Derivatives & Options

90 Derivatives & Options terms, defined in plain English — part of the 1345-term Finicade finance glossary. Each one has its own page, and links to the free game that teaches it.

0DTE Options: 0DTE options expire the same day they're traded, and they now make up roughly half of S&P 500 option volume.
Accumulator: A structured contract to buy an asset at a discount at regular intervals — as long as it stays above a barrier.
American Option: An option you can exercise any time up to expiry, not just on the final day.
Arbitrage: Earning a riskless profit by exploiting a price difference for the same thing in two places — buy where it's cheap, sell where it's dear.
Asian Option: An option whose payoff depends on the average price over its life, not just the price at expiry.
Assignment: Assignment is what happens to an option seller when the buyer exercises: you're obliged to deliver, buying or selling the underlying at the strike.
Autocallable: A structured product that automatically redeems early, paying a set coupon, if the underlying is above a level on a check date.
Backwardation: When futures prices sit below today's spot price, so the curve slopes down — often a sign of tight supply or strong demand for the asset right now.
Barrier Option: An option that switches on or off if the price touches a set level — a 'knock-in' comes alive, a 'knock-out' dies.
Basket Option: An option on a weighted group of assets rather than a single one — paying off on the basket's combined value.
Bermudan Option: An option you can exercise on several set dates, not just at expiry (European) or any time (American) — the halfway house, named for the island between the two.
Binary Option: An all-or-nothing option: it pays a fixed amount if a condition is met at expiry, and zero otherwise.
Black–Scholes Model: The Nobel-prize-winning formula that prices an option from five ingredients: today's price, the strike, time to expiry, interest rates and volatility.
Butterfly Spread: An options combination that profits if the price lands near a target and stays there — cheap to put on, with limited risk and reward.
Calendar Spread: A calendar spread sells a near-dated option and buys a longer-dated one at the same strike, harvesting the fact that short-dated options decay faster.
Call Option: The right to buy an asset at a fixed strike price before expiry.
Cash-Secured Put: A cash-secured put is selling a put while holding enough cash to buy the shares if assigned.
Chooser Option: An option that lets you decide later whether it's a call or a put.
Cliquet Option: A cliquet option is a series of forward-starting options that lock in gains at set intervals, resetting the strike each time — a ratchet.
Collar: Protecting a stock holding by buying a put and selling a call to help pay for it — capping both your downside and your upside.
Composite Option: An option on a foreign asset whose strike and payoff are converted at the live exchange rate — you're exposed to both the asset and the currency.
Compound Option: An option on an option — the right to buy or sell another option later, for a set premium.
Contango: When futures prices sit above today's spot price, so the curve slopes up — typical when it costs money to store an asset until delivery.
Cost of Carry: The net cost of holding an asset until a futures delivery date — storage and financing, minus any income it throws off.
Covered Call: Owning a stock and selling a call option against it to pocket the premium as income.
CPPI: CPPI shifts money between a risky asset and a safe one to keep a floor intact, buying more risk as the cushion grows — portfolio insurance by rule.
Currency Swap: A currency swap exchanges principal and interest payments in one currency for those in another, and unlike a rate swap the principal genuinely is exchanged.
Daily Settlement: The futures market's habit of tallying gains and losses every single day and moving cash between accounts — 'marking to market'.
Delta: How much an option's price moves for a $1 move in the underlying — the first and most-watched Greek.
Delta Hedging: Neutralising an option's directional risk by holding an offsetting amount of the underlying — delta-many shares per option — and topping it up as delta drifts.
Derivative: A contract whose value derives from something else — a stock, an interest rate, a barrel of oil.
Early Exercise: Exercising an American option before expiry.
Equity-Linked Note: A bond whose payoff is tied to a stock or index instead of a fixed coupon — a packaged bet dressed as a note.
European Option: An option that can only be exercised on its expiry date, not before.
Exchange Option: The right to swap one asset for another — say, give up stock A to receive stock B.
Exercise: Exercise is invoking your right as an option holder to buy or sell at the strike price.
Exotic Option: Any option more complex than a plain call or put — barriers, Asians, digitals, lookbacks.
Expiration: The date an option or futures contract ends.
Forward Contract: A private agreement to trade an asset at a set price on a future date — like a futures contract but bespoke and off-exchange.
Futures Contract: A binding agreement to buy or sell something at a fixed price on a future date.
Gamma: How fast delta itself changes as the underlying moves — the Greek of a Greek.
Gamma Squeeze: A gamma squeeze is a feedback loop where heavy call buying forces dealers to hedge by buying the underlying, pushing the price up and forcing more buying.
Hedging: Taking one position to offset the risk of another, like insurance you build yourself.
Implied Volatility: Implied volatility is the volatility that makes a model's option price match the market price: the market's turbulence forecast, read out of prices.
Initial Margin vs Variation Margin: Initial margin is collateral posted upfront to cover potential future losses; variation margin is cash moved daily to settle losses that have already happened.
