How I Trade

Trading Glossary

Here are terms and terminology used f0r trading, and for trading options.

Edward Phelps

Mar 4, 2024 — 5 min read

Here are terms and terminology used f0r trading and for trading options. (This post is updated occasionally.)

Short Put Spread

AKA: Bull Put Spread | Vertical Spread

Buy a Put, at strike price A (the lower price).
Sell a Put, at strike price B (the higher price). This limits my risk if the stock price goes down below strike price A.
The Price: The Credit amount received when the Spread trade is made. This is the most that can be made on a Spread trade.
The Spread: the difference between Strike Price B and Strike Price A is the Spread. I trade a $5 spread. This means the most that can be can lost on a Spread trade with a $5 spread is $500 ($5 x 100 (Shares) = $500).
The Bet: The stock will be above strike price B (the higher price) at expiration.
A Short Put Spread obligates me to buy the stock at strike price B if the option is assigned (which is fine IF the price is above strike price A at assignment) but gives me the right to sell the stock at strike price A (which caps my loss if the price is below strike price A at assignment).
When to run this Play: You’re bullish on the stock. You expect neutral activity (if strike price B is out-of-the-money).

Short Call Spread

AKA: Bear Call Spread | Vertical Spread

Sell a Call, at strike price A (the lower price).
Buy a Call, at strike price B (the higher price). This limits my risk if the stock price goes up above strike price A.
The Price: The Debit amount paid when the Spread trade is made.
The Spread: the difference between Strike Price A and Strike Price B is the Spread. I trade a $5 spread. This means the most that can be can lost on a Spread trade with a $5 spread is $500 ($5 x 100 (Shares) = $500).
The Bet: The stock will be below strike price A (the lower price) at expiration.
A Short Call Spread obligates me to sell the stock at strike price A if the option is assigned (which is fine IF the price is below strike price A at assignment) but gives me the right to buy the stock at strike price B (which caps my loss if the price is above strike price A at assignment).
When to run this Play: You’re bearish on the stock. You expect neutral activity (if strike price A is out-of-the-money).

Index Options vs. Equity Options

There are quite a few differences between options based on an index versus those based on equities, or stocks.

First, index options typically can’t be exercised prior to expiration. Equity options typically can.

Second, the last day to trade most index options is the Thursday before the third Friday of the expiration month. (Not always the third Thursday of the month. It may actually be the second Thursday if the month started on a Friday.) But the last day to trade equity options is the third Friday of the expiration month.

Third, index options are cash-settled. Equity options result in stock changing hands.

NOTE: There are several exceptions to these guidelines about index options. If you’re going to trade an index, you must take the time to learn and understand its characteristics. See What is an Index Option?

Credit

Money you receive into your account from a trade. Example: you Sell-To-Open a Short Put Spread and receive a $100 credit to your account.

Debit

Money you pay out of your account for a trade. Example: you Buy-To-Close a Short Put Spread and pay a $10 debit from your account.

Sell-To-Open

Sell-to-open is the sale of a short position on an option by a trader that creates an open short option position. The trader receives cash (or the premium) for the option at the time of the sale. This receipt of cash from the sale is also called a “credit” to the traders brokerage account.
The Put or Call position associated with the option may be covered, in which the option owner owns the underlying stock, or naked, where the option owner does not own the underlying stock (naked positions are riskier).

Buy-To-Close

Buy-to-close is terminology that option traders use to describe a trade that closes (or exits) an open short position.
A sell-to-open order creates an open short option position. A buy-to-close order closes (or exits) the open position.

In-The-Money (ITM)

For Call options: this means the stock price is above the option strike price. So if a Call has a strike price of $50 and the stock is trading at $55, that option is in-the-money.
For Put options: this means the stock price is below the option strike price. So if a Put has a strike price of $50 and the stock is trading at $45, that option is in-the-money.

Out-Of-The-Money (OTM)

For Call options: this means the stock price is below the option strike price.
For Put options: this means the stock price is above the option strike price.
The cost of Out-Of-The-Money options is defined entirely by the options time-value.

At-The-Money (OATM)

An option is “at-the-money” when the stock price is equal to the strike price. Since the two values are rarely exactly equal, when purchasing options the strike price closest to the stock price is typically called the “ATM strike.”

Intrinsic Value

The amount an option is in-the-money. Obviously, only in-the-money options have intrinsic value.

Time Value

The part of an option price that is based on its time to expiration. If you subtract the amount of intrinsic value from an option price, you’re left with the time value. An option that has no intrinsic value is out-of-the-money and its entire worth is based on time value.

Exercise

Exercise happens when the owner of an option invokes the right embedded in the option contract. In layman’s terms, Exercise means the option owner buys or sells the underlying stock at the strike price, and requires the option seller to take the other side of the trade.

I rarely Exercise my option rights. I typically close my option positions before expiration.

Assignment

When an option owner exercises the option, an option seller (or “writer”) is assigned and must make good on his/her obligation. That means he or she is required to buy or sell the underlying stock at the strike price.

Long

The term “long” implies a position of ownership. After you purchase an option or a stock, you are considered to be long on that security in your account.

Short

If you have sold an option or stock without actually owning it, you are then considered to be “short” on that security in your account. That’s one of the interesting things about options. You can sell something you don’t actually own. But when you do, you may be obligated to do something (typically buy or sell) at a later date.

Strike Price

The pre-agreed price per share at which a stock may be bought or sold under the terms of an option contract. The strike price may also be referred to as the “exercise” price.

Hazeltree Shortside Crowdedness Report

The Hazeltree Shortside Crowdedness Report is a monthly rating of the top stocks being shorted by funds in Hazeltree’s community, which includes approximately 700 asset manager funds. Stocks are graded on a scale of 1-99, with 99 meaning 99% of funds are shorting that stock. I use this report to check if the market is bullish (a stock is not listed in the report or has a low rating), or bearish (a stock appears in the report and has a high rating) on a stock.