When you first start learning about options trading, it can be overwhelming. There are so many terms and concepts to wrap your head around. To make things worse, a lot of the forex jargon is used interchangeably by experienced traders, making it even more confusing for beginners.
This article will demystify some of the most commonly used technical terms in options trading. By the end, you’ll better understand what people are talking about when they use these terms and a step closer to becoming a successful options trader yourself.
Standard technical terms used in options trading
Here are the most commonly used technical terms in options trading:
The option chain lists all the available options for trading on a particular security. The option chain will show you the different available strike prices and the expiration dates and put/call prices.
The strike price is when you can buy or sell the underlying security. For example, if you have a call option with a strike price of $50, you have the right to buy the stock at $50 per share.
The expiration date is the exact date on which your option will expire. If you don’t exercise your option by that date, you will lose the value of your option.
The put/call price is what you pay for the option itself. The put/call ratio is a good indicator of market sentiment. If the ratio is high, more puts than calls are traded, which indicates that the market is bearish. If the ratio is low, there are more calls than puts being traded, which indicates that the market is bullish.
The bid price is the highest price that someone is willing to pay for an option. The asking price is the lowest price that someone is willing to sell an option. The bid/ask spread is the difference between the two prices.
In the money (ITM)
An option is ITM when the current market price of the underlying security is higher than the strike price (for a call option) or lower than the strike price (for a put option).
Out of the money (OTM)
An option is OTM when the current market price of the underlying security is lower than the strike price (for a call option) or higher than the strike price (for a put option).
At the money (ATM)
An option is ATM when the current market price of the underlying security is equal to the strike price.
Volatility is a measure of how the price of a security fluctuates. High volatility means that the price is moving around a lot, while low volatility means that the price is relatively stable.
Implied volatility measures how much the market anticipates the security price will fluctuate in the future. It’s calculated using options prices, and it’s used to predict how volatile a stock might be in the future.
Delta is a measure of how much the price of an option changes when the price of the underlying security changes. It’s used to predict how much an options trade will lose or gain if the stock price moves by a certain amount.
Gamma is a measure of how much Delta, mentioned above, changes when the price of the underlying security changes. It’s used to predict how much an option’s Delta will change if the stock price moves by a certain amount.
Vega measures how much an option’s price changes when the volatility of the underlying security changes. It’s used to predict how much an options trade will lose or gain in value if the volatility of the stock goes up or down.
These are a few technical terms used in options trading and online options trading. If you’re new to options or crypto trading, it’s essential to familiarise yourself with these terms and use a reliable and experienced online broker before trading options.