Options & Derivatives

American options can be exercised any time before expiration, while European options can only be exercised at expiration, affecting pricing and early exercise risk.

An option is at the money when its strike price equals or is very close to the current stock price, having the highest time value and a delta near 0.50.

Binary options are simplified contracts that pay a fixed return if a condition is met at expiration, or zero if it is not, often associated with high risk and regulatory concern.

A butterfly spread is an options strategy using three strike prices that profits when the underlying stock is at the middle strike at expiration, offering defined risk and limited reward.

A calendar spread involves buying and selling options at the same strike price but different expiration dates, profiting from differences in time decay rates.

Convertible bonds are hybrid securities combining a regular bond with the option to convert into a fixed number of the issuing company's shares.

A covered call is an options strategy where an investor sells a call option on a stock they already own, generating income from the premium while capping upside potential.

Exercise is when an option holder uses their right to buy (call) or sell (put) stock at the strike price; assignment is when the option seller is obligated to fulfill that transaction.

The expiration date is the last day an options contract can be exercised or traded, after which it becomes worthless if not in-the-money.

Gamma measures the rate of change of an option's delta for every $1 move in the underlying stock, indicating how quickly directional exposure shifts.

An iron condor is a neutral options strategy that profits when the underlying stock stays within a defined price range, combining a bull put spread and a bear call spread.

LEAPS are options contracts with expiration dates more than one year away, allowing long-term directional positioning or hedging with defined risk.

An options chain is a tabular display of all available options contracts for a given stock, organized by expiration date and strike price, showing prices, volume, and Greeks.

The Options Greeks are a set of risk metrics (delta, gamma, theta, vega, rho) that measure how an option price responds to changes in underlying factors.

Options volume is the total number of option contracts traded during a given period, indicating the level of trading activity and interest in a particular stock or strike.

An option is out of the money when it has no intrinsic value: a call when the stock is below the strike, or a put when the stock is above the strike.

Put-call parity is a fundamental pricing relationship between call and put options at the same strike and expiration, linking options prices to the underlying stock and risk-free rate.

Theta measures the daily rate of time decay in an option, showing how much value the option loses each day as it approaches expiration.

Vega measures how much an option price changes for every 1 percentage point change in implied volatility of the underlying stock.

A vertical spread uses two options of the same type and expiration but different strike prices, creating a defined-risk, defined-reward directional position.