Break Even: The stock price(s) at which an option strategy results in neither a profit nor loss.
Call: An option contract that gives the holder the right to buy the underlying security at a specified price for a certain, fixed period of time.
In-the-money: A call option is in-the-money if the strike price is less than the market price of the underlying security. A put option is in-the-money if the strike price is greater than the market price of the underlying security.
Long position: A position wherein an investor is a net holder in a particular options series.
Out-of-the-money: A call option is out-of-the-money if the strike price is greater than the market price of the underlying security. A put option is out-of-the-money if the strike price is less than the market price of the underlying security.
Premium: The price a put or call buyer must pay to a put or call seller (writer) for an option contract. Market supply and demand forces determine the premium.
Put: An option contract that gives the holder the right to sell the underlying security at a specified price for a certain, fixed period of time.
Ratio Spread: A multi-leg option trade of either all calls or all puts whereby the number of long options to short options is something other than 1:1. Typically, to manage risk, the number of short options is lower than the number of long options (i.e. 1 short call: 2 long calls).
Short position: A position wherein the investor is a net writer (seller) of a particular options series.
Strike price or exercise price: The stated price per share for which the underlying security may be purchased (in the case of a call) or sold (in the case of a put) by the option holder upon exercise of the option contract.
Synthetic position: A strategy involving two or more instruments that has the same risk/reward profile as a strategy involving only one instrument.
Time decay or erosion: A term used to describe how the time value of an option can “decay” or reduce with the passage of time.
Volatility: A measure of the fluctuation in the market price of the underlying security. Mathematically, volatility is the annualized standard deviation of returns.