Glossary

Every term the course uses — plain English first, precision second. Sessions link here on a term’s first use, and this page is always open-book (except during warm-ups). Entries marked PRO are professional-tier vocabulary from the desk modules; don’t worry if they look alien early on — they’ll be old friends by Module 10.

0–9

0DTE PRO: An option on its final day of life — zero days to expiry. Gamma and theta are at their most extreme, so small stock moves flip deltas violently; 0DTE index options now make up a large share of all S&P option volume, and dealers’ hedging of them can shape the day’s price action. See also: gamma, pin risk, GEX

A

Adverse selection PRO: The market maker’s occupational hazard: the trades that reach you are disproportionately the ones where the other side knows something you don’t. It’s why quoting wider isn’t greed — it’s rent charged against informed flow. See also: market maker, edge, bid–ask spread
American option: An option you may exercise on any trading day up to and including expiry. Most listed single-stock options are American; early exercise is rarely optimal except around dividends or for deep-ITM puts, because exercising throws away remaining time value. See also: European option, exercise
Arbitrage: A trade that locks in profit with no risk and no net investment — free money. Real markets snuff these out almost instantly, and “no arbitrage” is the assumption from which all option pricing (put–call parity, the binomial tree, Black–Scholes) is built. See also: put–call parity, replication
Asian option PRO: An exotic whose payoff depends on the average price over a window rather than the price on the final day. Averaging smooths away the endpoint lottery, so Asians are cheaper than vanillas — popular with corporates hedging a stream of monthly exposures. See also: lookback option
Assignment: What happens to the short side when a holder exercises: the seller is assigned and must deliver shares at the strike (short call) or buy them at the strike (short put). If you’re short an ITM option into expiry, expect it. See also: exercise, pin risk
ATM (at the money): A strike at, or nearest to, the current stock price — the $100 strike with ACME at $100. ATM options carry the most time value and the largest gamma and vega; desks usually measure “at the money” against the forward rather than spot. See also: moneyness, forward price
Autocallable PRO: A structured note that pays a fat coupon and automatically redeems (“calls itself”) early if the stock is above a set level on an observation date — while exposing the buyer to losses below a downside barrier. The coupon is the price of a down-and-in put the buyer is implicitly selling; street-wide issuance leaves dealers warehousing the long side — long downside volatility they recycle by selling vol in calm markets and scramble to re-hedge in sell-offs, a recurring source of market fragility. See also: structured product, barrier option, knock-in

B

Backtest PRO: Running a strategy’s rules over historical data to see how they would have performed. Useful for shape and sanity, dangerous for certainty: costs, capacity, and overfitting all flatter the simulated curve. See also: overfitting, Sharpe ratio, slippage
Barrier option PRO: An option that switches on or off when the stock crosses a preset level. Cheaper than the vanilla because it can abandon you exactly when you’d want it most — and hedging one near its barrier is famously treacherous, since value jumps discontinuously there. See also: knock-out, knock-in, digital option
Bid–ask spread: The gap between the highest price buyers will pay (the bid) and the lowest price sellers will accept (the ask). It’s the market maker’s compensation and your immediate cost: cross a $0.10-wide market to get in and out and you’ve paid $0.10 a share before anything happens. See also: market maker, liquidity, slippage
Binomial model: Pricing by chopping time into steps where the stock can only move up or down, then working backwards from expiry, replicating the option with stock and cash at every node. With enough steps it converges to Black–Scholes — same logic, coarser grid. See also: replication, Black–Scholes, risk-neutral pricing
Black–Scholes: The 1973 landmark formula giving a fair option price from five inputs: stock price, strike, time to expiry, interest rate, and volatility. Its deeper message is that an option can be manufactured by continuously trading stock and cash — so its price is the cost of that manufacturing, not anyone’s forecast. See also: replication, implied volatility, d₁
Breakeven move: The daily stock move at which a long option position’s gamma winnings exactly cover its theta bill. Handy approximation: it’s the implied daily move, about annual IV ÷ 16 — move more than that and long gamma wins the day; move less and the rent eats you. See also: rule of 16, gamma, theta
Butterfly spread: A three-strike structure — e.g. long one $95 call, short two $100 calls, long one $105 call — that pays most if the stock finishes near the middle strike, with small, capped risk. On vol desks “the fly” also names the smile’s curvature: how much the wings cost over the ATM. See also: condor, smile, ratio spread

