🧭 Glossary

• American Option - option can be exercised any time up to the expiration date
• European Option - option can be exercised only on the expiration date
• Buy to Open - you buy a put or a call to open (ie start) a long position
• Sell to Open - you sell a put or a call to open (ie start) a short position
• Buy to Close - you buy a put or a call to close out (ie get out of) a short position. For example, if you created a short position by selling the MSFT 95 call, you buy the MSFT 95 call to close out your position.
• Sell to Close - you sell a put or a call to close out (ie get out of) a long position. For example, if you created a long position by buying the MSFT 95 call, you can sell the MSFT 95 call to close out your position.
• In the Money - an option is in the money if it has an intrinsic value greater than zero. Intuitively, it’s in the money if you can exercise it profitably right now.
• At the Money - an option is at the money if the stock price is equal to the strike price. Intuitively, it’s right at the border between where you can exercise it profitably (in the money) and where you can’t exercise it profitably (out of the money)
• Out of the Money - you can’t exercise it profitably. A K=100 call option is out of the money if the stock price is $80. $IV=Max(S-K,0)=Max(\$80-\$100,0)=\$0$
• Hockey Stick Diagram - The diagrams that show profit and loss for options often look like hockey sticks. Therefore, Hockey stick diagram usually refers to a profit and loss diagram for an option or an option strategy.
• Call - A call option is the right, but not the obligation, to buy some asset in the future, at a price that is agreed upon today, called the strike price, or exercise price.
• Covered Call - A covered call is when you sell a call option when you own 100 shares of the stock. If your counterparty exercises the option, you can just sell them your 100 shares. In this sense, your obligation to sell the shares is “covered” by the shares you already own.
• Counterparty - Derivatives are often structured as legal contracts. The person or company on the other side of the contract is often known as your counterparty. For example, if you buy a call option, then someone must have sold you the call option. They are responsible for selling you the underlying stock/bond/etc if you exercise your option. They are known as your counterparty.
• Derivative - A derivative is a financial instrument whose value depends on the values of other more basic underlying assets, such as stocks, bonds, currencies, commodities, or futures contracts. The derivative “derives” its value from the underlying asset.
• Hedging - Hedging involves engaging in a financial transaction that reduces or eliminates risk.
• Intrinsic Value - Intrinsic value is a measure of how much money you could make by exercising an option today. The IV of a Call option is $Max(S-K,0)$. The IV of a Put option is $Max(K-S,0)$.
• Long Call / Long Put - In general, a long position refers to an asset which is purchased or owned (now or in the future). Therefore a long call refers to a call option that you have purchased. It just means to buy a call option.
• Nearby Contract - the option contract currently trading that has the closest expiration date
• Premium - the price that you pay to purchase an option. The price is typically determined by supply and demand on an option exchange. We typically look up the premium in the “last transaction” column of and options price chart.
• Put - A put option is the right, but not the obligation, to sell some asset in the future, at a price that is agreed upon today, called the strike price, or exercise price.
• Short Call / Short Put - In general, a short position refers to an asset which must be delivered to a third party as a future date, or an asset which is borrowed and sold, but must be replaced in the future. Therefore, a short call refers to a situation when you sell a call option without owning any of the same call options. You have legally obligated yourself to be the counterparty of someone else who purchased the same option contract.
• Speculation - Speculation involves taking on risk in the pursuit of profit in anticipation of a favorable change in the price of an asset
• Strike - The pre-agreed price in a call or put option.
• Ticker - The 2-4 letter code that represents a specific stock. For example, MSFT represents Microsoft Stock.
• Time value - Time value represents that portion of an option premium that can’t be ascribed to intrinsic value. $TV = Premium - IV$. TV arises from the fact that you have locked in a strike price, but you don’t have to decide whether to buy/sell the stock until you know whether the actual stock price goes up or down in the future.
• Underlying - See the definition of derivative.
• Write a Call / Write a Put - Writing an option is a synonym for selling an option.

Bear Spread Bull Spread Leverage Straddle