ThetaPal
Clear, concise definitions for 40+ essential options trading terms. Whether you're new to selling premium or a seasoned theta gang member, this glossary covers everything you need to know.
Annualized return converts the return of a trade into a yearly equivalent, regardless of how long the trade was actually held. A 2% return on a 30-day covered call equals roughly 24% annualized. This allows comparison of trades with different holding periods.
Assignment occurs when an option seller is obligated to fulfill the terms of the contract. For a put seller, assignment means buying 100 shares at the strike price. For a call seller, assignment means selling 100 shares at the strike price. Assignment can happen any time before expiration for American-style options.
An option is at-the-money when the stock price is equal to or very close to the strike price. ATM options have the highest time value and the highest gamma. They have a delta near 0.50, meaning roughly a 50/50 chance of expiring ITM.
Breakeven price is the stock price at which a trade neither makes nor loses money at expiration. For a cash-secured put, breakeven equals the strike price minus the premium received. For a covered call, breakeven equals the stock purchase price minus premium collected.
Buy to close is the order used to close an existing short option position. If you sold a put or call to open, you buy to close when you want to exit the trade — typically to lock in profit or cut a loss before expiration.
A cash-secured put is an options strategy where you sell a put option and set aside enough cash to buy 100 shares at the strike price if assigned. You collect premium upfront and either keep the premium if the stock stays above the strike, or buy the stock at a discount (strike price minus premium received).
Cost basis is your total investment in a position, including the purchase price and any adjustments from option premiums, dividends, or fees. For the wheel strategy, cost basis is reduced by every premium collected from puts and calls sold on the same stock.
A covered call is an options strategy where you own 100 shares of a stock and sell a call option against those shares. You collect premium (income) in exchange for agreeing to sell your shares at the strike price if the stock rises above it. The word 'covered' means you already own the shares to deliver.
A credit spread involves simultaneously selling one option and buying another option on the same stock with a different strike price but the same expiration. The sold option has a higher premium, so you receive a net credit. The bought option limits your maximum loss. Common types include bull put spreads and bear call spreads.
Delta measures how much an option's price changes for every $1 move in the underlying stock. A delta of 0.30 means the option price moves roughly $0.30 for each $1 stock move. Delta also approximates the probability that an option will expire in-the-money.
The expiration date is when the option contract expires. DTE stands for 'Days to Expiration' — the number of calendar days remaining until expiration. Options lose time value faster as DTE decreases, particularly in the final 30 days (theta acceleration).
Extrinsic value is the portion of an option's price above its intrinsic value. It represents the time value and volatility premium. All out-of-the-money options consist entirely of extrinsic value. Extrinsic value decreases as expiration approaches (theta decay).
Gamma measures the rate of change of delta for every $1 move in the underlying stock. High gamma means delta changes quickly, making the position more sensitive to stock price movements. Gamma is highest for at-the-money options near expiration.
The Greeks are a set of risk measures that describe how an option's price changes in response to various factors: Delta (stock price), Gamma (delta acceleration), Theta (time), Vega (volatility), and Rho (interest rates). Traders use Greeks to understand and manage the risk of their option positions.
IV Percentile measures the percentage of days over the past year when implied volatility was lower than the current level. An IV Percentile of 90% means IV was lower than today's level on 90% of trading days in the past year.
IV Rank measures where the current implied volatility sits relative to its range over the past 52 weeks. An IV Rank of 80 means current IV is near the top of its annual range, suggesting options are relatively expensive — a favorable environment for selling premium.
Implied volatility is the market's forecast of the likely magnitude of a stock's price movement over a specific time period. Higher IV means options are more expensive because the market expects larger price swings. IV is a key input in options pricing models.
An option is in-the-money when it has intrinsic value. A call is ITM when the stock price is above the strike price. A put is ITM when the stock price is below the strike price. ITM options are more likely to be exercised or assigned.
Legal insider trading occurs when company insiders buy or sell their own company's stock and report the transactions to the SEC via Form 4 filings. This is different from illegal insider trading, which involves trading on material non-public information. Legal insider trades are public and can signal insider confidence or concern.
Intrinsic value is the amount an option is in-the-money. For a call with a $100 strike when the stock is at $105, intrinsic value is $5. Out-of-the-money options have zero intrinsic value. The remaining value of an option above its intrinsic value is called extrinsic (time) value.
An iron condor combines a bull put spread and a bear call spread on the same stock with the same expiration. You profit if the stock stays between the two short strikes. It is a neutral strategy that benefits from time decay and low volatility.
The multiplier for standard equity options is 100, meaning each contract represents 100 shares of the underlying stock. When an option is quoted at $2.50, the actual cost is $250 per contract ($2.50 x 100). Premium collected from selling one contract also applies to 100 shares.
