Options Trading Definitions – Must Know Terms for Beginners

Terms of options, Comment on this article

Read Review Visit Broker A Albatross Spread: This is an advanced strategy that can be used to profit from an underlying security remaining neutral. Learn how to use an Albatross Spread. American Style Option: A contract that gives the holder the flexibility of choosing to exercise their option at any point between buying the contract and the contract expiring.

More on American Style. Approval Levels: See Trading Levels.

Options Trading Terminology

Arbitrage: Taking advantage of price discrepancies by buying and selling to create a risk free trade. Arbitrage Trading Strategies: Strategies that involve the use of arbitrage.

Read more at Arbitrage Strategies. Ask Price: The price it costs to buy an option.

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Assignment: When the writer of a contract is required to fulfill their obligations under the terms of that contract — for example buying the underlying security if they have written calls or selling the underlying security if they have written puts. The writer will be issued with an assignment notice in such circumstances. At the Money Option: An option where the price of the underlying security is the same as the strike price.

Automatic Exercise: The process by which in the money options are automatically exercised if they are in the money at the point of expiration. Auto Trading: A trading method that involves using a third party to select your trades and having your broker automatically execute them.

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Read more on Auto Trading. B Basket Option: A type of option that is based on a group of underlying securities rather than just one.

Barrier Option: A type of option that can come into existence or go out of existence based on specific criteria is usually related to the price of the underlying security.

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More about Barrier Options. Bear Butterfly Spread: This is an advanced strategy that can be used when the outlook of an underlying security is bearish.

Learn how to use a Bear Butterfly Spread. Bear Call Spread: A simple strategy, using calls, that can be used when the expectation is that the underlying security will decline in price. Learn how to use a Bear Call Spread. Bearish: An expectation that an option, or any financial instrument, will decrease in price. Bearish Trading Strategies: Strategies that can be used to terms of options from a downward move in the price of a financial instrument. List of Bearish Strategies.

Bear Market: When the overall market is in decline. Bear Put Ladder Spread: This is an advanced strategy that can be used terms of options the outlook on an underlying security is bearish. Learn how to use a Bear Put Ladder Spread.

Bear Put Spread: A simple strategy using puts that can be used when the expectation is that the underlying security will decline in price.

Learn how to use a Bear Put Spread. Bear Ratio Spread: This is a strategy that can be used when the outlook on an underlying security is bearish. Learn how to use a Bear Ratio Spread. Bear Spread: A spread that is created to profit from bearish movements. Bear Trap: An unconfirmed market movement which how you can make money with your website a bear market, but is unconfirmed and ends up with the market moving upwards.

Bid Price: The price at which an option can be sold. Bid Ask Spread: The difference between the bid price and the ask price of an option. An indicator of liquidity, and often referred to simply as the spread.

Binary Option: A type of option that pays a fixed return if it expires in the money or nothing if it expires at the money or out of the money.

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More about Binary Options. Read more about the Binomial Pricing Model. Black Scholes Options Pricing Model: A pricing model that is based on factors that include the strike price, the price of the underlying security, the length of time until expiration, and volatility. Read about the Black Scholes Pricing Model.

Box Spread: An advanced strategy that involves the use of arbitrage. Break Even Point: The price or price range of the underlying security at which a strategy will break even, with no profits and no losses.

Breakout: When the price of a security moves above an existing resistance level or below an existing support terms of options. The expectation is that the security will continue to move in the prevailing direction.

Broker: An individual or a company that executes orders to buy and sell financial instruments on behalf of clients. Broker Commissions: The charge from a broker for executing orders on behalf of clients. Bull Butterfly Spread: This is a strategy that can be used when the outlook on an underlying security is bullish. Learn how to use a Bull Butterfly Spread.

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Bull Call Ladder Spread: This is a strategy that can be used when the outlook on an underlying security is bullish. Learn how to use a Bull Call Ladder Spread. Bull Call Spread: A simple strategy, involving calls, which can be used when the expectation is that the underlying security will increase in price. Learn how to use a Bull Call Spread.

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Bull Condor Spread: This is an advanced strategy that can be used when the outlook on an underlying security is bullish. Learn how to use a Bull Condor Spread.

Options Trading Terminology

Bullish: An expectation that an option, or any financial instrument, will increase in price. Bullish Trading Strategies: Strategies that can be used to profit from an upward move in the price of a financial instrument. List of Bullish Strategies. Bull Market: When the overall market is moving upwards.

(AKA Definitely-boring-definitions)

Bull Put Spread: A simple strategy, involving puts, which can be used when the expectation is that the underlying security will increase in price. Learn how to use terms of options Bull Put Spread. Bull Spread: A spread that is created to profit from bullish movements. Bull Trap: An unconfirmed market movement which suggests a bull market, but is unconfirmed and ends up with the market moving downward. Butterfly Spread: This is an advanced strategy that can be used to profit from an underlying security remaining neutral.

