Strategy glossary

American option

An option that can be exercised on any trading day up to and including expiry, not only at expiry. Most exchange-traded stock options are American-style, which is what makes early assignment possible for the seller of the option.

Assignment

Also: Being assigned

The event in which the seller of an option is obliged to fulfil the contract because the buyer has exercised — delivering or taking the underlying, or settling in cash. Assignment is allocated to short positions and can arrive without warning for American-style options.

At-the-money

Also: ATM

An option whose strike price is at or very close to the current price of the underlying. At-the-money options carry the most extrinsic value and the highest gamma and theta, since the outcome of exercise is most finely balanced there.

Backspread

A ratio structure that is net long options — more long contracts than short at a nearer strike — usually built for a large move. Because it is net long, its risk is defined: the worst case is a finite loss around the short strike.

Backwardation

A term-structure condition in which futures or forward prices for later expiries are lower than for nearer ones, so the curve slopes downward. It is the opposite of contango and often reflects near-term scarcity or a convenience yield in holding the physical underlying.

Basis

The difference between the price of a futures contract and the spot price of its underlying at a given moment. Basis reflects carrying costs and expectations and converges toward zero as expiry approaches, when futures and spot must meet at settlement.

Bid-ask spread

Also: Bid-offer spread

The gap between the highest price a buyer will pay (bid) and the lowest a seller will accept (ask). It is a real cost of trading: crossing it on entry and exit erodes returns, and it widens in illiquid strikes and far option wings.

Black–Scholes

Also: Black-Scholes-Merton

A mathematical model that prices a European option from the underlying's price, the strike, time to expiry, interest rate and volatility. It underpins most option pricing and the Greeks, though its assumptions — constant volatility, no jumps — only approximate real markets.

Box spread

A four-leg combination of a bull call spread and a bear put spread at the same strikes, whose payoff is locked to a fixed amount regardless of where the underlying settles. Its risk is defined, and it is used mainly as a financing or arbitrage tool.

Breakeven

The underlying price at which a position makes neither profit nor loss at expiry, after accounting for premium paid or received. A structure may have one breakeven or two; between or beyond them determines whether the position is in profit.

Broken wing

Also: Skip-strike

A variation of a butterfly or condor in which one wing is placed further from the body than the other, making the two wings unequal. The asymmetry shifts the risk to one side and can change the position's delta sign as the underlying moves across its strikes.

Butterfly

Also: Butterfly spread

A three-strike, defined-risk structure combining a body of two options at a middle strike with wings at strikes above and below. It profits most if the underlying settles at the body strike and loses a capped amount if it moves far in either direction.

Calendar spread

Also: Time spread, horizontal spread

A position that sells a nearer-dated option and buys a longer-dated option at the same strike, profiting from the faster time decay of the near leg. Its risk is defined by the net debit paid, and it is sensitive to shifts in implied volatility.

Call option

A contract giving the buyer the right, not the obligation, to buy the underlying at the strike price on or before expiry. The buyer pays a premium and gains if the underlying rises; the seller collects the premium and takes on the obligation to deliver.

Carry

Also: Cost of carry

The net cost of holding a position over time, combining financing or interest costs against any income such as dividends. Carry links spot and futures prices and, over longer option horizons, contributes to the drift that dominates short-term Greek exposures.

Cash settlement

Settlement of a contract by paying the net cash difference rather than delivering the underlying asset. Indian index options and index futures are cash-settled against a settlement price, which removes the delivery obligation and resolves pin risk automatically at expiry.

Cointegration

A statistical property of two or more price series that individually wander but move together over the long run, so a combination of them stays stationary. It is the formal basis for pairs trading, where the spread between two cointegrated instruments is expected to revert.

Collateral

Cash or securities pledged to cover the potential loss on a position, such as the funds set aside for a cash-secured put. Collateral funds a loss if the trade moves against you; it does not cap the loss, which is a separate structural matter.

