Glossary

Every term, in plain English.

148 markets terms, defined without the jargon. Search or browse A–Z.

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A

American option: An option that can be exercised any time up to expiration — most US stock options. Contrast with European.
Arbitrage: A near risk-free profit from price differences in the same asset across markets — quickly erased as traders exploit it.
Ask: The lowest price a seller is currently willing to accept for an option or stock.
Assignment: When the seller (writer) of an option is obligated to fulfil the contract — e.g. deliver shares on a short call.
At the money (ATM): When the underlying price is roughly equal to the option's strike price.
Auto-exercise: A broker automatically exercising an option that finishes in the money at expiration, so it isn't wasted.

B

Backwardation: When later-dated futures trade below the spot price — often a sign of tight near-term supply.
Basis risk: The risk that a hedge and the position it protects don't move in perfect lockstep, leaving some residual exposure.
Bear market: A sustained decline in prices, often defined as 20% or more off recent highs.
Beta: How much a stock tends to move relative to the broader market. A beta of 1.5 means ~1.5% per 1% market move.
Beta-weighting: Translating each position's delta into a common benchmark's terms, so a whole portfolio's directional risk is one number.
Bid: The highest price a buyer is currently willing to pay.
Bid-ask spread: The gap between the bid and ask. Wider spreads mean higher trading costs and less liquidity.
Black swan: An unpredictable, high-impact event that conventional models fail to anticipate.
Black-Scholes: A mathematical model for pricing European options from spot, strike, time, rate, and volatility.
Box spread: A bull call spread plus a bear put spread at the same strikes — a near risk-free position used to lend or borrow at a fixed rate.
Breakeven: The underlying price at which a position makes neither a profit nor a loss at expiry.
Bull market: A sustained rise in prices and optimism. (The bull is our mascot for a reason.)
Butterfly spread: A neutral, defined-risk strategy combining a bull and bear spread to profit if price stays near a central strike.
Buying power: The amount of capital available to open new positions, after margin requirements.

C

Calendar spread: Sell a near-dated option and buy a longer-dated one at the same strike, profiting from faster decay on the short leg.
Call: An option giving the right to buy the underlying at the strike price before expiry.
Charm: A second-order Greek: how delta changes as time passes (delta decay). Matters near expiry.
Clearinghouse: An institution that sits between buyer and seller in exchange-traded markets, guaranteeing the trade and managing risk with margin.
Collar: Holding stock while buying a protective put and selling a covered call — caps both downside and upside, often cheaply.
Contango: When later-dated futures trade above the spot price — normal for storable goods, reflecting the cost of carry.
Contract multiplier: How many units of the underlying one contract controls — typically 100 shares for equity options.
Conversion: Long stock combined with synthetic short stock (short call + long put) to lock in an arbitrage when parity is violated.
Cost of carry: The net cost of holding a position over time — financing costs minus any income like dividends.
Counterparty: The other side of a trade. Counterparty risk is the chance they fail to meet their obligation.
Counterparty risk: The risk that the other party to a contract fails to meet its obligations. Exchange-traded futures largely remove it via a clearinghouse.
Covered call: Selling a call against shares you already own to collect premium income.
Currency pair: An FX quote showing how much of one currency buys another, e.g. EUR/USD = 1.08. Buying a pair buys the first currency and sells the second.
Currency swap: An agreement to exchange principal and interest payments in one currency for those in another, usually over several years.

D

Days to expiry (DTE): How many calendar days remain until an option expires — a key input to time decay and pricing.
Delta: How much an option's price moves per $1 move in the underlying. Roughly the chance of finishing in the money.
Delta hedging: Trading the underlying to offset an option's directional risk, keeping the position delta-neutral.
Derivative: A contract whose value derives from an underlying asset, rate, or index. Options, forwards, futures, and swaps are all derivatives.
Diagonal spread: Like a calendar spread, but the two options also have different strikes.
Dividend: A cash payment some companies make to shareholders out of profits, usually quarterly.
Dividend risk: The risk that a short call is assigned early, just before an ex-dividend date, so the holder captures the dividend.
Dividend yield: A stock's annual dividend divided by its share price, shown as a percentage.
Drawdown: The peak-to-trough decline in an account or strategy — a key measure of pain and risk.

