Option Terms Explained

This page explains the option words you will meet on the Options screen and in the option chain. It is written for someone who is new to options, so every term is in plain English.

Nothing here is a suggestion about what or when to trade, and nothing here says whether any structure is good or bad. It only explains what the words mean.

What an option contract is

An option is a contract on something else. That something else is called the underlying, and it is usually an index or a stock.

Two things are fixed into the contract:

• a strike price, and
• an expiry date.

There are two kinds of option contract, a call and a put. There are two sides to every contract, the buyer and the seller. Almost every option word on this page is one of those four things described in more detail.

Options are derivatives, so they are traded in the derivatives segment of the Indian stock exchanges rather than in the cash segment where shares are bought and sold.

Calls and puts

Term	What it is	When it gains value
Call (CE)	The right to buy the underlying at the strike price.	When the underlying goes up.
Put (PE)	The right to sell the underlying at the strike price.	When the underlying goes down.

On an option chain the calls are on the left, the puts are on the right, and the strike prices run down the middle. So the same strike has one call and one put beside it, and those two move in opposite directions.

You will see the short forms CE for a call and PE for a put in symbol names and on the screen.

Buying and selling an option

Every option contract has a buyer and a seller. The two sides are not mirror images of each other, because the risk is not the same.

• Buying an option means you pay the premium. That premium is the most you can lose. You do not have to add money later, whatever the market does.
• Selling an option, also called writing it, means you receive the premium. In return you take on the obligation in the contract. The loss is not limited to the premium you received, so your broker holds margin against the position and can ask for more if the market moves against you.

This difference is why a sold leg needs much more money behind it than a bought leg of the same contract. It is also why the Options screen always sends its buy legs before its sell legs.

Strike price

The strike is the price written into the contract. It is the price at which the underlying would be bought or sold if the contract were exercised.

Strikes are not free numbers. The exchange lists them at fixed steps, so you see a ladder of strikes going up and down from the current price, each one a fixed distance from the next. That distance is called the strike step, and it is different for different underlyings.

Expiry

The expiry is the date the contract ends on. After that date the contract no longer exists.

• Before expiry, the option’s price holds both the value it has today and the value of the time still left.
• At expiry, only the value it has today is left. An option that is not in the money at expiry simply expires worthless.

One underlying usually has several expiries listed at the same time, a nearer one and one or more further out. The same strike has a different price in each expiry, because a different amount of time is left in each.

Expiry dates, and how many are listed, are set by the exchange and change from time to time. Your broker’s contract details are the right place to check the exact date.

Lot size and quantity

Options are not traded one at a time. They trade in a fixed bundle called a lot.

• The lot size is how many units of the underlying one lot stands for. It is set by the exchange for each underlying.
• You trade in whole lots: one lot, two lots, and so on. You cannot trade half a lot.
• So the quantity that reaches the exchange is lots × lot size.

This matters when you read a profit or loss figure. A small move in the premium is multiplied by the lot size, so the money involved is much larger than the premium alone suggests.

This page does not print any lot size, on purpose. They are changed by the exchange from time to time, so a number written here would go stale and a wrong lot size sizes your whole order wrong.

To look one up, open Tools → Instruments in AutoTrader Web, search for the contract, and read the Lot Size column in the results. Your broker’s contract details are the other place to check. AutoTrader Web itself always uses the current lot size when it places your order.

Premium: the price of an option

The premium is the price of the option contract itself. It is not the price of the underlying.

• The buyer pays the premium.
• The seller receives it.

The premium is quoted per unit, so the money that actually changes hands for one lot is the premium multiplied by the lot size.

When a structure has several legs, the premiums are added together with their signs: what you pay for bought legs, less what you receive for sold legs. If more money goes out than comes in, the structure is a net debit. If more comes in than goes out, it is a net credit.

In the money, at the money, out of the money

These three describe where the strike sits compared with the current price of the underlying.

Term	A call is this when…	A put is this when…	What it means
In the money (ITM)	the underlying is above the strike	the underlying is below the strike	The option has real value today.
At the money (ATM)	the strike is at or very near the current price	the strike is at or very near the current price	It sits on the edge between the two.
Out of the money (OTM)	the underlying is below the strike	the underlying is above the strike	It has no value today, only a chance of gaining some.

On the option chain the in-the-money side is shaded, so you can see where the money is at a glance instead of comparing every number yourself.

Intrinsic value and time value

The premium of an option is made of two parts.

• Intrinsic value is the part that is real right now, which is how far the option is in the money. An out-of-the-money option has no intrinsic value at all.
• Time value is everything else in the premium. It is what buyers will pay for the chance that the underlying moves further before expiry.

