Options Trading Glossary: Essential Terms

New to options trading? This glossary covers the essential terms you'll encounter when using GammaLedger and trading options.

Basic Option Terms

Call Option

A contract giving the buyer the right (but not the obligation) to buy 100 shares of stock at a specified price (strike price) before expiration.

Put Option

A contract giving the buyer the right (but not the obligation) to sell 100 shares of stock at a specified price (strike price) before expiration.

Strike Price

The predetermined price at which the option contract can be exercised. Also called the "exercise price."

Expiration Date

The last day the option contract is valid. For standard monthly options, this is the third Friday of the month. Options expire at 4:00 PM ET on expiration day.

Premium

The price paid (or received) for an option contract. Quoted on a per-share basis but contracts are for 100 shares.

Example: Premium of $2.50 = $250 per contract (2.50 × 100)

In-the-Money (ITM)

Call: Stock price > Strike price
Put: Stock price < Strike price

At-the-Money (ATM)

Stock price ≈ Strike price (within a few dollars)

Out-of-the-Money (OTM)

Call: Stock price < Strike price
Put: Stock price > Strike price

Trading Actions

Buy to Open (BTO)

Opening a new long position by purchasing an option. You pay the premium.

Sell to Open (STO)

Opening a new short position by selling an option. You collect the premium.

Buy to Close (BTC)

Closing an existing short position by purchasing back the option you previously sold.

Sell to Close (STC)

Closing an existing long position by selling the option you previously bought.

Assignment

When an option seller is required to fulfill their obligation: - Put seller: Must buy 100 shares at strike price - Call seller: Must sell 100 shares at strike price

Exercise

When an option buyer chooses to use their right to buy or sell shares at the strike price.

Option Strategies

Covered Call

Owning 100+ shares of stock and selling a call option against those shares. Generates income but caps upside.

Cash-Secured Put (CSP)

Selling a put option while holding enough cash to purchase the shares if assigned. Generates income and potentially acquires stock at a discount.

Wheel Strategy

Systematic approach: Sell CSPs → Get assigned → Sell covered calls → Repeat. See our full Wheel Strategy guide.

PMCC (Poor Man's Covered Call)

Buying a deep ITM LEAP call and selling shorter-term OTM calls against it. Cheaper alternative to owning 100 shares.

Credit Spread

Selling one option and buying another option of the same type (both calls or both puts) at different strikes. Defined-risk strategy.

Vertical Spread

Generic term for spreads using options at different strikes but same expiration. Can be bullish or bearish.

Iron Condor

Selling an OTM put spread and an OTM call spread simultaneously. Profits from low volatility.

Straddle

Buying (or selling) both a call and put at the same strike and expiration. Bets on volatility (long) or lack thereof (short).

The Greeks

Delta (Δ)

Rate of change in option price relative to $1 move in underlying stock. - Call delta: 0 to 1.0 (or 0 to 100) - Put delta: -1.0 to 0 (or -100 to 0) - 30 delta ≈ 30% probability of expiring ITM

Gamma (Γ)

Rate of change of delta. Measures how fast delta changes as stock price moves. Highest for ATM options near expiration.

Theta (Θ)

Time decay. Amount option loses in value per day, all else equal. Always negative for long options.

Vega (ν)

Sensitivity to implied volatility changes. Higher vega = more sensitive to volatility shifts.

Rho (ρ)

Sensitivity to interest rate changes. Usually less important for retail traders.

Profit & Loss Terms

Unrealized P&L

Paper profit or loss on current open positions. Not "real" until position is closed.

Realized P&L

Actual profit or loss from closed positions. "Locked in" gains or losses.

Cost Basis

The effective entry price including premiums collected/paid. Used to calculate true P&L.

Example: - Assigned 100 shares at $50 strike - Collected $2 premium on put - Cost basis: $48/share ($50 - $2)

Break-Even

Stock price where a position results in zero profit/loss, accounting for all premiums and costs.

Max Profit

The maximum possible gain from a strategy (if it exists).

