Options & Derivatives Vocabulary

a contract giving the buyer the right, but not obligation, to purchase shares at a set price before expiration

“He bought call options on the stock ahead of earnings, expecting a positive surprise.”

a contract giving the buyer the right, but not obligation, to sell shares at a set price before expiration

“She bought put options as insurance against a decline in her portfolio.”

the predetermined price at which an option holder can buy or sell the underlying asset

“With the stock at $110, the $100 strike price call option was in the money.”

the price paid to purchase an options contract

“The high implied volatility made the option premium expensive relative to historical norms.”

the market's forecast of likely future price movement, derived from current option prices

“Implied volatility spiked before the earnings announcement, making options expensive.”

the rate of change in an option's price relative to a $1 move in the underlying asset

“The call option had a delta of 0.60, meaning it would gain $0.60 for every $1 the stock rose.”

the rate at which an option loses value each day due to the passage of time; time decay

“Theta of -$0.05 meant the option lost five cents of value every day it sat idle.”

an investment made to reduce the risk of adverse price movements in an asset

“The airline hedged its fuel costs by buying oil futures six months out.”

an agreement to buy or sell an asset at a predetermined price on a specific future date

“Farmers use futures contracts to lock in crop prices before harvest.”

the use of borrowed capital to amplify potential returns — and potential losses

“With 10x leverage, a 5% move in the underlying wiped out the trader's entire position.”