Glossary topic
Options Mechanics
48 terms
Why this topic matters
Options mechanics are the contract rules beneath every strategy: calls and puts, strike, expiration, premium, moneyness, the 100-share multiplier, exercise, assignment, and the chain where those contracts trade.
Build the foundation for every options trade. Read the chain, separate intrinsic value from time value, calculate the premium with the contract multiplier, and follow the exercise and assignment path. Then carry the contract into a complete payoff plan.
Topic questions
Options Mechanics FAQ
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1 termA
2 termsAmerican-Style Option
An American-style option is an option contract that the holder can exercise on any eligible business day through its expiration date.
At the Money (ATM)
An at-the-money (ATM) option is an option whose strike price equals the price of the underlying, so its premium is entirely extrinsic value.
B
3 termsBinary Option
A binary option, or digital option, is an all-or-nothing contract; the cash-or-nothing type pays a fixed amount if its settlement condition is met and nothing if not.
Break-Even Price
A break-even price is the underlying price at expiration where an option position’s payoff equals its net cost, so it produces neither a profit nor a loss.
Buying Power Reduction
Buying power reduction (BPR) is the decrease in an account’s available buying power caused by an order, measured by comparing balances before and after the trade.
C
4 termsCall Option
A call option is a contract that gives the buyer the right, but not the obligation, to buy an underlying asset at a set strike price, a right that ends at expiration.
Cash-Settled Option
A cash-settled option is an option that pays its intrinsic value in cash at exercise or expiration instead of delivering the underlying asset.
Contract Multiplier
The contract multiplier is the number, 100 for standard US equity options, that converts a quoted per-share option price into the actual cash value of one contract.
Conversion and Reversal Arbitrage
Conversion and reversal arbitrage are put-call parity trades that lock stock and options into a fixed strike value at expiration to capture any mispricing net of carry.
D
1 termE
9 termsEarly Exercise
Early exercise is the exercise of an American-style option before its expiration date, which ends the option and creates its share transaction or cash settlement.
Employee Stock Options
Employee stock options are employer-granted rights to buy company shares at a fixed exercise price, earned through vesting and governed by the grant agreement.
European-Style Option
A European-style option is an option contract that can be exercised only at expiration, so its writer cannot be assigned before the contract settles.
Ex-Dividend Assignment Risk
Ex-dividend assignment risk is the chance that a short American-style call is assigned before a dividend because a holder exercises to own the shares in time.
Exercise (Options)
Exercise is the action an option holder takes to use the contract right, creating a share transaction at the strike or a cash settlement amount.
Exercise by Exception
Exercise by exception is OCC’s expiration procedure that processes qualifying in-the-money options for exercise unless a clearing member submits contrary instructions.
Exotic Option
An exotic option is an option whose payoff or exercise rules differ from a standard call or put, through features such as barriers, averaging or digital payouts.
Expiration Date
The expiration date is the final date an option contract remains valid, after which it is exercised, settled, or expires without value.
Extrinsic Value
Extrinsic value is the portion of an option’s premium above its intrinsic value, pricing the time and uncertainty that remain before expiration.
F
1 termI
3 termsIn the Money (ITM)
An in-the-money (ITM) option is an option with positive intrinsic value: a call whose strike is below the underlying price or a put whose strike is above it.
Index Option
An index option is an option on a market index, such as the S&P 500, that settles in cash against a specified index value instead of delivering shares.
Intrinsic Value
Intrinsic value is the amount an option is in the money, calculated from the current stock price and strike price with zero as the minimum.
L
1 termM
1 termN
3 termsNaked Option
A naked option is a short call or put sold without the shares, cash reserve, or offsetting option that would cover its exercise obligation.
No-Arbitrage Bounds
No-arbitrage bounds are model-free upper and lower limits on option prices, set by intrinsic value, the underlying, the discounted strike, and prices at other strikes.
Notional Value
Notional value is the dollar amount of underlying an options position references, measured as strike or stock price × 100 × contracts for standard equity options.
O
9 termsOpen Interest
Open interest is the number of outstanding option contracts in a series that have been opened and not yet closed, exercised, or expired.
Option Adjustment
An option adjustment is a change to a listed option’s strike, contract count or deliverable after a corporate action such as a split, special dividend or merger.
Option Assignment
Option assignment is the notice that obligates a short option writer to sell or buy the underlying at the strike, or pay cash, after a holder exercises.
Option Chain
An option chain is a structured quote table that organizes every listed call and put for an underlying by expiration date and strike price.
Option Premium
Option premium is the market price of an option, paid by the buyer for the contract’s rights and received by the seller for taking on the obligation.
Options
Options are contracts that give the buyer the right, but not the obligation, to buy or sell an underlying asset at a set strike price by a set expiration date.
Options Clearing Corporation (OCC)
The Options Clearing Corporation is the central counterparty that clears, settles, issues, and guarantees obligations for US exchange-listed options.
Options Expiration (OPEX)
Options expiration, often shortened to OPEX, is the date and settlement process when an option contract ends and its remaining exercise rights are resolved.
Out of the Money (OTM)
An out-of-the-money (OTM) option is an option with zero intrinsic value: a call whose strike is above the underlying price or a put whose strike is below it.
P
5 termsPhysically Settled Option
A physically settled option resolves exercise by delivering the specified underlying asset or contract deliverable against payment of the strike price.
Pin Risk
Pin risk is the uncertainty an option writer faces when the underlying closes near a short strike at expiration, leaving assignment unknown until after the close.
Probability of Profit
Probability of profit (POP) is the modeled chance that a complete options position earns a positive result at a selected date, such as expiration.
Put Option
A put option is a contract that gives the holder the right, but not the obligation, to sell an underlying asset at a set strike price by expiration.
Put-Call Parity
Put-call parity is the no-arbitrage relationship linking European call, put, underlying, financing, and dividend values at the same strike and expiration.
R
1 termS
2 termsSection 1256 Contract
A Section 1256 contract is a regulated futures contract, nonequity option or other covered contract that normally gets 60/40 capital-gain treatment and year-end marking.
Strike Price
The strike price is the fixed price at which a call holder can buy, or a put holder can sell, the underlying when the option is exercised.