Condor

Also: Condor spread

A four-strike, defined-risk structure with a wider profit zone than a butterfly, built from two spreads whose inner strikes are separated. It profits if the underlying settles between the inner strikes and loses a capped amount beyond the outer strikes.

Contango

A term-structure condition in which futures prices for later expiries are higher than for nearer ones, so the curve slopes upward. It is the normal state for many markets, reflecting the cost of carry, and is the opposite of backwardation.

Covered

Also: Covered position

A position in which a short option is offset by holding the underlying, as in a covered call where owned stock backs a sold call. Covered means the option leg is hedged by the asset, though the asset itself can still fall in value.

Credit spread

A two-leg option spread that collects a net premium at entry, because the option sold is worth more than the option bought. Its maximum profit is the credit received and its maximum loss is the strike width minus that credit, so it is defined-risk.

Debit spread

A two-leg option spread that costs a net premium at entry, because the option bought is worth more than the option sold. Its maximum loss is the debit paid and its maximum profit is the strike width minus that debit, so it is defined-risk.

Deep in-the-money

An option whose strike is far on the profitable side of the underlying's current price, so it consists almost entirely of intrinsic value with little time value left. Deep in-the-money options behave much like the underlying, with a delta close to one.

Defined risk

A position whose maximum loss is capped by its own structure — a long option leg or the combination itself stops the payoff from falling further in both tails. The cap comes from the position, not from the underlying reaching zero, and defined does not mean small.

Delta

The Greek measuring how much an option's price changes for a one-point change in the underlying. It ranges from 0 to 1 for calls and 0 to −1 for puts, and it also approximates the probability of finishing in-the-money and the equivalent underlying exposure.

Delta-neutral

A position constructed so that its net delta is close to zero, leaving it insensitive to small moves in the underlying at that instant. Delta-neutrality is not permanent — gamma causes the delta to drift as the underlying moves, requiring rebalancing to maintain.

Diagonal spread

A position combining different strikes and different expiries — part calendar, part vertical — such as buying a longer-dated option at one strike and selling a shorter-dated option at another. Its risk is defined by the net debit, and it carries both time and directional exposure.

Drawdown

The decline in account value from a peak to a subsequent trough, usually stated as a percentage. Drawdown measures the depth of a losing stretch and the capital that must be recovered to return to the previous high; deeper drawdowns require disproportionately larger gains to erase.

Early assignment

Assignment of an American-style short option before expiry, most often on the short leg of a spread when it goes deep in-the-money or around a dividend. It can leave a trader holding an unexpected underlying position and break the intended structure of a spread.

European option

An option that can be exercised only at expiry, never before. Indian index options are European-style, which removes early-assignment risk for the seller. The Black–Scholes model prices European options directly, without the adjustment American-style exercise would require.

Exercise

The act by which an option buyer invokes the contract right — buying the underlying with a call, or selling it with a put, at the strike. Exercise transfers the obligation to an assigned seller; for cash-settled contracts it is resolved as a cash difference.

Expiry

Also: Expiration

The date on which an option or futures contract ceases to exist and is settled. After expiry the contract has no further value; an option finishes either in-the-money and settled, or out-of-the-money and worthless. Indian index options have weekly and monthly expiries.

Exposure margin

An additional margin the exchange requires on top of SPAN margin as a buffer against adverse moves, forming the second component of Indian F&O margin. Like SPAN, it is recomputed through the day, and brokers and the exchange revise the rules periodically.

Extrinsic value

Also: Time value

The part of an option's premium beyond its intrinsic value, reflecting the time left and the implied volatility. Extrinsic value is highest at-the-money and decays to zero by expiry, when only intrinsic value remains. It is what an option seller collects and a buyer pays for.

Fill

The execution of an order, in whole or in part, at a given price. A fill confirms a trade has happened; a partial fill means only some of the requested quantity traded. The fill price, net of the bid-ask spread, is the real entry or exit cost.