C

Calendar spread: Sell a near-dated option and buy a longer-dated one at the same strike. You’re renting out fast-decaying near-term theta while keeping slower-decaying vega — a bet on time passing quietly, on term structure, or on an event repricing. See also: term structure, diagonal spread, theta
Call option: The right, but not the obligation, to buy stock at a fixed strike price by expiry. Pay ≈$4 today for the one-month ACME $100 call: below $100 at expiry you walk away and lose the $4; above it you’re paid dollar-for-dollar. See also: put option, option, premium
Cap & floor PRO: The interest-rate world’s calls and puts: a cap is a strip of optionlets that pay whenever a floating rate fixes above the cap rate; a floor pays when it fixes below the floor rate. Quoted in normal (basis-point) vol rather than percent vol. See also: swaption, normal vol
Carry PRO: What a position earns or bleeds if the world stays exactly where it is — for options, mostly theta collected versus gamma given up. “Positive carry” trades pay you to wait; the recurring catch is that carry is usually compensation for a tail you haven’t met yet. See also: theta, variance risk premium
Cash-secured put: Selling a put while parking enough cash to buy the shares if assigned — short the one-month ACME $95 put for ≈$2 with $9,500 set aside. Either you keep the premium, or you buy a stock you wanted anyway at an effective $93. See also: covered call, assignment
Charm PRO: Delta’s drift as one day passes with nothing else moving (quoted per day, like theta). It’s why an OTM option’s delta melts toward 0 and an ITM option’s climbs toward ±1 into expiry — and why a book hedged flat last night needs re-truing this morning. See also: delta, vanna, delta hedging
Collar: Long stock, plus a protective put below, financed by selling a call above — own ACME at $100, buy the $90 put, sell the $110 call, often for roughly zero net premium. You’ve boxed the outcome into a band: floored downside, capped upside. See also: risk reversal, covered call
Condor: A butterfly with the middle pulled apart: four strikes, e.g. short the $95/$105 strangle and long the $90/$110 wings (an “iron condor” when built from both puts and calls). Sold, it pays if the stock stays inside the body; the wings cap the damage when it doesn’t. See also: butterfly spread, strangle
Contract multiplier: The number of shares one listed contract controls — 100 for US equity options. A $2.50 quoted premium is $250 per contract, and 3 contracts of a 0.40-delta call carry the stock exposure of 3 × 100 × 0.40 = 120 shares. See also: premium, delta
Convexity PRO: Curvature in a payoff: gains that accelerate and losses that decelerate as the move grows. Options are convexity machines — a long option’s delta grows as you win and shrinks as you lose — and convexity is what you’re really buying in a tail hedge. See also: gamma, tail hedge
Covered call: Own the stock, sell a call against it — hold ACME at $100 and sell the one-month $105 call for ≈$2. The premium is income and cushion; the cost is giving up upside beyond $105. By put–call parity it has the same shape as a short put. See also: cash-secured put, put–call parity