Time value shrinks as expiry comes closer, and at expiry it is gone. That is why an option is worth only its intrinsic value on its last day, and why an out-of-the-money option expires worth nothing.

Breakeven

Breakeven is the price of the underlying at which a structure makes neither a profit nor a loss at expiry.

• On one side of that price the structure makes money; on the other side it loses money.
• A simple structure has one breakeven. A structure with legs on both sides, such as a straddle, a strangle or a condor, has two — one on each side.

The Options screen works out the breakeven for whatever you have built. It shows it in the header of the Payoff at expiry table, and again as a labelled row inside the table.

Breakeven is worked out from the premiums alone. It does not include brokerage, taxes or any other charge, so your real breakeven is a little further away than the figure shown.

Margin on options

Margin is the money your broker holds against a position.

• Bought options need no margin. You have already paid the premium, and that is the whole risk.
• Sold options need margin, because the possible loss is open ended. Your broker holds money against it and can ask for more if the market moves the wrong way.
• A hedged structure, where a bought leg limits what a sold leg can lose, usually needs far less margin than that sold leg would need on its own.

How much margin is required is decided by your broker and the exchange, not by AutoTrader Web. The Options screen shows each account’s available margin when you place, so you can see which accounts have room, but it does not work out the requirement itself. Your broker is the right place to check what a particular structure will need.

The Greeks

The Greeks are numbers that describe how an option’s price is expected to change. They are shown in the Greeks view of the option chain, and each one answers a different question.

Greek	What it measures	Unit used on the chain
Delta	How much the option price moves when the underlying moves.	With respect to the forward.
Gamma	How much delta itself changes when the underlying moves.	Raw — per one point of the forward. It is not rescaled.
Theta	How much value the option loses as time passes.	Per calendar day.
Vega	How much the option price moves when implied volatility changes.	Per 1% of implied volatility.
IV	Implied volatility, meaning how much movement the current price implies.	% annualised.

Units matter here. The same Greek is printed in different units by different tools, so a number that looks wrong is often just a different unit. Gamma on our chain is raw, per one point of the forward, which is the form most option traders use. A small screen cannot show this next to the column heading, so it is written here.

Greeks are calculated values, not prices quoted by the exchange. They move as the market moves, and they depend on the model used to work them out.

Multi-leg structures

A structure with more than one option contract in it is called multi-leg. Each contract inside it is a leg.

These are the common names. They describe the shape of a structure. They are not a recommendation to use any of them.

Name	What it is made of
Spread	Two legs of the same type, one bought and one sold at different strikes. A call spread uses two calls; a put spread uses two puts.
Straddle	A call and a put at the same strike, both bought or both sold.
Strangle	A call and a put at different strikes, both bought or both sold. Wider than a straddle.
Butterfly	Three strikes: one leg at an outer strike on each side, and double the quantity at the middle strike.
Iron fly	The same shape as a butterfly, built from calls and puts together — a short straddle at the middle strike, with a bought call and a bought put outside it.
Iron condor	Four legs: a call spread above the current price and a put spread below it. Flatter in the middle than an iron fly.

Two more words you will meet:

• Wing — the outer, bought legs of a four-leg structure. They limit how far the structure can lose.
• Width — how far apart the strikes of a structure are set.

On the Options screen these two words are the names of the controls that shape a template, and they have exact meanings there: Width is how far out of the money the main strikes sit, and Wing is the extra distance out to the protective legs. Both are counted in strike steps.

The Options screen offers several of these as ready-made templates, and you can also build any structure yourself by choosing the legs one at a time.

Words you will see on the Options screen

Word	What it means on the screen
Basket	The whole set of legs you have built, treated as one thing to place.
Leg	One option contract inside the basket, with its own side, strike and quantity.
Net credit / net debit	The premiums of every leg added together — money received, or money paid.
Multiplier	How many times the basket a particular account trades. An account at 3× places three times the size you built.
Allocation	A saved answer to which of your accounts trade and how much each one trades. You can keep several, name them, and pick one with a click when you place.
Width	How far out of the money the main strikes of a template sit, in strike steps.
Wing	The extra distance out to the protective legs of a four-leg template, in strike steps.
Payoff at expiry	What the basket would be worth at expiry, across a range of underlying prices.
Underlying	The index or stock the options are written on.
Forward	The price the underlying is expected to trade at on the expiry date. The Greeks are measured against it.

Numbers that change, and where to check them

Some numbers on this page have no fixed value. They change over time, so this page deliberately does not print any of them:

• lot sizes and strike steps (look a lot size up in Tools → Instruments),
• expiry dates, and how many expiries are listed,
• margin requirements for a structure,
• brokerage, taxes and other charges,
• market timings and square-off times.

All of these are set by your broker or by the exchange. Your broker is the right place to check the current figure for any of them.