Gamma

The Greek measuring how fast an option's delta changes as the underlying moves — the curvature of the payoff. Gamma is highest for at-the-money options near expiry, and a long-gamma position gains from large moves in either direction while paying theta for the privilege.

Gamma risk

The risk that a position's delta shifts rapidly as the underlying moves, most acute for short options near expiry. High gamma means a small move can turn a comfortable position into a large loss quickly, which is why short gamma positions demand close monitoring near expiry.

Gap risk

The risk that the underlying jumps from one price to another without trading in between — overnight or after news — so stops and hedges cannot execute at intended levels. Gap risk is why a placed stop-loss may fill far worse than its trigger, or not protect at all.

Greeks

The set of sensitivities that describe how an option's value responds to its inputs: delta to the underlying's price, gamma to delta, theta to time, vega to volatility and rho to interest rates. The Greeks are the working vocabulary of option risk management.

Hedge

A position taken to offset the risk of another, reducing exposure to an adverse move. A protective put hedges a stock holding; a futures short can hedge a portfolio. Hedging trades away potential gain in exchange for reduced loss, and rarely removes risk entirely.

Implied volatility

Also: IV

The volatility figure that, put into an option pricing model, reproduces the option's current market price. It is the market's estimate of future volatility over the option's life, and it drives extrinsic value — higher implied volatility means richer premiums.

India VIX

An index reporting the expected 30-day volatility of NIFTY, computed from the prices in the index option order book. India VIX is a measurement of what options are pricing, not a trading signal, and a high reading usually reflects genuinely elevated risk.

Intrinsic value

The part of an option's premium that would be realised if it were exercised immediately: the amount by which it is in-the-money, and zero if it is not. A call's intrinsic value is the underlying price minus the strike, floored at zero; a put's is the reverse.

Iron butterfly

A four-leg, defined-risk credit structure selling an at-the-money call and put and buying protective wings above and below. It collects a large credit and profits if the underlying settles near the body, with a capped loss if it moves beyond either wing.

Iron condor

A four-leg, defined-risk credit structure selling an out-of-the-money call spread and put spread, profiting if the underlying settles between the short strikes. Its maximum loss, a wing width minus the credit, commonly exceeds its maximum profit, so it must win more often than it loses to break even.

IV crush

A sharp fall in implied volatility, typically just after a scheduled event such as earnings or a policy decision, once the uncertainty resolves. IV crush deflates extrinsic value and can leave option buyers with a loss even when the underlying moved in their favoured direction.

IV percentile

The proportion of trading days over a lookback window on which implied volatility closed below today's level, expressed from 0 to 100. An IV percentile of 70 means implied volatility was lower than today on 70 percent of those days.

IV rank

A measure of where current implied volatility sits between its lowest and highest readings over a lookback window, scaled from 0 to 100. An IV rank of 80 means implied volatility is near the top of its recent range for that specific instrument.

Jade lizard

A three-leg structure selling an out-of-the-money put and an out-of-the-money call spread, arranged so the total credit exceeds the call spread's width, removing upside risk. The short put is unhedged, so the position is undefined-risk to the downside all the way to zero.

Kelly criterion

A formula giving the position size that maximises the long-run growth rate of capital, based on the edge and the odds of a bet. Full Kelly is volatile, so practitioners often use a fraction of it; over-betting relative to Kelly raises the risk of ruin sharply.

Leg

One individual option or futures contract within a multi-part position. A vertical spread has two legs, an iron condor four. Legging in means entering the legs separately rather than as one order, which risks an unfavourable price move between fills.

Leverage

The use of a small amount of capital to control a larger notional exposure, as options and futures allow. Leverage magnifies both gains and losses relative to the capital committed, so a modest adverse move in the underlying can produce a large percentage loss.

Liquidity

The ease with which a contract can be bought or sold without moving its price, reflected in tight bid-ask spreads and large resting size. Illiquid strikes cost more to trade and are harder to exit, a particular hazard in far option wings near expiry.