Interest Rate Cap and Floor: A cap pays out when a floating rate rises above a set level, a floor when it falls below one — insurance on borrowing or lending costs.
Interest Rate Swap: An interest rate swap exchanges a fixed rate for a floating one on a notional amount that never changes hands.
Intrinsic Value: The part of an option's price you'd pocket if you exercised it right now — how far in-the-money it is.
Iron Condor: An iron condor sells an out-of-the-money call spread and put spread at once, profiting if the underlying stays inside a range until expiry.
LEAPS: LEAPS are exchange-traded options with expiries more than a year out.
LIBOR: LIBOR was the benchmark rate at which banks said they could borrow from each other, and for decades it priced hundreds of trillions in loans and derivatives.
Lookback Option: A lookback option pays off against the best price reached over its life rather than the price at expiry — perfect hindsight, at a price.
Max Pain: Max pain is the strike at which the largest dollar value of options expires worthless — the price that would hurt option buyers most.
Moneyness: Moneyness is where an option's strike sits versus the current price — in-the-money, at-the-money or out-of-the-money.
Naked Option: A naked option is one sold without holding the underlying or the cash to cover it.
Open Interest: Open interest is the number of derivative contracts currently outstanding — opened and not yet closed or expired.
Option: The right — but not the obligation — to buy (a call) or sell (a put) at a set price before a set date.
Option Premium: The price you pay to buy an option — its whole cost, and the most a buyer can lose.
Option Strategies: Combining calls and puts into a shaped bet — spreads, straddles, collars, butterflies — to profit from a specific view on direction or volatility.
Options Chain: An options chain is the grid of every listed option on one underlying, laid out by strike and expiry.
Overnight Index Swap (OIS): An OIS swaps a fixed rate against the compounded overnight rate, so its fixed leg is a clean market forecast of average central bank policy over the term.
Path Dependence: When a payoff depends not just on the final price but on the whole route it took to get there.
Principal Protection: A structured product that guarantees your original money back while giving some of the upside of a risky asset — built from a safe bond plus an option.
Protective Put: Holding a stock and buying a put on it as insurance — the put caps your downside while you keep all the upside.
Put Option: The right to sell an asset at a fixed strike price before expiry.
Put-Call Parity: A no-arbitrage identity tying a call, a put, the stock and a bond into one equation: hold the right combination and two portfolios must cost the same.
Quanto Option: An option on a foreign asset that pays out in your home currency at a fixed exchange rate — so you get the asset's move without the currency risk.
Reverse Convertible: A structured note paying a fat coupon, with a catch: if the linked stock falls past a barrier, you're repaid in the fallen shares instead of cash.
Rho: How much an option's price responds to a change in interest rates.
Roll Yield: Roll yield is the gain or loss from replacing an expiring futures contract with a later-dated one.
Rolling an Option: Rolling closes an option position and reopens it at a later expiry or a different strike, usually to avoid assignment or buy a losing trade more time.
Second-Order Greeks: Second-order Greeks measure how the first-order Greeks themselves move.
Shout Option: An option that lets you 'shout' once to lock in the current gain as a floor, while keeping the upside if the price climbs further.
SOFR: SOFR is the Secured Overnight Financing Rate — the cost of borrowing cash overnight against US Treasuries, and LIBOR's replacement.
Spread Option: An option on the difference between two prices — the gap between crude and refined oil, or two interest rates.
Straddle: Buying a call and a put at the same strike, betting on a big move in either direction.
Strike Price: The fixed price at which an option lets you buy or sell the underlying.
Swap: A contract to exchange two streams of cash flows — classically, swapping a floating interest rate for a fixed one.
Swaption: An option on a swap — the right, not the obligation, to enter an interest-rate swap on set terms later.
The Greeks: The Greeks are the sensitivities of an option's price — delta, gamma, vega, theta and rho — the dials a trader watches to hedge a book.
The Wheel Strategy: The wheel sells cash-secured puts until assigned, then sells covered calls on the shares until called away, then starts again.
Theta: The rate an option loses value as a day passes, all else equal — time decay.
Time Value: The slice of an option's premium beyond its intrinsic value — what you pay for the chance the price moves further your way before expiry.
Total Return Swap: A total return swap pays one party the entire return of an asset — price change plus income — for a financing rate, without them ever owning it.
Underlying Asset: The thing a derivative derives its value from — the stock behind an option, the oil behind a futures contract.
Variance Swap: A variance swap pays the difference between the volatility an asset actually realises and a level agreed up front — a pure bet on volatility.
Vega: How much an option's price moves when volatility changes by one percentage point.
Vertical Spread: A vertical spread buys one option and sells another of the same type and expiry at a different strike, capping both the cost and the payoff.
Volatility Smile: The real-world pattern where options far from the money imply higher volatility than those at the money — plotting them curves like a smile or skew.
Volatility Term Structure: The volatility term structure is implied volatility plotted across expiries for a given strike.

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