Options come with their own vocabulary, and much of the confusion new traders feel is simply unfamiliar words used quickly. This glossary explains the options trading terms you will meet most often, grouped by topic, in plain language.
Each definition is short. Where a term needs more depth, other articles on this site cover it in detail.
Contract basics
Option. A contract that gives the buyer the right, but not the obligation, to buy or sell an underlying at a set price by or on a set date. The seller takes on the matching obligation.
Call option. The right to buy the underlying at the strike price. Gains when the underlying rises.
Put option. The right to sell the underlying at the strike price. Gains when the underlying falls.
Underlying. The index or share the option is based on.
Strike price. The price at which the option can be exercised.
Expiry. The date on which the option ceases to exist. Contracts may expire weekly or monthly depending on the underlying and current exchange rules.
Lot size. The number of units in one contract, set by the exchange. Premiums are quoted per unit and multiplied by the lot size.
European-style. An option that can be exercised only at expiry. Options in India are European-style.
Cash settlement. Settling an option by paying the difference in cash, as with index options.
Physical settlement. Settling by actual delivery of shares, as with stock options held in the money at expiry.
Prices and values
Premium. The price of an option, paid by the buyer to the seller.
Intrinsic value. What the option would be worth if exercised now. For a call option, the amount by which the underlying is above the strike; for a put option, the amount by which it is below.
Time value. The part of the premium above intrinsic value, paid for the possibility of further gain before expiry. It falls to zero at expiry.
In the money. An option with intrinsic value.
At the money. An option whose strike is at or very close to the current price of the underlying.
Out of the money. An option with no intrinsic value; its premium is entirely time value.
Bid and ask. The highest price a buyer is offering and the lowest price a seller is asking. The gap between them is the spread, a hidden cost of trading.
Open interest. The number of contracts currently outstanding at a strike, not yet closed or expired.
Option chain. A table showing all strikes for an underlying and expiry, with prices, open interest, implied volatility and other data for both call and put options.
The Greeks and volatility
Delta. How much an option's price changes for a small move in the underlying. Also used as a rough measure of directional exposure.
Gamma. How fast delta changes as the underlying moves. Highest for at-the-money options near expiry.
Theta. How much an option loses in value per day from the passage of time, all else equal. Accelerates near expiry.
Vega. How much an option's price changes for a change in implied volatility.
Rho. Sensitivity to interest rates; usually minor for short-dated options.
Implied volatility. The volatility figure implied by an option's market price. Used to judge whether options are relatively expensive or cheap.
Historical volatility. How much the underlying has actually moved over a past period.
India VIX. An index of expected near-term volatility for the Nifty, derived from option prices.
Skew. The pattern of different implied volatilities across strikes; for indices, lower strikes usually carry higher implied volatility.
Common positions
Long. Having bought a contract.
Short. Having sold a contract, taking on the obligation.
Naked option. A sold option without any offsetting position to limit loss.
Covered call. Holding shares and selling a call option against them.
Protective put. Holding shares and buying a put option to limit downside.
Vertical spread. Buying and selling options of the same type and expiry at different strikes, such as a bull call spread or bear put spread.
Credit spread. A spread that collects a net premium, such as a bull put spread or bear call spread.
Straddle. A call option and a put option at the same strike and expiry, bought or sold together.
Strangle. A call option and a put option at different out-of-the-money strikes, bought or sold together.
Iron condor. A combination of two credit spreads, one on each side, creating a defined-risk range position.
Calendar spread. Options at the same strike in different expiries.
Margin, settlement and trading
Margin. Collateral blocked by the broker to hold a position, especially for sold options and futures. Not the price of the position, and not the maximum possible loss.
Mark-to-market. Daily settlement of futures gains and losses in cash.
Square off. Closing a position by taking the opposite trade.
Rollover. Closing a position in one expiry and opening a similar one in a later expiry.
Exercise. Using the right granted by an option. In India this happens at expiry for in-the-money options.
Assignment. The obligation falling on the seller when an option is exercised.
Ban period. A period when new positions in a stock's derivatives are restricted because open interest has neared the market-wide limit.
Contract note. The broker's record of trades executed, with prices and all charges.
Freeze quantity. The maximum quantity allowed in a single order for a contract; larger orders must be split.
Expiry day. The final trading day of a contract, when time value disappears and option prices react most sharply to small moves.
Learning these terms is the first step. Understanding how they interact — how time, volatility and price combine in a real position — is where most of the work lies.
An account with a full option chain
Premium, open interest, implied volatility and Greeks on one screen. Free to open
This is educational material, not advice, and no position is recommended. We run no tips group and no signal service, we manage nobody's money, and no return is promised. Derivatives can lose more than the amount blocked against them.
Disclosure: the account-opening link on this page is under Atul Shrivastava's Zerodha Authorised Person registration (NSE AP Reg: AP2516003481; Zerodha Broking Ltd. SEBI Reg: INZ000031633) and earns a revenue share. TheFinBaba is not a SEBI-registered Investment Adviser — this content is educational, not investment advice.
Frequently Asked Questions
What is the difference between a call option and a put option?
A call option gives the right to buy the underlying at the strike price and gains when it rises. A put option gives the right to sell at the strike price and gains when it falls.
What does in the money mean?
An option with intrinsic value: a call option with the underlying above the strike, or a put option with the underlying below the strike.
What is open interest?
The number of option or futures contracts at a strike that are still open, not yet closed or expired.
What are the Greeks?
Measures of how an option's price responds to changes: delta to the underlying's price, gamma to changes in delta, theta to time, vega to implied volatility and rho to interest rates.
Is margin the same as the maximum loss?
No. Margin is collateral blocked to hold a position. Losses on sold options and futures can exceed the margin.
Related Reading
- Options course for retired investors
- The Greeks in depth
- Reading an option chain
- How options differ from futures
- How the premium is formed
- Getting the segment enabled
Disclaimer: TheFinBaba provides educational content only - this is not investment advice. Trading involves risk of loss.