Open interest is the total number of outstanding option contracts that have not been closed, exercised, or expired. High open interest indicates an active, liquid market for that option. Changes in open interest can signal new positions being opened or existing positions being closed.
An option is out-of-the-money when it has no intrinsic value. A call is OTM when the stock price is below the strike price. A put is OTM when the stock price is above the strike price. OTM options consist entirely of time value (extrinsic value).
Premium is the price paid for an option contract, quoted per share but representing 100 shares. If an option premium is $2.50, the total cost is $250 per contract. Option sellers collect premium as income; option buyers pay premium for the right to buy or sell.
Probability of profit estimates the likelihood that a trade will be profitable at expiration based on current market conditions. For option sellers, POP is closely related to delta — a 30-delta put has roughly a 70% probability of expiring worthless (profitable for the seller).
Rolling is closing an existing option position and simultaneously opening a new one with a different expiration date and/or strike price. Traders roll to extend a position, collect additional premium, or adjust their risk. A 'roll for credit' means the new position generates more premium than the cost to close the old one.
SEC Form 4 is a filing required by the Securities and Exchange Commission when company insiders (officers, directors, and 10%+ shareholders) buy or sell company stock. These filings are publicly available and must be submitted within two business days of the transaction.
The STOCK Act (Stop Trading on Congressional Knowledge Act) is a 2012 law requiring members of Congress and their staff to report stock transactions within 45 days. These filings are publicly available and can be tracked to monitor congressional trading activity.
Sell to open is the order used to initiate a new short option position. When you sell a covered call or cash-secured put, you use a sell-to-open order. This creates an obligation that remains until the option is bought to close, expires, or is assigned.
Selling premium is a trading approach focused on selling options to collect income. The strategy profits from time decay (theta) as options lose value over time. Common premium-selling strategies include covered calls, cash-secured puts, credit spreads, iron condors, and strangles.
A straddle involves selling (or buying) both a put and a call on the same stock with the same strike price and expiration. A short straddle profits when the stock stays near the strike price, while a long straddle profits from large moves in either direction.
A strangle involves selling (or buying) both a put and a call on the same stock with the same expiration but different strike prices. A short strangle collects premium from both sides and profits if the stock stays between the two strikes.
The strike price is the predetermined price at which the option holder can buy (call) or sell (put) the underlying stock. For covered calls, the strike is the price at which your shares would be called away. For cash-secured puts, the strike is the price at which you would buy the shares.
The wheel strategy is an options income strategy that cycles between selling cash-secured puts and covered calls on the same stock. You sell puts until assigned shares, then sell covered calls on those shares until they are called away, then repeat. The goal is to collect premium at every step.
Theta measures the rate of time decay in an option's price. It represents how much value an option loses each day as it approaches expiration, all else being equal. Theta is always negative for option buyers and works in favor of option sellers (premium collectors).
Theta burned percentage measures how much of the original time value has decayed since you opened the position. If you sold an option for $3.00 and it is now worth $0.60, theta burned is 80%. A high theta burned percentage (e.g., 80%+) often signals it is time to close the position and open a new one.
Theta decay is the reduction in an option's value as time passes, also called time decay. All options lose value over time because the probability of a large price move decreases as expiration approaches. Theta decay accelerates in the last 30-45 days before expiration.
Theta gang is a colloquial term for options traders who primarily sell premium (options) to profit from time decay. The name refers to theta, the Greek letter representing time decay. Theta gang strategies include the wheel strategy, covered calls, cash-secured puts, and credit spreads.
Vega measures how much an option's price changes for each 1% change in implied volatility. Higher vega means the option is more sensitive to volatility changes. Longer-dated options have higher vega than shorter-dated ones.
Volatility risk premium is the difference between implied volatility and realized (actual) volatility. When IV exceeds realized volatility, option sellers have an edge because options are priced for larger moves than actually occur. A positive VRP is the primary source of edge for premium sellers.
The most critical terms for options traders are: Delta (directional risk), Theta (time decay), Implied Volatility (option pricing), Strike Price (exercise price), Premium (option cost/income), and DTE (days to expiration). For premium sellers, understanding the wheel strategy, covered calls, and cash-secured puts is essential.
Intrinsic value is the amount an option is in-the-money — the real, tangible value if exercised right now. Extrinsic value (also called time value) is the remaining premium above intrinsic value, representing the possibility of further price movement before expiration. Out-of-the-money options have zero intrinsic value and consist entirely of extrinsic value.
Selling premium means selling options contracts to collect income upfront. The seller profits when the option loses value over time (theta decay) or expires worthless. Common premium-selling strategies include covered calls, cash-secured puts, credit spreads, iron condors, and strangles. This approach is sometimes called 'theta gang' trading.