Assignment

Learn how to use a Butterfly Spread. Buy to Close Order: An order that is placed when you want to close an existing short position through buying contracts that you have previously written. Read more about the Buy to Close Order.

Buy To Open Order: An order that is placed when you want to open a new position through buying contracts.

Key Options Terms

Read more about the Buy to Open Order. C Calendar Call Spread: This is a simple strategy that can be used to profit from an underlying security remaining neutral. Also known as a Time Call Spread. Learn how to use a Calendar Call Spread. Calendar Put Spread: This is a simple strategy that can be used to profit from an underlying security remaining neutral.

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Terms of options known as a Time Put Spread. Learn how to use a Calendar Put Spread. Calendar Spread: A type of spread that is created using multiple contracts with different expiration dates.

Also referred to as a time spread. Read more about Calendar Spreads. Calendar Straddle: This is an advanced strategy that can be used to profit from an underlying security remaining neutral.

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Learn how to use a Calendar Straddle. Calendar Strangle: This is an advanced strategy that can be used to profit from an underlying security remaining neutral. Learn how to use a Calendar Strangle. Call: See Call Option. Call is often used instead of the full term. Called Away: The process that takes place when the writer of calls is required to fulfill their obligation and sell the underlying security at the agreed strike price.

Call Option: A type of option which grants the holder the right, but not the obligation, to buy the relevant underlying security at an agreed strike price. Read more about Calls. Call Ratio Backspread: An advanced strategy that can be used for profit in a volatile market, when there is a bullish outlook. Learn how to use a Call Ratio Backspread. Call Ratio Spread: This is an advanced strategy that can be used to profit from an underlying security remaining neutral.

Learn how to use a Call Ratio Spread. Carrying Cost: The implied cost of using capital to purchase financial instruments based on interest incurred from borrowing that capital or interest lost from taking that capital from an interest bearing account. Cash Settled Option: A type of option in which any profits due to the holder at terms of options point of exercise or expiration are paid in cash rather than an underlying security terms of options transacted.

Read more about Cash Settled Options. Chain: Tables that are used to show various information related to specific options. Read more about Chains. Chooser Option: A type of option that allows the holder to choose whether it's a call or a put at some point during the term of the contract.

Close: The point at the end of a trading day when the market closes and final prices are calculated. Closing Order: An order which is used to close an existing position. Combination Order: A type terms of options order that combines multiple orders into lve indicator for binary options. Commodity Option: A type of option where the underlying security is either a physical commodity or a commodity futures contract.

Compound: A type of option where the underlying security is another contract. Condor Spread: This is an advanced strategy that can be used to profit terms of options an underlying security remaining neutral. Learn how to use a Condor Spread. Contingent Order: A type of order that allows for the trader to set specific parameters for exiting a position. Contract Neutral Hedging: A technique for hedging terms of options involves a trader buying as many options as units of the underlying security they own.

Contract Range: The range between the highest and lowest price that an option contract has been traded at.

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Contract Size: The number of units of the underlying security that are covered by a contract. The typical contract size is It should be noted that prices are displayed based on one unit of underlying security.

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Covered Call: This is a simple strategy that can be used to make a profit from existing stock holdings when they are neutral and they are protected against a short term drop in their price. Learn how to use a Covered Call. Covered Put: This is an advanced trading strategy that can be used in conjunction with short selling stock to profit if the stock remains neutral; terms of options also protects against a short term rise in their price.

Learn how to use a Covered Put. Credit: Money that is received into a trading account. Credit Spread: A type of spread that is cash positive — i. Read more about Credit Spreads.

Currency Option: A type of option where the underlying security is a specific currency. D Day Order: A type of order that is cancelled at the end of a trading day if it hasn't been filled.

Day Trader: A trader who enters and exits their trading positions within one trading day, often holding onto positions for just a few minutes or hours. Day Trading: The style of trading used by day traders, where positions are entered and exited within the same trading day. Read more about Day Trading. Debit: Money that is paid out from a trading account. Delta Neutral Hedging: A strategy that is used to protect an existing position from small movements in price.

This can be used to hedge existing positions in stocks or other financial instruments. Read more about Delta Neutral Hedging.

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Delta Neutral Trading: A strategy designed to create trading positions which will neither profit nor loss if there are small movements in the price of the underlying stock, but will return profits if the terms of options of the underlying security moves significantly in either direction. Read more about Delta Neutral Trading.

Options Terminology

Delta Value: One of the Greeks, the delta value measures the theoretical effect of changes in the price of the underlying security on the price of the option. Also referred to as Options Delta.

Terms of options A financial instrument which derives its value primarily from the value of another financial instrument. Options are a type of derivative.

Diagonal Spread: A type of spread that is created by using multiple contracts with different expiration dates and different strike prices.

Read more about Diagonal Spreads. Directional Risk: The risk of loss from the price of a security moving in an unfavorable direction. For example, if you write calls you exposed to the directional risk of the underlying security possibly increasing in price. Directional Outlook: The expectation of which direction, if any, that the price of a security will move in.