If you’re new to options trading, understanding the core terminology is essential. This guide breaks down the most important concepts in simple terms, with links to authoritative resources so you can deepen your knowledge as you go.
Core “Must-Know” Terms
An option is a financial contract that gives you the right—but not the obligation—to buy or sell an asset at a predetermined price before a specific date. According to the Options Industry Council, options are widely used for hedging risk and generating income.
A call option gives you the right to buy a stock at a set price, while a put option gives you the right to sell a stock.
The strike price is the agreed-upon price at which the asset can be bought or sold, while the expiration date is the deadline for exercising that right.
The premium is simply the price you pay to purchase the option contract.
Pricing & Risk Concepts
Options pricing is made up of intrinsic value and extrinsic value (time value). Intrinsic value reflects real profit, while extrinsic value reflects time and expectations.
One of the most important drivers is implied volatility (IV). As explained in the Options Industry Council pricing guide, higher volatility generally leads to higher premiums.
Delta measures price movement, Theta measures time decay, and Gamma measures how Delta changes.
Moneyness
In the Money (ITM): Has intrinsic value.
At the Money (ATM): Stock price ≈ strike price.
Out of the Money (OTM): No intrinsic value.
Common Trade Types
Long Call / Long Put: Buying options.
Short Call / Short Put: Selling options.
Covered Call: Income strategy using owned stock.
Cash-Secured Put: Selling puts with reserved cash.
For a full breakdown, see the SEC investor bulletin on options.
Additional Terms
Open Interest: Number of active contracts.
Liquidity: Ease of entering/exiting trades.
Assignment: Seller must fulfill contract.
Exercise: Buyer uses their right.
Sources & Further Reading
Options Industry Council – Options Basics