D

d₁: The first Black–Scholes ingredient: a standardized, volatility-adjusted measure of how far the stock sits from the strike (with a +½σ² correction), in units of one standard deviation σ√T. N(d₁) is the call’s delta — the hedge ratio. See also: d₂, delta, Black–Scholes
d₂: Simply d₁ − σ√T. N(d₂) is the risk-neutral probability that the option finishes in the money — the chance of exercise in the pricing world, which is not a real-world forecast. See also: d₁, risk-neutral pricing, digital option
Delta (Δ): How much an option’s price changes per $1 move in the stock — the slope. A 0.62-delta call gains about $0.62 on a $1 rally; delta doubles as the hedge ratio (62 shares per contract) and as a rough probability of finishing in the money. See also: gamma, delta hedging, moneyness
Delta hedging: Neutralizing an option’s directional risk by holding −Δ shares against it and re-trading as delta changes. It converts a bet on direction into a bet on volatility — and it is the daily craft of every options desk. See also: delta-neutral, gamma scalping, replication
Delta-neutral: A position whose deltas sum to zero, so a small stock move leaves P&L unchanged to first order. Not “no risk”: gamma, theta, and vega are all still alive — you’ve only removed the directional opinion. See also: delta hedging, gamma
Diagonal spread: A calendar with a twist: different expiries and different strikes — e.g. buy a six-month $100 call, sell a one-month $110 call against it. It blends a vertical’s directional lean with a calendar’s theta rental. See also: calendar spread, vertical spread
Digital (binary) option PRO: Pays a fixed amount if the stock is beyond the strike at expiry — all or nothing. Its price is essentially the discounted probability N(d₂), and it behaves like an impossibly tight call spread, which is why hedging one near the strike at expiry is a knife-edge. See also: d₂, barrier option, pin risk
Dispersion trading PRO: Selling index volatility and buying volatility on the index’s members (or the reverse) — a bet on correlation, because index vol is average single-name vol glued together by correlation. Classic form: short index straddles versus long single-stock straddles. See also: implied correlation, variance swap
Distribution: The full menu of possible outcomes with their probabilities — for a stock, the bell-ish curve of where price might sit at some horizon. Options are priced off the whole distribution, not a single forecast, which is why tails and skew matter so much. See also: lognormal, expected value
Drawdown PRO: The peak-to-trough loss of a strategy or account — the number that ends careers before long-run averages get a chance to work. Short-vol strategies specialize in long, smooth gains punctuated by sudden, deep drawdowns. See also: Sharpe ratio, Kelly criterion, VaR
Drift: The average direction of a random walk — the μ in stock-price models. Over short horizons it’s tiny next to volatility (the √t law: wiggle beats trend), which is why option pricing can afford to ignore your market view entirely. See also: random walk, risk-neutral pricing

E

Edge PRO: The gap between the price you trade at and fair value — the market maker’s expected profit per trade. Collect small edge many times and hedge away the risk: that, not prediction, is the professional business model. See also: market maker, adverse selection
European option: An option that can be exercised only at expiry itself, not before. Major index options are typically European, and Black–Scholes prices European options; for most purposes the practical difference from American style is small. See also: American option, exercise
Exercise: Using your right: converting the option into its promised stock trade — buying at the strike (call) or selling at the strike (put). In practice you usually sell the option instead, because exercising forfeits any remaining time value. See also: assignment, time value
Expected shortfall (CVaR) PRO: The average loss across the worst q% of outcomes — “when the bad tail hits, how bad is it on average?” It repairs VaR’s blind spot: VaR marks the fence line; expected shortfall measures how far the cliff drops beyond it. See also: VaR, stress test
Expected value: The probability-weighted average outcome: sum of payoff × chance. A ticket paying $100 with 3% probability has an expected value of $3 — the anchor for “fair price”, before hedging costs and risk premia adjust it. See also: distribution, risk-neutral pricing
Expiry (expiration): The date the contract ends and the option collapses to its intrinsic value. Everything an option is — time value, theta, gamma — is organized around this deadline. See also: time value, 0DTE

F

Forward price: The fair price agreed today for buying the stock at a future date: spot grown at the interest rate, net of dividends (F = S·e^(r−q)T). Desks measure moneyness and quote strikes against the forward, not spot — “the 95%F put”. See also: moneyness, synthetic, put–call parity
Forward volatility PRO: The implied vol between two future dates that today’s term structure implies — e.g. the 3-to-6-month vol baked inside the 3m and 6m quotes. Variances add across time: σ²₀₋₆ₘ·T₆ = σ²₀₋₃ₘ·T₃ + σ²₃₋₆ₘ·(T₆−T₃). See also: term structure, calendar spread

