Asset 7
Asset 7

GLOSSARY OF TERMS

A reference guide for MLOS jargon

Here’s a glossary of essential terms for investors in multi-leg option strategies:

Glossary of Multi-Leg Option Strategies Terms

  • Options: Financial derivatives that give buyers the right, but not the obligation, to buy or sell an underlying asset at a predetermined price by a specific date.
  • Call Option: An option that gives the holder the right to buy the underlying asset at a specified strike price by the expiration date.
  • Put Option: An option that gives the holder the right to sell the underlying asset at a specified strike price by the expiration date.
  • Strike Price: The price at which the underlying asset can be bought or sold when exercising an option.
  • Expiration Date: The date by which the option must be exercised or allowed to expire worthless.
  • Premium: The price paid by the option buyer to the option seller for the right granted by the option.
  • Multi-Leg Strategy: An options strategy involving two or more option contracts, often used to create complex trading positions.
  • Vertical Spread: An options strategy involving buying and selling options of the same type (calls or puts), with the same expiration date, but different strike prices.
  • Horizontal Spread: Also known as a calendar spread; this strategy involves buying and selling options of the same type with the same strike price but different expiration dates.
  • Diagonal Spread: An options strategy that combines elements of vertical and horizontal spreads, involving different strike prices and expiration dates.
  • Straddle: An options strategy involving buying both a call and a put option with the same strike price and expiration date, aiming to profit from significant price movement in either direction.
  • Strangle: An options strategy involving buying a call and a put option with different strike prices but the same expiration date, aiming to profit from large price movements.
  • Iron Condor: A multi-leg strategy combining a bear call spread and a bull put spread, used to profit from low-volatility markets with limited risk.
  • Iron Butterfly: An options strategy involving a combination of a call and a put spread with the same expiration date, creating a fixed-risk, fixed-reward setup.
  • Butterfly Spread: An options strategy that combines a bull spread and a bear spread, using options with three different strike prices.
  • Gamma: A measure of the rate of change in delta relative to changes in the underlying asset’s price, indicating how much an option’s delta will move with changes in the asset’s price.
  • Delta: The sensitivity of an option’s price to changes in the price of the underlying asset, indicating how much the option price is expected to move for every 1-unit change in the underlying.
  • Theta: A measure of an option’s price sensitivity to time decay, indicating how much value an option loses each day as it nears expiration.
  • Vega: A measure of an option’s price sensitivity to changes in implied volatility, indicating how much an option’s price will change with a 1% change in implied volatility.
  • Rho: A measure of an option’s price sensitivity to changes in interest rates, indicating how much the option price will change with a 1% change in interest rates.
  • Implied Volatility (IV): The market’s forecast of the likely movement in the underlying asset’s price, derived from option prices.
  • IV Rank: This is the percentile of volatility the underlying stock has seen over the last 52 weeks.  As a general rule of thumb, only sell premium or collect “credit” when the IV rank for the underlying is 50% or greater.  
  • Underlying Asset: The security or financial instrument on which the option is based, such as a stock, index, or commodity.
  • Assignment: The process by which an option seller is required to fulfill the obligation of the option, such as delivering or accepting the underlying asset.

These terms cover the fundamental concepts and strategies that someone investing in multi-leg option strategies should understand.

Glossary - Miiflo