Options & investing glossary

103 definitions

%B

Where price sits inside the envelope: (price − lower band) / (upper band − lower band). 1.0 is the upper band, 0.5 the middle, 0.0 the lower.

A-setup

A candidate that clears trend, setup, paycheck and calendar together. The only grade that earns full size.

American-style

An option that can be exercised on any trading day up to and including expiration (most U.S. equity options).

Anchored VWAP

The same calculation started from a date you choose — an earnings gap, a major swing low — so it spans weeks or months instead of one session.

Annualized return

The period return scaled to a full year for fair comparison.

Annualized yield on capital

Your return scaled to a full year so trades of different lengths can be compared fairly: period return x 365 / days held.

Ask

The lowest price a seller is willing to accept right now. A buyer pays around this.

Assignment

When the put buyer exercises and you must buy the 100 shares at the strike.

At the money (ATM)

A put whose strike is right at the current stock price — roughly 0.50 delta.

ATR

Average True Range — Wilder's 14-day average of the true range, quoted in dollars. The stock's typical daily travel, gaps included.

Bid

The highest price a buyer is willing to pay right now. As a SELLER, this is roughly what you can collect if you sell immediately.

Bid-ask spread

The gap between the highest price a buyer will pay (bid) and the lowest a seller will accept (ask). You generally sell near the bid.

Bollinger Bands

John Bollinger's envelope: a 20-period simple moving average with an upper and lower band two standard deviations away from it.

Breakeven

Strike minus premium — the share price at which, if assigned, you are exactly even.

Buy to close (BTC)

Buying back the put you originally sold, ending that obligation. You pay whatever the put is now worth.

Call

An option whose owner can BUY 100 shares at the strike price. Calls gain value when the stock rises.

Call option

A contract giving the buyer the right to buy 100 shares at the strike price before expiration. You are the seller, so you take the matching obligation.

Called away

When the call buyer exercises and you must sell your 100 shares at the call strike. It happens when the stock finishes above the strike at expiration.

Capped upside

Once the stock passes your strike, you stop participating in further gains — your sale price is fixed at the strike. That is the price of the premium.

Cash reserve

Money you deliberately leave uncommitted so you can keep selling puts (or buy shares cheap) when the market is falling and premiums are fat.

Collar

Owning shares plus a long protective put (a floor) financed by a short covered call (a ceiling). Downside is capped, and so is upside.

Collateral

The cash set aside to buy the shares — strike x 100 per contract.

Concentration

How much of your account rides on a single stock. High concentration means one earnings miss can dominate your whole year.

Confluence

Several independent signals pointing the same way at once. No single indicator earns a trade; the stack does.

Cost basis

What you effectively paid for shares after subtracting every premium collected — the true break-even on a wheeled stock.

Covered

It means you already own the 100 shares the call could obligate you to deliver. Your shares are the collateral.

CPI print

The Bureau of Labor Statistics' monthly consumer price index release, published at 8:30am ET around the middle of the month — the inflation number the whole rates market trades.

Credit put spread

Sell a put and buy a cheaper, lower-strike put. You collect a net credit, but the long put caps your maximum loss.

Deep in-the-money

A strike well below the current price (for a call), so the option moves almost dollar-for-dollar with the stock.

Deep in-the-money (ITM)

A short put whose strike is far above the current stock price — so it has large intrinsic value and assignment is very likely.

Defined risk

A position whose maximum loss is a fixed, known dollar amount, because a long option caps how far the loss can run.

Delta

How much the option price moves per 1 dollar move in the stock; for short puts its absolute value approximates the chance of assignment.

Delta band

The target range of deltas you sell within — a consistent rule that replaces ad-hoc strike picking.

Divergence

Price makes a new extreme and the oscillator does not. A warning condition about thinning momentum, never an entry by itself.

DTE

Days to expiration — how many calendar days until the option expires.

Earnings

A company's quarterly results announcement — a scheduled, high-uncertainty event that can move the stock sharply.

EMA

Exponential moving average — the same idea, but recent closes carry more weight via a multiplier of 2/(N+1), so the line turns sooner after a change of direction.

Ex-dividend date

The cutoff to own shares for the next dividend. The stock typically drops by the dividend amount that morning, which affects assignment timing.

Expected move

The one-standard-deviation range the option market has priced in for a given expiry: price x IV x the square root of DTE divided by 365.

Extrinsic (time) value

Everything above intrinsic value — the price of the time and uncertainty left before expiration. This is the part that decays away.

Extrinsic value

The portion of premium that is pure time and volatility value — the part theta eats away.

FCF yield

Free cash flow divided by market capitalisation. The cash the business actually throws off, expressed as a yield you can hold up against a Treasury.

FOMC

The Federal Reserve's rate-setting committee. Eight scheduled meetings a year; the statement lands at 2:00pm ET, the press conference half an hour later.

Gamma

How fast delta itself changes as the stock moves. It is the acceleration behind delta.

Gamma risk

How fast your delta changes as expiry approaches. In the final two weeks a small move in the stock swings the position far more than the remaining premium is worth.

Gap

A jump in price between one day's close and the next day's open, common after earnings — it can leap right past your strike.

Golden cross

The 50-day SMA closing above the 200-day SMA on daily closes; the death cross is the same crossing downward. Lagging regime context, not an entry trigger.

Historical volatility (HV)

How much the stock has ACTUALLY moved in the recent past. IV is the forecast; HV is the track record.

Implied volatility (IV)

The market's forward-looking expectation of movement, derived from current option prices. Higher IV means richer premiums.

Intrinsic value

The real, here-and-now value if the option expired this instant. Only ITM options have intrinsic value.

IV percentile

The share of the past year's trading days on which implied volatility closed below today's. More robust than IV rank, because a single freak spike cannot distort it.

