Options
Theta
Time decay — the rate at which an option loses value as expiration approaches, all else equal. Works against buyers and in favor of sellers. Accelerates in the final 30 days.
Related Terms
Call Option
A contract giving the buyer the right (not obligation) to purchase 100 shares of a stock at the strike price before expiration. Profitable when the stock rises above the strike plus premium paid.
Put Option
A contract giving the buyer the right (not obligation) to sell 100 shares at the strike price before expiration. Used as a hedge or to profit from a declining stock.
Strike Price
The fixed price at which an option contract can be exercised. Also called the exercise price.
Premium
The price paid to buy an option contract. Determined by intrinsic value (how far ITM it is) and time value (time until expiration and implied volatility).
Implied Volatility (IV)
The market's forecast of a stock's future price movement, derived from option prices. High IV = expensive options; low IV = cheap options. IV spikes before earnings.
ITM / ATM / OTM
In-the-Money (ITM): the option has intrinsic value (call: stock > strike; put: stock < strike). At-the-Money (ATM): stock price ≈ strike. Out-of-the-Money (OTM): no intrinsic value yet.