Options Trading Glossary

Plain-English definitions of the key terms used in the Wheel Strategy and options trading generally.

Ask: The lowest price a seller is willing to accept for a stock or option at a given moment.
Assignment: When the buyer of an option exercises their right, obliging the seller to buy shares (for a put) or sell shares (for a call) at the strike price. In the Wheel Strategy, assignment is a planned step, not a failure.
Bid: The highest price a buyer is willing to pay for a stock or option at a given moment.
Bid-ask spread: The gap between the bid and the ask. A narrow spread usually signals an actively traded, liquid option; a wide spread can mean poor pricing.
Brokerage fee: The cost your broker charges to execute a trade, which affects the overall profitability of a position.
Buy to Close (BTC): An order that buys back an option you previously sold, closing out the position before expiration.
Buying power: The cash available in your account to support new trades.
Buying power reduction: The amount of buying power committed to a particular trade. For a cash-secured put, this equals the strike price multiplied by 100.
Call option: A contract giving the buyer the right, but not the obligation, to buy 100 shares at the strike price before the expiration date.
Called away: When your shares are sold because the stock rose above your covered call's strike price at expiration.
Cash-secured put: A put sold while keeping enough cash in the account to buy the shares if assigned. The conservative approach recommended for newer traders.
Cost basis: The effective price per share after accounting for all premiums collected, fees paid, and dividends received over the life of a trade.
Covered call: A call option sold against shares you already own. The shares "cover" your obligation to sell if the option is exercised.
Days to Expiration (DTE): The number of days remaining until an options contract expires.
Delta: A measure of how much an option's price is expected to change for a one-dollar move in the underlying stock. Also used as a rough proxy for the probability of an option expiring in the money.
ETF (Exchange-Traded Fund): A basket of assets that trades on an exchange like a single share. ETFs offer diversification within one position, which is why many Wheel traders prefer them.
Expiration date: The date on which an options contract ceases to exist. By this date the option must be exercised, closed, or it expires worthless.
Expiring worthless: When an option reaches expiration with no intrinsic value. The seller keeps the full premium and no further action is needed. This is the preferred outcome when selling options.
Gamma: A measure of how quickly delta changes. Gamma increases near expiration, which can cause larger swings in an option's value.
Good Til Cancelled (GTC): An order that stays active until it is filled or cancelled. Useful for closing trades at a target price.
Implied volatility: The market's estimate of how much a stock's price is likely to move. Higher implied volatility means higher option premiums.
In the money (ITM): An option that has intrinsic value. A put is in the money when the stock price is below the strike; a call is in the money when the stock price is above the strike.
IV Percentile: The percentage of days over the past year that had lower implied volatility than today. Helps gauge whether volatility is currently elevated.
IV Rank: Where today's implied volatility sits relative to its highest and lowest points over the past year.
Leveraged ETF: An ETF designed to deliver two or three times the daily return of an index. Because it resets daily, it can drift away from the underlying index over time, which generally makes it unsuitable for the Wheel.
Limit order: An order that executes only at your specified price or better, protecting you from an unfavourable fill.
Margin call: A broker's demand for additional funds when your account value falls below the required level, typically needing action within a short window.
Market order: An order that executes immediately at the best price currently available.
Naked (uncovered) put: A put sold without enough cash to cover assignment, relying on margin. It carries margin-call risk and is not the conservative approach.
Net credit: When a roll or adjustment brings in more premium than it costs. The preferred outcome for any adjustment.
Net debit: When a roll or adjustment costs more than it brings in. Sometimes worthwhile, but it should be a deliberate choice.
Open interest: The total number of outstanding option contracts that have not yet been closed or exercised. Higher open interest generally means more liquidity.
Option contract: An agreement giving the buyer the right, but not the obligation, to buy or sell shares at a set price before a set date.
Out of the money (OTM): An option with no intrinsic value. A put is out of the money when the stock price is above the strike; a call is out of the money when the stock price is below the strike.
Overbought: A security believed to be trading above its fair value.
Oversold: A security believed to be trading below its fair value.
Premium: The price of an option contract, paid by the buyer and received by the seller. When you sell an option, the premium is credited to your account immediately.
Probability of profit: The estimated likelihood that an option will expire worthless, based on current market conditions.
Put option: A contract giving the buyer the right, but not the obligation, to sell 100 shares at the strike price before the expiration date.
Return on Risk (ROR): A measure of a trade's potential profit relative to the capital put at risk, calculated as net profit divided by the amount at risk. Often expressed as an annualised percentage so trades with different durations can be compared.
Rolling: Closing an existing option position and simultaneously opening a new one, usually at a later expiration, as a single transaction.
RSI (Relative Strength Index): A momentum indicator measuring the speed and size of recent price changes. Below 30 is considered oversold; above 70 is considered overbought.
Sell to Open (STO): An order that creates a new short option position by selling a contract you do not already hold.
Short option position: The position you hold after selling to open a put or a call.
Stochastic indicator: A momentum indicator showing where the current price sits within its recent range. Below 20 is considered oversold; above 80 is considered overbought.
Strike price: The price at which shares can be bought (for a call) or sold (for a put) under the option contract.
Support level: A price at which a stock has historically stopped falling and begun to recover. The opposite of a resistance level.
Resistance level: A price at which a stock has historically stopped rising. The mirror image of a support level.
Theta: A measure of how much value an option loses each day from time decay. Theta accelerates as expiration approaches and works in the seller's favour.
Time decay: The gradual erosion of an option's value as it approaches expiration. It works against buyers and in favour of sellers.
Triple Income Strategy: Another name for the Wheel Strategy, referring to its three income sources: put premiums, call premiums, and capital appreciation.
Underlying: The stock or ETF that must be delivered if an option is exercised.
Vega: A measure of how much an option's price changes when implied volatility moves. When you sell a put, you have negative vega exposure, meaning you benefit when volatility falls.
Wheel Strategy: A structured, repeating cycle of selling cash-secured puts on a stock or ETF you would be happy to own, and, if assigned, selling covered calls against those shares until they are called away, then beginning again. Also called the Options Wheel or the Triple Income Strategy.