Plain-English definitions of every options-income term used on OptionIncomeTools. Each definition is written to be self-contained — designed for both human readers and AI engines that need a precise, quotable answer.
A neutral-to-bullish options strategy where the seller writes a put contract and sets aside cash collateral equal to 100 shares × strike price. The seller collects premium upfront. If the stock stays above the strike at expiration, the put expires worthless and the seller keeps the premium. If the stock falls below the strike, the seller is obligated to buy 100 shares per contract at the strike price.
A bullish-to-neutral options strategy where the seller sells a call contract against 100 shares of stock already owned per contract. The premium is collected upfront. If the stock stays below the strike at expiration, the call expires worthless and the seller keeps the shares and the premium. If the stock closes above the strike, the shares are sold (called away) at the strike price.
A continuous options income strategy combining cash-secured puts and covered calls. The seller sells CSPs on a stock they would be comfortable owning. If assigned, they sell covered calls against the stock. When the stock is called away, they restart with CSPs. Premium income compounds across cycles.
An option Greek measuring the change in option price for a $1 change in the underlying stock price. Call deltas range 0 to 1.0; put deltas range -1.0 to 0. Delta also approximates the probability the option finishes in-the-money at expiration.
An option Greek measuring the change in delta for a $1 change in the underlying stock price. Gamma is highest for at-the-money options near expiration. High gamma means delta changes rapidly with stock price moves.
An option Greek measuring daily time decay. Theta is negative for long options (they lose value daily) and positive for short options (sellers profit from time decay). Income strategies like the wheel monetize positive theta.
An option Greek measuring change in option price for a 1% change in implied volatility. Long options have positive vega; short options have negative vega. Selling premium when implied volatility is elevated captures the largest vega advantage.
An option Greek measuring change in option price for a 1% change in risk-free interest rates. Rho has minimal impact for short-dated options but matters for LEAPS and long-dated positions.
The market's forecast of the underlying stock's future volatility, derived from current option prices. Higher implied volatility means options are more expensive. Implied volatility is annualized and expressed as a percentage.
Current implied volatility expressed as a percentile of the past 52 weeks of IV. Formula: (Current IV − 52w IV Low) / (52w IV High − 52w IV Low) × 100. An IV Rank of 80 means options are unusually expensive for that specific stock.
The sharp drop in implied volatility immediately after a binary event like earnings. Pre-event, IV is inflated by outcome uncertainty. Post-event, IV collapses 30-80% overnight regardless of stock movement. Premium sellers benefit; long-option buyers are hurt.
Days to expiration. The number of calendar days until an option contract expires. Common income-strategy DTE windows: 7-14 (weekly), 21-45 (standard), 30-60 (conservative).
Per-cycle yield extrapolated to a full year. Formula: (premium ÷ capital at risk) × (365 ÷ DTE). A 1% return on a 30-day cycle equals approximately 12% annualized. It is a comparison metric, not a guaranteed annual return.
For cash-secured puts: premium received divided by collateral required, expressed as a percentage. ROC measures the income generated per dollar of cash tied up.
The net cost per share of stock acquired through assignment. For cash-secured puts: strike − premium received. For covered calls after multiple cycles: original cost − sum of all premiums received.
The price at which the option holder can exercise the contract. For puts, the strike is the price at which the seller may be obligated to buy shares. For calls, it is the price at which the seller may be obligated to sell shares.
The price paid for an option contract, quoted per share. Total premium per contract = quoted premium × 100 shares. For income strategies, premium is what the seller collects upfront.
The total number of outstanding option contracts of a specific strike and expiration. Open interest indicates liquidity — higher numbers mean tighter bid-ask spreads and easier exits.
The difference between the highest price buyers will pay (bid) and the lowest price sellers will accept (ask). Tight spreads (under 5%) indicate liquid options. Wide spreads make entering and exiting positions costly.
The probability that a short option will be exercised, requiring the seller to fulfill the contract. Assignment risk rises with delta, decreases with time, and spikes around ex-dividend dates for in-the-money calls.
The relationship between strike price and current stock price. Out-of-the-money (OTM): puts below spot or calls above spot. At-the-money (ATM): strike near spot. In-the-money (ITM): puts above spot or calls below spot.
The estimated chance an options trade ends profitable. For short premium strategies, PoP equals approximately 1 minus the absolute delta. Monte Carlo simulation provides more precise estimates.
The standard mathematical model for theoretical option pricing developed by Fischer Black, Myron Scholes, and Robert Merton. Inputs: stock price, strike, time to expiration, risk-free rate, and implied volatility.
The first trading day on which a stock trades without entitlement to the most recently declared dividend. Buyers on or after this date do not receive the dividend. Early exercise risk on in-the-money covered calls spikes near this date.
Closing an existing option position and simultaneously opening a new one at a different strike or expiration. Common reasons: avoid assignment, lock in profit, or extend time for a thesis to play out.
A four-leg options strategy combining a bull put spread and a bear call spread. Maximum profit occurs when the underlying stock stays between the two short strikes at expiration. Common in high-IV-Rank environments.
A two-leg options strategy of buying or selling a call and put at the same strike and expiration. Long straddles profit from large moves in either direction. Short straddles profit from small moves and IV crush.
A two-leg options strategy of buying or selling a call and put at different strikes (typically OTM) at the same expiration. Lower cost than a straddle but requires a larger move to profit.
A covered call placed simultaneously with the purchase of the underlying stock. Buy 100 shares and sell 1 call as a single combined order.
An options position replicating the payoff of owning stock: long call + short put at the same strike. Used when capital efficiency or borrowing constraints make direct stock ownership undesirable.