Long

Holding a position that gains when the instrument rises in value — owning stock, buying a call, or being long a future. A long option position has paid premium and carries defined risk; long is the opposite of short.

Lot size

The fixed number of units of the underlying in one derivatives contract. At the time of writing NIFTY is 75 and BANKNIFTY is 30 units per lot; NSE revises lot sizes periodically, so the current specification should always be checked before trading.

Margin benefit

The reduction in required margin granted when a position's risk is hedged, such as a defined-risk spread whose long leg caps its short leg. The exchange's risk model recognises the capped worst case and demands far less collateral than for an equivalent naked position.

Margin call

A demand from the broker to deposit additional funds when the account's margin falls below the required level, often because a position has moved against it. If unmet, the broker may liquidate positions — sometimes at unfavourable prices in thin conditions — to restore the margin.

Mark to market

Also: MTM

The daily revaluation of open positions to current market prices, crediting or debiting the resulting gain or loss to the account. Mark to market means unrealised losses are settled in cash each day, which can trigger margin calls before a position is closed.

Mean reversion

The tendency of a price or spread to return toward an average level after deviating from it. Mean-reversion strategies bet on that pull, but the assumption fails when a genuine regime change moves the average itself, turning a reversion trade into a trend loss.

Moneyness

A description of an option's strike relative to the underlying's price: in-the-money if exercise would profit, at-the-money if strike and price coincide, out-of-the-money if exercise would not profit. Moneyness governs how much of the premium is intrinsic versus extrinsic value.

Multiplier

The factor converting an option or futures price into a rupee value per contract, equal to the lot size for Indian index derivatives. A price move of one point on a NIFTY contract at a lot size of 75 changes the contract's value by 75 rupees.

Naked option

Also: Uncovered option

A short option with no offsetting position to cap its risk. A naked put loses all the way down to zero if the underlying falls; a naked call has genuinely uncapped loss because the underlying's price has no ceiling. Both attract high margin.

Negative skew

A volatility skew in which out-of-the-money puts carry higher implied volatility than equidistant calls, so downside protection is priced richer than upside. Equity indices typically show negative skew because markets fall faster than they rise and demand for crash protection is persistent.

Net credit

The net premium received when opening a multi-leg position, when the options sold are worth more than those bought. Net credit is the maximum profit of many defined-risk credit structures and is received up front, though it is not kept unless the position expires favourably.

Net debit

The net premium paid when opening a multi-leg position, when the options bought cost more than those sold. Net debit is the maximum loss of many defined-risk debit structures, paid up front, and represents the capital at risk in the position.

Notional value

The total value of the underlying that a contract controls, equal to the underlying price times the lot size. One NIFTY lot at spot 24,000 and a lot size of 75 carries a notional value of 18,00,000 rupees — the exposure, not the margin posted.

Open interest

Also: OI

The total number of derivatives contracts of a given series that remain open and not yet closed or settled. Rising open interest signals new positions entering; it measures participation and, alongside volume, indicates liquidity in a particular strike or expiry.

Option chain

A tabular listing of all available option contracts for an underlying, arranged by strike and expiry, showing prices, volumes, open interest and often implied volatility for each call and put. The option chain is the primary screen from which strategies are constructed and priced.

Out-of-the-money

Also: OTM

An option whose strike is on the unprofitable side of the underlying's current price, so exercising it would yield nothing. Out-of-the-money options have no intrinsic value and consist entirely of extrinsic value, which decays to zero if the option stays out-of-the-money at expiry.

Payoff diagram

A chart plotting a position's profit or loss at expiry against the underlying's price, showing breakevens, maximum profit and maximum loss as the shape of the line. It reveals whether risk is defined or undefined by whether the tails flatten or keep falling.

Physical settlement

Settlement of a contract by delivering the actual underlying rather than cash. Indian single-stock derivatives are physically settled, so an in-the-money option carried to expiry results in delivery of shares, requiring the full purchase or delivery obligation to be met.

