Trading options without understanding the basic terminology will limit you. We use many of these terms in our Discord server during the trading day when making callouts or discussing potential trades. We cover and use many of these terms in our free Intro to Options Trading course, so feel free to reference this page whenever you get stuck.
Common Options Trading Terminology
Strike Price: In a call option, the strike price is the price an investor can buy the underlying stock associated with the contract. In a put option, the strike price is the price they can sell the underlying stock.
Call Option (Calls): A call option is an options contract that gives the purchaser the right to buy shares of a stock at the strike price.
An options trader will open a call option when they think that the underlying stock will go up by the expiration date.
Put Option (Puts): A put option is an options contract that gives the purchaser the right to sell shares of a stock at the strike price fixed price.
An options trader will open a put option when they think that the underlying stock will go down by the expiration date.
Implied Volatility: This is a critical concept to understand. Important enough that we published an entire course module on it. Implied volatility forecasts the likely movement of any stock’s price.
Bid/Ask Price: The bid price is the highest price a buyer is willing to pay for an option. The ask price is what the seller is willing to accept for an option.
Day Trading: This is when an options trader buys an options contract with the plan to sell it on the same day.
Swing Trading: This is when an options trader buys an options contract with the plan to sell it at least one day later.
Scalping: This is when an options trader (namely BootyTrades🍑) buys an options contract with the plan to sell it quickly. Sometimes a scalp is bought and sold within minutes.
Bull or Bullish: A bull market is when many stock prices are moving up in unison. Bullish options traders expect a stock to go up.
Bear or Bearish: A bear market is when many stock prices are moving down in unison. Bearish options traders expect a stock to go down.
Averaging Down: Averaging down a trade is when you add contracts to a position as the price changes to have a lower average entry point. A lower average entry point means that the underlying stock doesn’t need to move as much to make your trade profitable.
Pattern Day Trader (PDT): A pattern day trader (PDT) is a trader who executes four or more day trades within five business days using the same account. If you have less than $25,000 in your margin account, you will be automatically flagged by your broker and prohibited from making any further day trades. We created a free course video & wrote an article on how to get around the PDT rule with an account smaller than $25,000.
Stock Split: When a company increases the number of its shares to boost the stock’s liquidity by splitting a single share into multiple. This means that the shareholder will now have multiple shares for every single share they currently own.
Check back here for new additions to the common options trading terms list.