Max Loss

The maximum possible loss from a strategy (if it exists).

Defined Risk

Strategies where maximum loss is known upfront (e.g., spreads).

Undefined Risk

Strategies where losses could be unlimited (e.g., naked calls) or very large (e.g., naked puts).

DTE (Days to Expiration)

Number of calendar days until option expiration. Important metric for time decay.

Theta Decay

The daily erosion of option value due to time passing. Accelerates as expiration approaches.

LEAPS (Long-term Equity Anticipation Securities)

Options with expiration dates more than 1 year away. Often used for PMCC strategy.

Weekly Options

Options that expire weekly instead of monthly. More trading opportunities but also faster theta decay.

Volatility Terms

Implied Volatility (IV)

Market's expectation of future volatility, derived from option prices. Higher IV = more expensive options.

IV Percentile

Where current IV ranks relative to the past year. 50th percentile = median IV over past year.

IV Rank

Current IV relative to its 52-week high/low range. Formula: (Current IV - 52w Low) / (52w High - 52w Low)

Volatility Crush

Sharp drop in IV after an event (e.g., earnings), causing rapid option value decrease even if stock price doesn't move much.

Historical Volatility (HV)

Actual past volatility of the stock price. Different from implied volatility.

Position Management

Rolling

Closing an existing option position and simultaneously opening a new one at a different strike and/or expiration.

Types: - Roll out: Same strike, later expiration - Roll up: Higher strike (calls), same or later expiration - Roll down: Lower strike (puts), same or later expiration

Leg

One component of a multi-part option strategy. A vertical spread has two legs; an iron condor has four.

Legging In/Out

Entering or exiting a multi-leg strategy one leg at a time instead of as a single order. Usually not recommended due to execution risk.

Closing Order

Order to exit an existing position (BTC or STC).

Opening Order

Order to enter a new position (BTO or STO).

GammaLedger-Specific Terms

Trade Status

Classification of trade state in GammaLedger: - Open: Active position - Closed: Completed trade - Assigned: Put was assigned, now holding stock - Rolling: In process of rolling to new strike/expiration

Strategy Auto-Detection

GammaLedger automatically categorizes trades into strategies (Wheel, PMCC, Credit Spread, etc.) based on leg structure.

Effective Cost Basis

GammaLedger's calculation of true entry price accounting for all premiums collected/paid across rolls.

Net Open Contracts

Total number of unclosed option contracts after netting all opening and closing legs.

Risk Management Terms

Position Sizing

Determining how much capital to allocate to each trade. Common rule: no more than 5-10% per position.

Buying Power Reduction (BPR)

Amount of margin/cash required to maintain a position. Varies by broker and strategy.

Maintenance Margin

Minimum equity required to keep position open. If account falls below this, you'll get a margin call.

Win Rate

Percentage of trades that are profitable. High win rate doesn't guarantee overall profitability.

Profit Factor

Ratio of gross profits to gross losses. Above 1.5 is generally considered good.

Expectancy

Average profit per trade. Formula: (Win Rate × Avg Win) - (Loss Rate × Avg Loss)

Quick Reference

Term	Definition
Long	You own/bought the option
Short	You sold the option (obligation)
Naked	Selling options without owning underlying
Covered	Selling options while owning underlying
Synthetic	Option strategy that mimics stock position
Collar	Protective put + covered call on same stock
Dividend Risk	Risk of early assignment before ex-dividend date
Pin Risk	Risk of assignment uncertainty when stock = strike at expiration

Learning Resources

Common Abbreviations

BTO = Buy to Open
STO = Sell to Open
BTC = Buy to Close
STC = Sell to Close
CSP = Cash-Secured Put
CC = Covered Call
PMCC = Poor Man's Covered Call
DTE = Days to Expiration
ITM = In-the-Money
ATM = At-the-Money
OTM = Out-of-the-Money
IV = Implied Volatility
HV = Historical Volatility
P&L = Profit and Loss

This glossary is for educational purposes. Always understand the risks before trading options. Consider paper trading before risking real capital.