Glossary
Plain-English definitions of the terms used on this site.
- At the money
- An option whose strike price is at or very near the current market price.
- Benchmark
- The market a portfolio is compared against. This site uses the S&P 500 and the Nasdaq-100.
- Black-Scholes model
- A standard formula for estimating an option’s price from the market price, strike, time to expiration, interest rates and volatility.
- Call option
- A contract giving its owner the right, but not the obligation, to buy an asset at the strike price before expiration.
- Collar
- Buying a put and selling a call on the same holding. The call premium helps pay for the put, and gains above the call strike are given up.
- Covered call
- Selling a call on a holding you own, usually for income. It caps gains and offers little protection.
- Dividend-adjusted price
- A price history that assumes dividends were reinvested, so it reflects total return.
- Drawdown
- A decline from a previous high to a later low, usually stated as a percentage.
- Exercise
- Using the right an option gives you: buying at the strike with a call, or selling at the strike with a put.
- Expiration
- The date an option contract ends.
- Hedge
- An investment made to reduce the risk of a harmful price move in something you already own.
- Implied volatility
- The level of future price swings the options market is pricing in. Higher implied volatility means more expensive options.
- In the money
- A call with a strike below the market price, or a put with a strike above it.
- Opportunity cost
- The return given up by choosing one option over another, such as gains above a collar’s cap.
- Out of the money
- A call with a strike above the market price, or a put with a strike below it.
- Payoff diagram
- A chart showing what a position is worth at expiration across a range of market prices.
- The price paid by an option’s buyer to its seller.
- Protective put
- Buying a put on a holding you own, to set a floor under losses.
- Put option
- A contract giving its owner the right, but not the obligation, to sell an asset at the strike price before expiration.
- Put spread
- Buying one put and selling another with a lower strike. It costs less than a single put but only protects between the two strikes.
- Put spread collar
- A put spread paired with a sold call. Protection starts at the higher put and stops at the lower one; gains are capped at the call.
- Skew
- The pattern in which options with lower strikes are priced with higher implied volatility, making downside protection relatively expensive.
- Strike price
- The price at which an option lets its owner buy or sell.
- VIX
- The Cboe Volatility Index, a measure of the S&P 500’s expected volatility over the next 30 days, drawn from option prices.
- VXN
- The Cboe Nasdaq-100 Volatility Index, the Nasdaq-100 counterpart to the VIX.