Reference

Options Trading Glossary

Every options term you need, in plain English. No jargon, no fluff, just clear definitions you can use today. New to options? Start with the options trading for beginners guide.

Options Basics

Start here if you are new. These are the core building blocks of every options trade.

Call Option: A contract that gives the buyer the right to buy 100 shares of a stock at a set price before a set date. The seller takes on the matching obligation. Calls vs puts explained.
Put Option: A contract that gives the buyer the right to sell 100 shares at a set price before a set date. Used as insurance, or sold for income.
Strike Price: The agreed-upon price at which the option can be bought or sold. It is the level that decides if the option ends up in or out of the money.
Expiration Date: The last day the option contract is active. After this date, the contract is either exercised or expires worthless. What happens when an option expires.
Premium: The price paid for an option. Buyers pay it. Sellers collect it as income.
Assignment: When the option seller is required to deliver on the contract, buying or selling 100 shares at the strike. Common with cash-secured puts and covered calls.
Exercise: When the option buyer uses their right to buy or sell shares at the strike price.
In the Money (ITM): When exercising the option would have value. A call is ITM when the stock is above the strike. A put is ITM when the stock is below the strike.
At the Money (ATM): When the stock price is right at the strike price.
Out of the Money (OTM): When exercising the option has no value. Most options sold for income are OTM at entry.

The Greeks

The Greeks measure how an option's price reacts to different market changes. You do not need to master them on day one, but knowing the basics helps you manage trades.

Delta: How much the option price moves for every $1 the stock moves. A delta of 0.30 means the option moves about $0.30 when the stock moves $1. Theta vs delta for spreads.
Gamma: How fast delta changes as the stock moves. High gamma means the option's behavior shifts quickly near the strike.
Theta: How much value the option loses each day from time decay. Option sellers want positive theta, time on their side. How theta decay works.
Vega: How much the option price moves when implied volatility changes by 1%. Big news events raise vega.
Rho: How much the option price moves when interest rates change. Usually small for short-term trades.

Income Strategies

These are the core strategies CFU teaches. Each one has a stated risk and a clear way to manage the trade.

Covered Call: Selling a call against 100 shares you already own. You collect premium and cap your upside at the strike. Try the free covered call scanner.
Cash-Secured Put (CSP): Selling a put while holding enough cash to buy 100 shares at the strike. You get paid to wait for a stock to come to your price.
The Wheel: A loop of selling cash-secured puts, getting assigned, then selling covered calls until shares are called away. Designed for steady income.
Put Credit Spread (PCS): Selling a put and buying a further-out put for protection. Both your max profit and max loss are capped at order entry.
Call Credit Spread (CCS): Selling a call and buying a further-out call for protection. A bearish trade with capped risk.
Iron Condor: A trade that profits when the stock stays inside a price range. It combines a put credit spread and a call credit spread on the same ticker.
Long Call: Buying a call to bet on a stock going up. Risk is limited to the premium paid.

Risk & Position Sizing

Risk management is what separates traders who last from traders who blow up. These are the terms we use every day at CFU.

Max Loss: The most you can lose on a trade if everything goes wrong. Always know this before you enter.
Defined Risk: A trade whose maximum loss is known before you enter, usually because an option you bought caps the loss on the one you sold. A naked short call has undefined risk. Defined vs undefined risk.
Max Profit: The most you can earn on a trade if everything goes right.
Return on Risk (ROR): Maximum profit divided by maximum loss. A spread risking $300 to make $100 has a 33% ROR.
Probability of Profit (POP): The chance, estimated by a pricing model, that a trade ends at least at breakeven at expiration. A high POP says how often a trade should win, not how much it loses when it does not. What POP means in options trading.
Position Sizing: Choosing how many contracts to trade so a single loss does not blow up your account. A common rule is to risk 1 to 2% of the account per trade. CFU's published record uses one contract per trade.
Stop Loss: A pre-set exit point if the trade goes against you. We define the stop before entering, not in the heat of the moment.
Rolling: Closing one option and opening a similar one further out in time or at a different strike. Used to give a trade more time. CFU's rule is one roll and done, or none. How rolling works.

Market & Pricing Terms

These terms come up every time you scan for trades or evaluate a setup.

Implied Volatility (IV): The market's forecast for how much a stock will move. Higher IV means richer option premiums. Implied volatility and IV rank explained.
IV Rank: Where current IV sits compared to the past year, on a 0 to 100 scale. We prefer to sell options when IV rank is high.
Earnings: The quarterly report when a company shares results. Stocks often move a lot right after. Many income traders avoid holding through earnings.
Ex-Dividend Date: The first day a stock trades without its upcoming dividend. Matters for covered call traders who want to keep the dividend.
Liquidity: How easy it is to buy or sell an option without moving the price. Liquid options have tight bid-ask spreads and lots of volume.
Open Interest: The number of option contracts currently open on a strike. Higher open interest usually means better liquidity.
Bid-Ask Spread: The gap between the buyer's price (bid) and the seller's price (ask). Tighter spreads mean cheaper to trade.

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