G

Gamma (Γ): How fast delta changes per $1 of stock move — the curvature of the option’s value. Long gamma bends you the right way (deltas grow into winners, shrink out of losers); it peaks at the money near expiry, and it’s exactly what you pay theta to own. See also: delta, theta, convexity
Gamma scalping PRO: The long-gamma money machine: hedged flat, you’re mechanically forced to sell after rallies and buy after dips as your deltas swing — buy low, sell high, by construction. The scalps are real income; the question is always whether they beat the theta rent. See also: delta hedging, breakeven move
GEX (gamma exposure) PRO: An estimate of dealers’ aggregate gamma, built from open interest. When dealers are long gamma their hedging leans against the market (sell rallies, buy dips) and dampens moves; when they’re short, hedging chases moves and amplifies them — a market-wide weather report. See also: market maker, pin risk, open interest

H

Hedge: A position added to reduce a risk you already carry, usually at some cost — the put under your stock, the shares against your short call. Hedging trades away expected return for survivability. See also: delta hedging, tail hedge, collar

I

Implied correlation PRO: The average pairwise correlation that reconciles an index’s implied vol with its members’ implied vols. It usually trades rich versus realized correlation — the premium dispersion trades harvest — and it lurches toward 1 in crashes, when everything falls together. See also: dispersion trading, worst-of
Implied move PRO: The move the market has priced in for a horizon or an event, read straight off the ATM straddle: roughly straddle price ÷ stock price, or IV ÷ 16 for a single day. The pre-earnings question is never “will it move?” but “more or less than the implied move?” See also: straddle, rule of 16
Implied volatility (IV): The volatility number that makes Black–Scholes reproduce an option’s market price — the market’s traded price of uncertainty, quoted in vol points. Comparing what’s implied with what the stock subsequently realizes is the core professional vol trade. See also: realized volatility, vega, smile
Intrinsic value: What exercising right now would collect: max(S − K, 0) for a call, max(K − S, 0) for a put. With ACME at $107, the $100 call has $7 of intrinsic value; anything you pay above that is time value. See also: time value, moneyness
Inventory risk PRO: The risk a market maker carries between taking a trade and laying it off: holding whatever flow handed you while prices move. Quotes skew to shed unwanted inventory — a dealer’s prices are partly a position advertisement. See also: market maker, adverse selection
ITM (in the money): An option that already has intrinsic value: a call struck below the stock (the $95 call with ACME at $100) or a put struck above it. High delta, stock-like behavior, more expensive premium but relatively little time value. See also: moneyness, intrinsic value

K

Kelly criterion PRO: The bet size that maximizes long-run compound growth — for a simple repeated bet, roughly edge divided by variance (f* = μ/σ²). Over-betting Kelly is punished far more brutally than under-betting, which is why sensible desks size at a fraction of it. See also: drawdown, margin
Knock-in PRO: A barrier option that starts dormant and only becomes a live vanilla if the stock touches the barrier. The down-and-in put embedded in autocallables is the classic example — downside risk that wakes up precisely in a sell-off. See also: barrier option, knock-out, autocallable
Knock-out PRO: A barrier option that dies if the stock touches the barrier — an up-and-out call, say, that vanishes on a rally through $120. Cheaper than the vanilla because it abandons you in some of the states you’d have been paid in; hedges gap wildly near the barrier. See also: barrier option, knock-in

L

Leverage: Controlling a large exposure with a small outlay. A ≈$4 call on a $100 stock commands the upside of $100 of stock — 25× the notional per dollar — which magnifies percentage gains and losses alike; options add asymmetry on top of the amplification. See also: margin, contract multiplier
Liquidity PRO: How much you can trade, how quickly, without moving the price — visible as tight spreads and deep quotes. Liquidity is a fair-weather friend: it evaporates precisely in the stressed moments when you most need to trade. See also: bid–ask spread, slippage
Lognormal: The distribution Black–Scholes assumes for future prices: returns are normal, so prices are skewed to the right and can never go below zero. Real markets keep the shape but grow fatter tails and a heavier downside than the pure lognormal admits. See also: distribution, random walk, smile
Long: Owning something. Long stock profits when price rises; long an option means you bought it and own its rights — paying premium and theta in exchange for convex, capped-loss payoff. The opposite side of every long is a short. See also: short, premium
Lookback option PRO: An exotic that pays off the best price achieved over the window — buying the low or selling the high, in hindsight. Perfect timing, sold as a product; priced accordingly, at roughly twice the vanilla. See also: Asian option, barrier option

