Puts, Calls, and All the Other Terms to Know Before Trading Options

Options come with their own specific language, and before you start trading, you'll want to make sure you can speak it. (If you already know that an Iron Condor is not a member of the Marvel Cinematic Universe and is in fact a complicated way to trade options, you can skip this part. For anyone else, read on.)

Strike price: The agreed upon future purchase or sell price of the option’s underlying asset.

Put options: These give you the right to sell an asset at a particular price. You buy a put option when you think a stock price is going to fall. It’s similar to short selling. 

Call options: The opposite of a put. These options give you the right to buy an asset at a particular price. It’s used by investors who think a stock price is going to go up.

Expiry date: The date by which you can exercise or sell to close option contracts. The time before expiry can range from a single week to as many as three years.

In the money: In the money — or “ITM” if you’re texting with someone in a Patagonia vest — means that an investor would profit from exercising an option. 

Out of the money: This one’s easy: the opposite of in the money. 

Premium: How much an option will cost you to purchase. Though premiums are quoted per share, they are generally bundled and sold in increments of 100 shares per contract. So if the premium is $5.50, those options will cost you $550 per contract.

Breakeven: The amount the underlying stock needs to move for you to break even on an options trade.  

Time value: How much time there is between now and the expiry date. 

Volatility: A measure of an underlying asset’s price swings.  

Bid, Ask, and Spread: A bid is how much traders are currently willing to spend on an asset (in this case an option), an ask is how much sellers are willing to spend on it, and the spread is the difference between the two. The spread can sometimes be wider for options than for stocks, which may make it harder for you to sell an option than a stock. 

Mark: That college friend you really should call. Those were fun times. Also: the midpoint between the bid and the ask. It’s often quoted as the best measure of value.

High: The highest price at which a given security has traded over the current or last trading day. 

Low: The lowest price at which a given security has traded over the current or last trading day. 

Last trade: The price at which an asset was bought or sold in its most recent transaction. 

Volume: The total number of options contracts being traded over the current or last trading day. 

Open interest: The total number of option contracts that are currently active.

Implied volatility: An estimate of how much a stock will fluctuate over the life of an option. The number is reflected as a percentage. The higher it is, the more movement is expected — meaning there’s a higher chance of profit (or loss) — and the more the option will be worth. Implied volatility typically increases with market expectations for risk and general demand for options.  

What are the Greeks in options?

The Greeks are calculations that help investors estimate the price of an options contract.

Delta: An estimate of how much an option's value is likely to change when the price of the underlying stock changes. Delta values range from -1.0 to 1.0. A delta of 0.25, for example, tells you that for every $1 increase in the value of the underlying stock, the value of the option should increase by about $0.25. A negative delta means that an increase in stock price results in a decrease in option value.

Gamma: How much an option’s delta changes in response to changes in the price of the underlying asset. When someone buys an option, it has positive gamma between 0 and 1. The closer an option is to expiry or the strike price, the higher that number goes; the farther it is from either, the lower the number goes. For investors hedging their options positions by also holding the underlying stock, Gamma is often used to determine how much of the stock to buy/sell after the stock price changes in order to remain hedged against future moves.

Theta: An estimate of an option’s decline in value over time. Also known as “time decay,” theta is expressed as a negative number, and it grows as an option gets closer to expiring. 

Vega: An estimate of how much the price of an options contract will change in response to a change in the implied volatility of the underlying asset. The higher the vega, the more sensitive an option is to big events like earnings.

Rho: An estimate of how sensitive the value of an option is to changes in the interest rate of (because these are USD options) a U.S. Treasury bill. Call options tend to have a positive rho and put options have a negative one. Rho tends to be less of a factor than the other Greeks, but can still be useful if you expect interest range to change.