E

Early exercise: Exercising an American option before expiry — occasionally worthwhile, e.g. to capture a dividend.
Earnings per share (EPS): A company's profit divided by its number of shares — profit attributable to each share.
Equity: Ownership in a company. Stocks are equity — a claim on assets and profits — as opposed to debt.
ETF: Exchange-traded fund — a basket of assets (often an index) that trades like a single stock.
European option: An option that can only be exercised at expiration — most index options. Contrast with American.
Ex-dividend date: The cutoff date for owning a stock to receive its next dividend; option holders may exercise early to capture it.
Exercise: Using your right to buy (call) or sell (put) the underlying at the strike price.
Expected move: The market-implied size of a likely move by expiry, derived from option prices (roughly the at-the-money straddle price).
Expiration: The date after which the option ceases to exist. Unexercised options expire worthless.
Extrinsic value: The part of an option's premium beyond intrinsic value — the price of time and volatility. Decays to zero by expiry.

F

Fill: The execution of an order. A partial fill means only some of the requested quantity traded.
Forex: The foreign-exchange market, where currencies are traded — the largest market in the world. Also written FX.
Forward contract: A private agreement to buy or sell an asset at a future date and price — like a future, but customised and not exchange-traded.
Futures contract: A standardised, exchange-traded agreement to buy or sell an asset at a set price on a future date.
FX swap: A pair of legs that buys a currency now (spot) and sells it back later (forward), or the reverse — a way to hold a currency for a period.

G

Gamma: How fast delta changes as the underlying moves. Highest for at-the-money options near expiry.
Gamma squeeze: A feedback loop where market makers hedging short calls must buy stock as it rises, pushing the price up further.

H

Hedge: A position taken to offset risk in another — e.g. buying puts to protect long stock.
Historical volatility: Another name for realized volatility: the standard deviation of past price returns, annualised.

I

Implied volatility (IV): The market's expectation of future volatility, baked into an option's price. Higher IV means richer premiums.
In the money (ITM): An option with intrinsic value: a call below the price, a put above it.
Index: A measure of a slice of the market, e.g. the S&P 500 tracks ~500 large US companies.
Interest-rate swap: A swap exchanging fixed-rate interest payments for floating-rate ones on the same notional; only the net difference changes hands.
Intrinsic value: How deep in the money an option is right now — never below zero.
IPO: Initial public offering — when a company first sells its shares to the public.
Iron butterfly: A neutral, defined-risk strategy: sell an at-the-money straddle and buy wings for protection.
Iron condor: A neutral, defined-risk strategy selling an out-of-the-money call spread and put spread together.

J

Jade lizard: A short put plus a short call spread, structured so there's no risk to the upside while collecting premium.

L

Lambda: Also called omega — the percentage change in an option's price per 1% change in the underlying. A measure of leverage.
LEAPS: Long-dated options with expirations a year or more away.
Leg: One individual option (or stock) position within a multi-part strategy.
Leverage: Controlling a large position with a small amount of capital. Options are inherently leveraged.
Liquidity: How easily an asset trades without moving its price. Tight bid-ask spreads signal high liquidity.
Long: Owning an option or asset — you've bought it and benefit if it gains value.
Long straddle: Buying a call and a put at the same strike — profits from a big move in either direction; loses if the stock sits still.

M

Maintenance margin: The minimum equity you must keep in a margin account to hold a position open.
Margin: Collateral a broker requires to hold certain (often short) options positions.
Margin call: A broker's demand to add funds (or close positions) when account equity falls below the maintenance requirement.
Mark to market: Revaluing a position at current prices, so gains and losses are recognised continuously.
Market capitalization: A company's total market value: share price × shares outstanding.
Max pain: The price at which the most options (by open interest) expire worthless — sometimes watched as a magnet near expiry.
Mid price: The midpoint between the bid and the ask — a fair-value reference and a good target for limit orders.
Moneyness: Where the strike sits versus the current price — in, at, or out of the money.

N

Naked option: A short option with no offsetting position, carrying undefined (potentially large) risk.
Notional value: The total value an option controls — the underlying price × shares per contract (100) — versus the smaller premium paid.

O

Open interest: The total number of outstanding option contracts that haven't been closed or exercised.
Option: A contract giving the right, not the obligation, to buy or sell an asset at a set price by a set date.
Order book: The live list of resting buy and sell orders at each price, showing market depth.
Out of the money (OTM): An option with no intrinsic value — its premium is entirely time and volatility value.
Over-the-counter: A trade made privately between two parties rather than on an exchange (also called OTC). Such contracts are customisable but carry counterparty risk.