Pin risk

For physically-settled options, the uncertainty a seller faces when the underlying settles almost exactly at the strike near expiry, leaving assignment unpredictable and possibly resulting in an unwanted position. Cash-settled index options resolve this automatically at the settlement price, so pin risk does not arise.

Position sizing

The decision of how many contracts or lots to trade, set by the maximum loss the account can accept rather than by the margin available. Correct position sizing fixes the acceptable loss first and derives the size from it, keeping any single loss survivable.

Premium

The price paid by an option buyer to the seller for the contract's rights. Premium comprises intrinsic value plus extrinsic value; it is the buyer's maximum loss and the seller's maximum gain, and it decays over the option's life as expiry approaches.

Put option

A contract giving the buyer the right, not the obligation, to sell the underlying at the strike price on or before expiry. The buyer pays a premium and gains if the underlying falls; the seller collects the premium and takes on the obligation to buy.

Put-call parity

The no-arbitrage relationship linking a European call and put at the same strike and expiry: C − P = S − K·e^(−rT), where S is the spot, K the strike, r the rate and T the time. It ties option prices to the underlying and enables synthetic positions.

Ratio spread

A spread holding unequal numbers of long and short options, typically net short — more sold than bought. A net-short ratio spread is undefined-risk because the extra short options are unhedged, distinguishing it from a backspread, which is net long and defined-risk.

Realised volatility

Also: Historical volatility

The actual volatility the underlying has exhibited over a past period, measured from its price movements. Compared against implied volatility, it reveals whether options were priced too high or too low — the core of the gamma-versus-theta bet a long-gamma trader makes.

Rho

The Greek measuring an option's price sensitivity to a change in the risk-free interest rate. Rho is small for short-dated options and matters little for weeklies, becoming material only for long-dated options where the discounting of the strike is significant.

Risk of ruin

The probability that a series of losses reduces an account to a level from which it cannot recover, or below a threshold that forces a stop. Risk of ruin rises steeply with position size relative to capital, which is why over-leverage is the common cause of blow-ups.

Rolling

Closing an existing option position and opening a similar one at a later expiry, a different strike, or both — to extend a view or manage a threatened position. Rolling incurs fresh costs and can convert a defined loss into a larger open-ended exposure if done to avoid realising a loss.

Settlement price

The official price at which a contract is settled at expiry, determined by the exchange — for Indian index derivatives, typically a weighted average of the underlying over a defined closing window. It fixes the cash payout and resolves pin risk for cash-settled options.

Short

Holding a position that gains when the instrument falls in value — selling a call, buying a put, or shorting a future. A short option position has collected premium and carries the obligation to perform; net-short-call positions carry genuinely uncapped loss.

Skew

Also: Volatility skew

The pattern of implied volatility varying across strikes at a single expiry, so options at different strikes trade at different volatilities. Equity index skew is usually negative, with downside puts richer than upside calls, reflecting persistent demand for crash protection.

SPAN margin

The first component of Indian F&O margin, computed by the exchange's Standard Portfolio Analysis of Risk model over a range of hypothetical price and volatility moves. SPAN is recomputed through the trading day, so a naked position's requirement expands as it moves against you.

Spread

A position combining two or more legs of the same type to shape the risk and reward, such as a vertical, calendar or ratio spread. Spreads generally reduce cost and cap risk relative to a single option, at the price of capping the potential profit too.

Stop-loss

An order to exit a position once the price reaches a predefined level, intended to limit loss. A stop-loss does not guarantee the exit price: in a gap or fast market the fill can be far worse than the trigger, or the level may be skipped entirely.

Straddle

A position combining a call and a put at the same strike and expiry. A long straddle buys both, is defined-risk with loss capped at the total premium, and profits from a large move either way; a short straddle sells both and is undefined-risk with uncapped loss.

