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Glossary of Terms and Strategies for Options Trading
Complete Options Glossary: Strategies, Terms, Greeks, and Option Selling Techniques. Clear, concise, and suitable for both beginners and advanced traders. Learn to trade options effectively.
Basic concepts
Beginner
Premium
The price that the buyer pays for the option and the seller receives for the obligation.
Detail
Premium is the price of an option that the option buyer pays to acquire the right to buy (call) or sell (put) the underlying asset. For the option writer, the premium is the income for accepting the obligation. The amount of the premium depends on the price of the underlying, the strike price, the time to expiration, volatility (IV), interest rates and dividends. It expresses the “value” of the option at a given time.
The option premium consists of two key components: intrinsic value and time value.
Intrinsic value is the difference between the underlying asset’s price and the strike price if the option is in-the-money (ITM).
Time value reflects the remaining potential for the option to become profitable and is influenced by implied volatility and time until expiration.
Optimal conditions
Premium is high when volatility (IV) is high — suitable for writing. Low premium for buying options (cheaper speculation). Write options if IV is high and I expect a decline.
Max profit
For the option seller: the premium received is the maximum profit.
Max loss
For the option buyer: the premium paid is the maximum loss.
Risks
Risk of poor valuation (e.g. low premium but high probability of loss), poor IV estimate, unexpected market movements (gap), assignment for the underwriter.
Greeks
Theta: decay of premium over time. Vega: sensitivity of premium to changes in volatility. Delta: change in premium when the underlying price changes. Gamma: rate of change in delta.
Variations
Premium call and put options, different premium levels depending on strike (ITM, ATM, OTM), LEAPS (long-term premium), weekly options (low premium).
Usage example
The buyer buys a call option on TSLA strike 200 for a premium of $5, expiring in 30 days. If TSLA rises to 220, the value of the option increases, the premium can increase to $15. The writer of this option receives a premium of $5, but if the price of TSLA rises above 200, he bears the risk of delivering the shares at a lower price.
DTE
The premium increases with longer expiration.
IV (implied volatility)
Higher IV = higher premium. Low IV = cheap options.
Premium
Debit position.
Margin
Yes, for a statement. The writer must have margin to cover the obligation. The buyer of an option does not need margin, he only pays the premium, but the broker may require a cash reserve in case of exercise, especially for put options.
Notes
When writing options, the premium is the maximum possible profit. For the option buyer, the maximum risk. It is important to monitor IV and Theta decay.
Tags
premium, option price, option, yield, cost, call, put, strike, expiration
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