P

Pin risk: Uncertainty near expiry when the price sits right at the strike, leaving assignment unclear.
Poor man's covered call: A long deep-ITM LEAPS call with a short near-dated call against it — mimics a covered call for far less capital.
Position sizing: Choosing how much to risk on a trade — typically a small, fixed fraction of the account to survive losing streaks.
Premium: The price paid to buy an option, or received to sell it. The cost of the choice.
Price-to-earnings ratio (P/E): Share price divided by earnings per share — how much you pay per $1 of annual earnings.
Primary market: Where securities are first issued (e.g. an IPO), with the money going to the company.
Protective put: Buying a put on stock you own as insurance against a fall, while keeping the upside.
Put: An option giving the right to sell the underlying at the strike price before expiry.

R

Realized volatility: How much the underlying actually moved over a past period — contrast with implied volatility.
Reversal: The opposite of a conversion: short stock plus synthetic long stock, capturing a parity mispricing.
Rho: How sensitive an option's price is to changes in interest rates. Usually the smallest Greek.
Risk reversal: Selling a put to help fund buying a call (or vice versa) — a leveraged directional bet that also expresses a view on skew.
Roll: Closing one option position and opening a similar one at a different strike or expiry.

S

Secondary market: Where investors trade existing shares with each other, e.g. a stock exchange.
Settlement: Fulfilling a contract at expiry — delivering the asset (physical) or exchanging cash (cash settlement).
Share: A single unit of ownership in a company; owning shares makes you a part-owner (shareholder).
Shareholder: Someone who owns shares in a company and therefore holds a fractional claim on it.
Shares outstanding: The total number of a company's shares currently held by all investors.
Sharpe ratio: Risk-adjusted return: excess return divided by volatility. Higher means more return per unit of risk.
Short: Selling (writing) an option or asset — you collect premium but take on obligations.
Short straddle: Selling a call and a put at the same strike — collects premium and profits if the stock barely moves. Undefined risk.
Short strangle: Selling an out-of-the-money call and put — a wider, higher-probability version of a short straddle. Undefined risk.
Slippage: The difference between a trade's expected price and the price it actually fills at.
SOFR: The Secured Overnight Financing Rate, a common floating benchmark interest rate used in swaps; it replaced LIBOR.
Spot price: The current market price of the underlying asset, right now.
Spread: A position combining multiple options of the same type to define risk and reduce cost.
Standard deviation: A statistical measure of dispersion; in options it frames the expected range of a move (e.g. a 1-sigma move).
Stop order: An order that becomes a market order once a trigger price is hit — used to cap losses or enter on momentum.
Stop-limit order: Like a stop order, but converts to a limit (not market) order at the trigger — avoids terrible fills, may not fill at all.
Straddle: Buying a call and a put at the same strike — a bet on a big move in either direction.
Strangle: Buying an out-of-the-money call and put — a cheaper bet on a big move than a straddle.
Strike price: The fixed price at which an option can be exercised.
Swap: A derivative where two parties exchange cash flows — e.g. trading a fixed interest rate for a floating one.
Synthetic position: Recreating one instrument's payoff using others — e.g. long call + short put mimics long stock.

T

Tail risk: The risk of rare, extreme moves in the far tails of the distribution — small probability, large impact.
Term structure: How implied volatility varies across expiration dates for the same underlying.
The wheel: A cycle of selling cash-secured puts until assigned, then selling covered calls until called away — collecting premium throughout.
Theta: How much an option loses in value per day from time decay, all else equal.
Tick: The smallest price increment an instrument can move in.
Time decay: The erosion of an option's extrinsic value as expiration approaches — measured by theta.
Total return: An investment's full return: price change (capital gain) plus any dividends received.

U

Underlying: The asset an option is based on, such as a stock, ETF, or index.

V

Vanna: A second-order Greek: how delta changes with implied volatility (or vega with spot).
Vega: How much an option's price changes per 1% change in implied volatility.
Vertical spread: Buying and selling options of the same type and expiry but different strikes.
VIX: The market's best-known volatility index, tracking 30-day implied volatility on the S&P 500 — the 'fear gauge'.
Volatility: How much the underlying's price fluctuates. More volatility means pricier options.
Volatility skew: When options at different strikes trade at different implied volatilities — often higher for downside puts.
Volatility smile: A u-shaped pattern where in- and out-of-the-money options carry higher implied volatility than at-the-money ones.
Volatility surface: A 3-D map of implied volatility across both strikes (skew) and expirations (term structure).
Volume: The number of contracts traded over a period — a gauge of activity and liquidity.
Vomma: A second-order Greek: how vega changes as implied volatility changes — vega's convexity.

W

Warrant: A company-issued security similar to a long-dated call, giving the right to buy its shares at a set price.
Weeklys: Options that expire every week rather than monthly, offering more expiration choices and faster decay.
Writer: The seller of an option, who receives the premium and takes on the obligation.