NCFM Options Trading Strategies key terms

The price a buyer pays and a writer receives for an option contract, quoted per share and multiplied by the lot size. It has two parts: intrinsic value and time value.

The number of underlying shares one exchange-traded option contract controls. In Indian index and stock options this is a fixed market-lot quantity set by the exchange, so premium per contract equals quoted premium times lot size.

The fixed price at which the holder of an option may buy (call) or sell (put) the underlying. Strike selection determines moneyness, premium, and the payoff profile of every strategy.

The date on which an option contract stops trading and its final settlement value is determined. Indian index options expire weekly and monthly, which sharply affects time decay near expiry.

A contract feature allowing the holder to exercise only on the expiry date, not before. Most index options use this style, so early-exercise value is absent and pricing depends purely on the terminal payoff.

A contract feature allowing the holder to exercise at any time up to expiry. Single-stock options usually carry this style, creating early-exercise considerations for deep in-the-money positions and for writers facing assignment.

The position of the strike relative to the underlying price, classified as in-the-money, at-the-money, or out-of-the-money. Moneyness drives intrinsic value, delta, and the probability that an option finishes with value.

The amount an option would be worth if exercised immediately: the excess of the underlying over the strike for a call, or the strike over the underlying for a put. It is never negative.

The part of the premium that exceeds intrinsic value, reflecting the chance the option gains value before expiry. It shrinks as expiry approaches and is highest for at-the-money options.

A no-arbitrage relationship linking European call and put prices at the same strike and expiry: call minus put equals the underlying price minus the present value of the strike. Violations create conversion and reversal arbitrage.

A closed-form pricing model for European options that assumes lognormal prices, constant volatility, and no early exercise. It outputs a fair premium from spot, strike, time, rate, dividend, and volatility inputs.

The volatility level that, fed into a pricing model, reproduces the option's observed market price. It expresses how much movement the market is pricing and is the main input traders trade rather than the premium itself.

The annualised standard deviation of past underlying returns over a chosen window. Comparing it with implied volatility helps a trader judge whether options look cheap or expensive relative to realised movement.

The pattern where implied volatility varies across strikes instead of being flat, usually higher for out-of-the-money puts in equity indices. It reflects demand for downside protection and fat-tail risk pricing.

The change in option premium for a one-unit change in the underlying, ranging from 0 to 1 for calls and 0 to -1 for puts. It also approximates the risk-neutral probability of finishing in the money.

The rate at which delta changes as the underlying moves. Long options have positive gamma, meaning delta accelerates against the position; short options have negative gamma and lose faster on large moves.

The daily loss in option premium from the passage of time, all else equal. Long option positions bleed theta while short option positions collect it, making theta central to premium-selling strategies.

The change in option premium for a one-percentage-point change in implied volatility. Long options are vega-positive; short-premium strategies are vega-negative and gain when volatility falls.

The sensitivity of option premium to a change in the risk-free interest rate, usually one percentage point. Rho matters most for long-dated options and is generally the least watched of the major Greeks.

The erosion of an option's time value as expiry approaches, accelerating in the final weeks and fastest for at-the-money contracts. It is the economic force behind theta and premium-selling strategies.

Holding the underlying and writing a call against it to collect premium. The position caps upside above the strike while offering limited downside cushion equal to the premium received.

Owning the underlying and buying a put to insure against a fall below the strike. It sets a floor on losses at the cost of the put premium, similar to buying insurance.

Buying a lower-strike call and writing a higher-strike call with the same expiry. It reduces cost and caps profit between the strikes, a defined-risk way to express a moderate upward view.

Buying a higher-strike put and writing a lower-strike put with the same expiry. The structure lowers cost at the price of capping gains, and profits as the underlying falls toward the lower strike.

Any two-leg option position using the same expiry but different strikes, either both calls or both puts. Debit versions cost premium for limited reward; credit versions collect premium for limited risk.

A spread entered for a net inflow of premium, such as a bull put spread or bear call spread. Maximum loss is the strike gap minus the credit, and the seller profits if the short option expires worthless.

Buying or selling a call and a put at the same strike and expiry. The long version profits from a large move either way; the short version collects premium and profits if price stays near the strike.

A two-leg position using an out-of-the-money call and an out-of-the-money put at the same expiry. It costs less than a straddle but needs a larger move to profit, and the short form has wider breakevens.

A three-strike, four-leg structure combining a bull and bear spread that profits when price finishes near the middle strike. It has limited risk and limited reward and is cheap when entered for a small debit.

A four-leg position using four strikes that profits if the underlying stays within a range at expiry. The iron condor sells an inner call and put spread while buying outer wings for defined risk.

Buying one option and writing more than one option at a different strike, so the leg quantities are unequal. It lowers cost or creates a credit but leaves the position naked and exposed beyond the written strikes.

Holding the underlying, buying a protective put, and writing a call to finance it. The result is a capped range of outcomes, commonly used by holders who want downside protection at low net cost.

A short option position with no offsetting underlying or option leg. The writer keeps the full premium but faces large or theoretically unlimited loss, and must post margin to cover that exposure.

The cash or collateral an exchange and broker require against a short option or spread position. It is calculated from underlying price, strike, volatility, and lot size, and short naked positions demand the most.

The process by which an option writer is notified that a holder has exercised, obliging the writer to deliver or take the underlying at the strike. Assignment is allocated through the clearing corporation.

The final discharge of an option obligation at expiry, either by physical delivery of shares or by cash payment of the intrinsic value. Indian index options settle in cash, while stock options settle by delivery.

A combination of options and the underlying that replicates the payoff of another instrument, such as a call plus a short underlying mimicking a put. Traders use synthetics to exploit mispricing across related contracts.