Strangle

A position combining an out-of-the-money call and an out-of-the-money put at different strikes. A long strangle costs less than a straddle and needs a larger move to profit; a short strangle collects premium and is undefined-risk, with genuinely uncapped loss on the call side.

Strike price

Also: Exercise price

The fixed price at which an option's holder may buy (call) or sell (put) the underlying if exercised. The strike relative to the underlying's price sets the option's moneyness and how its premium divides between intrinsic and extrinsic value.

STT

Also: Securities Transaction Tax

A statutory tax on securities and derivatives transactions in India. A trap: letting an in-the-money index option go to settlement can attract a materially different charge than squaring it off before expiry. Rates and rules are set by statute and revised, so current rules must be checked.

Synthetic position

A combination of options and the underlying that replicates the payoff of another instrument, built using put-call parity. A long call plus a short put at the same strike is a synthetic long underlying; synthetics let traders reconstruct exposures and exploit mispricings between related instruments.

Term structure

The pattern of implied volatility or futures prices across different expiries for the same underlying. A rising term structure means later expiries price higher; it shapes calendar and diagonal spreads, which trade the difference between near and far expiries.

Theta

The Greek measuring how much an option loses in value from the passage of one day, all else equal. Theta is negative for option buyers and positive for sellers, and it accelerates as expiry approaches, most steeply for at-the-money options in their final days.

Theta decay

Also: Time decay

The erosion of an option's extrinsic value as time passes toward expiry. Theta decay is not linear — it accelerates in the final weeks and is steepest for at-the-money options — which is why sellers favour shorter-dated options and buyers are penalised for waiting.

Time value

Also: Extrinsic value

The portion of an option's premium attributable to the time remaining and the implied volatility, over and above any intrinsic value. Time value is greatest at-the-money and decays to zero by expiry, at which point only intrinsic value survives.

Undefined risk

A position whose loss is capped only by the underlying running out of room to fall — reaching zero — or by nothing at all. Undefined risk means no structural leg limits the loss; only net-short-call positions have genuinely infinite loss, since price has no upper bound.

Underlying

The asset on which a derivative is based — the index, stock, currency or commodity that an option or futures contract references. The underlying's price, volatility and carry drive the derivative's value; for NIFTY options the underlying is the NIFTY 50 index.

Vega

The Greek measuring how much an option's price changes for a one-point change in implied volatility. Vega is positive for option buyers, who gain when volatility rises, and negative for sellers; it is largest for at-the-money options with more time to expiry.

Vertical spread

A two-leg spread buying and selling options of the same type and expiry at different strikes. Verticals are defined-risk: a debit vertical caps loss at the premium paid, a credit vertical at the strike width minus the credit received. They express a directional view cheaply.

Volatility risk premium

The tendency for implied volatility to exceed subsequently realised volatility on average, so option prices embed a premium sellers may collect. It compensates sellers for bearing the risk of large moves, and it disappears — or reverses sharply — precisely when a violent move occurs.

Volatility smile

A pattern in which implied volatility is higher for options far in- or out-of-the-money than for at-the-money options, tracing a smile shape across strikes. It shows the market prices tail outcomes more richly than a constant-volatility model such as Black–Scholes assumes.

Whipsaw

A sequence of sharp reversals that repeatedly triggers entries and exits at unfavourable prices, common in choppy, range-bound conditions. Whipsaw punishes trend-following and stop-based systems, which are stopped out on a reversal only for the price to swing back the other way.

Wing width

The distance in strike points between the body and the outer strike of a butterfly or condor, or between the two strikes of a spread. Wing width sets the maximum loss of a defined-risk credit structure — a wider wing raises both the capped loss and the margin required.

Zero-days-to-expiry

Also: 0DTE

An option traded on its expiry day, with hours or minutes of life remaining. At zero days to expiry gamma and theta are extreme, so value swings violently with small underlying moves and decays to intrinsic value fast. SEBI and the exchanges have flagged expiry-day retail losses.