Exercise

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The action taken by the holder of an option to buy (in the case of a call) or sell (in the case of a put) the underlying asset at the strike price.

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