IV rank

Current IV's position between its 52-week low and high: 100 x (current IV - low IV) / (high IV - low IV). A rank of 80 is 80% of the way through that range, not above 80% of past days.

IV rank / percentile

IV rank measures position within the past year's low-to-high IV range. IV percentile measures the percentage of historical trading days with lower IV. They are different measures and can disagree.

Last

The price of the most recent actual trade. Can be stale if the option has not traded in a while — trust bid/ask more.

LEAPS

A Long-term Equity AnticiPation Security — simply an option that expires far in the future, often a year or more out.

Let it ride

Choosing to hold an open position to expiration without adjusting it.

Long-term

Generally, shares held more than one year; gains are often taxed at lower long-term rates.

MACD

The 12-period EMA minus the 26-period EMA, with a 9-period EMA of that line as its signal. Unbounded, so it has no fixed extremes.

Mark / Mid

The midpoint between bid and ask. A fair estimate of the option's real value, and a sensible price to aim your limit order at.

Max loss

(Strike minus premium) x 100 per contract — only if the stock somehow goes to zero.

Max profit

Premium x 100 x contracts — the most you can make, earned if the put expires worthless.

Naked call

Selling a call without owning the shares. The risk is theoretically unlimited, and it is not part of the wheel. Avoid it.

Net credit

When the premium from the new put is larger than the cost to buy back the old one, so cash flows to you.

Notional

The full dollar value a position controls if you were assigned. For a cash-secured put it is strike x 100 x contracts — the cash actually on the hook.

OBV

On-Balance Volume — Joe Granville's running total that adds a day's volume on an up close and subtracts it on a down close. Only the slope means anything.

Open interest

The total number of contracts of that option currently held open. Higher means a deeper, more active market.

Out of the money (OTM)

A put whose strike is below the current stock price — it has no value if exercised today.

Out-of-the-money (OTM)

For a call, a strike above the current stock price. The stock has to climb to reach it, so the call has no intrinsic value yet — only time value.

Overbought / oversold

The classic 70 and 30 lines. Read them as speed readings, not instructions — in a strong trend they stop meaning what the textbook says.

P/E ratio

Price divided by earnings per share. Meaningless on its own — only useful against the same stock's own history and its sector peers.

Pin risk

Uncertainty at expiration when the stock closes right at your strike, so you do not know if you will be assigned.

Poor-man's covered call (PMCC)

Owning a deep in-the-money LEAPS call as a stock substitute and selling shorter-dated calls against it.

Premium

The cash the buyer pays you up front for the put. It is yours to keep forever.

Premium received

Cash collected up front = quoted premium x 100 x contracts.

Profit target

A pre-set buy-back level — conventionally around 50% of the credit received — that closes the trade before its slowest and riskiest stretch.

Protective put

A long put you buy on shares you own — insurance that lets you sell at the put's strike no matter how far the stock falls.

Put

An option whose owner can SELL 100 shares at the strike price. Puts gain value when the stock falls.

Realized loss

A loss that becomes final the moment you close the trade — as opposed to a paper loss that can still recover.

Realized P/L

Profit or loss that is locked in — the position is fully closed and the cash is final.

Relative volume

Today's volume divided by the average for the comparable period. RVOL 2.0 means twice the normal level of participation.

Rolling

Closing your current put and opening a new one further out in time, usually as a single combined order.

RSI

Relative Strength Index — J. Welles Wilder's 1978 oscillator, bounded 0-100, comparing average gains to average losses over the last 14 bars.

Sell to open (STO)

Selling a brand-new put, which collects fresh premium and starts a new obligation.

Short-term

Generally, a position held one year or less; gains are typically taxed at ordinary income rates in the U.S.

Slippage

The money lost to a wide spread or poor fill — the difference between the fair mid-price and the price you actually get.

SMA

Simple moving average — the plain arithmetic mean of the last N closing prices, recalculated every day. Stable, slow, and the version used in the classic 50/200 signals.

Squeeze

Bandwidth — (upper − lower) / middle — falling to its lowest level in about six months of trading. Volatility has compressed and an expansion is due.

Strike price

The fixed price at which you have agreed to buy the 100 shares if assigned.

Tail risk

The risk of rare, extreme moves living in the 'tails' of the bell curve — the events that look unlikely until the day they happen.

Theta

The amount of value an option loses each day from the passage of time alone. As the seller, theta works in your favour.

Theta decay curve

The shape of how an option loses value over time: gentle far out, steep in the final weeks.

Time decay

The steady erosion of an option's price as expiration approaches, all else equal.

Total premium income

Every dollar of premium you have collected from puts and calls, added up across the whole portfolio.

Trend structure

The pattern of swing points: higher highs plus higher lows is an uptrend, lower highs plus lower lows a downtrend. Losing half the pair is the first warning.

Unrealized P/L

Paper profit or loss on positions still open; it can still move before you close them.

Vega

How much an option's price moves per one-percentage-point change in implied volatility. Vega 0.10 means 10 dollars per contract for a 1-point IV move.

VIX

CBOE's index of 30-day expected S&P 500 volatility, read from SPX option prices and quoted as an annualised percentage. It measures size of moves, never direction.

Volatility crush

The sudden drop in implied volatility right after an event resolves, deflating option premiums.

Volume

How many contracts traded today. High volume signals active, easy-to-trade options.

VWAP

Volume-weighted average price for the current session: cumulative typical price x volume divided by cumulative volume, restarting every morning.

Wash sale

A rule that can disallow a loss if you buy back a substantially identical position within 30 days.

Wheel of death

Getting assigned shares high, then watching the stock keep falling while you sell calls below your cost — slowly bleeding as the position never recovers.

Win rate

The share of your closed positions that ended profitably — a measure of how often the strategy works, not how much it makes.