M

Margin PRO: Collateral your broker or clearinghouse demands against positions that can lose more than you paid — short options above all. Margin calls arriving at the worst possible moment are the transmission mechanism of most blowups. See also: short, leverage, drawdown
Market maker: The dealer who quotes both a bid and an ask, earning the spread for standing ready to trade with anyone. Market makers hedge their deltas immediately and manage the leftover Greeks — most option “sellers” you face are hedged dealers, not gamblers. See also: bid–ask spread, edge, inventory risk
Max pain PRO: The expiry price at which the total value of all outstanding options is smallest — where option holders in aggregate “hurt most”. Folklore says prices gravitate there; the respectable version of the story is dealers hedging large open interest, i.e. pinning. See also: pin risk, open interest, GEX
Moneyness: Where the strike sits relative to the stock (or its forward): in, at, or out of the money. Pros express it as a percentage — the “95% put” on a $100 stock — or in delta terms, like “the 25-delta call”. It’s the option’s address on the payoff map. See also: ITM, ATM, OTM
Monte Carlo simulation: Pricing by brute-force imagination: simulate thousands of random price paths, average the payoffs, discount back. Slower than a formula but unfazed by path-dependent exotics — the Swiss Army knife of quantitative pricing. See also: random walk, lognormal, expected value

N

Normal vol (bp vol) PRO: Volatility quoted in absolute basis points of the underlying rate rather than as a percentage of its level — the convention in rates markets, where a move from 1% to 2% is enormous and percent-of-level vol would mislead. A 90bp normal vol means a one-sigma year shifts the rate about ±0.90%. See also: swaption, cap & floor

O

Open interest: The number of contracts currently alive — created when both sides open, destroyed when they close. Unlike volume it measures standing positions, which is why open interest by strike is the raw material for pinning and dealer-gamma analysis. See also: volume, GEX, max pain
Option: A contract granting the right, but not the obligation, to buy (call) or sell (put) an asset at a set strike by a set expiry, in exchange for an upfront premium. That asymmetry — capped loss, open-ended gain — is the entire subject. See also: call option, put option, premium
Option chain: The full quote board for one underlying: every strike and expiry with its bid, ask, volume, open interest, and implied vol. Reading a chain fluently — spotting the ATM, the skew, the crowded strikes — is a core practical skill. See also: bid–ask spread, open interest
OTM (out of the money): An option with no intrinsic value yet: a call struck above the stock (the $110 call with ACME at $100) or a put struck below it. Pure time value and low delta — cheap convexity, and the natural home of both hedges and lottery tickets. See also: moneyness, time value
Overfitting PRO: Torturing a backtest until it confesses: tuning rules so tightly to the past that they fit its noise, then fail out of sample. The tells are too many parameters, a too-beautiful Sharpe, and performance that dies the day you go live. See also: backtest, Sharpe ratio

P

P&L attribution PRO: The desk’s daily autopsy: explaining a book’s profit as delta × move + ½·gamma × move² + theta + vega × Δσ + smaller terms. If a chunk lands in “unexplained”, your model — or your Greeks — are lying to you. See also: gamma, theta, vega
Payoff diagram: The hockey-stick chart of profit versus stock price at expiry — this course’s basic instrument. Kinks sit at strikes, stacking legs adds their diagrams together, and the smooth curve floating above it is the option’s value before expiry. See also: intrinsic value, strike
Pin risk PRO: The agony of a short option expiring exactly at the strike: you can’t know whether you’ll be assigned, so you can’t know your weekend position. More broadly, “pinning” is price gravitating toward big open-interest strikes as hedgers trade their gamma. See also: assignment, max pain, GEX
Premium: The price of the option — what the buyer pays the seller upfront, quoted per share ($2.87) and settled per contract (×100 = $287). It decomposes into intrinsic value plus time value. See also: intrinsic value, time value, contract multiplier
Put option: The right, but not the obligation, to sell stock at the strike by expiry — insurance you can also speculate with. The one-month ACME $95 put for ≈$2 pays dollar-for-dollar below $95: a floor for the stockholder, a capped-risk short for the bear. See also: call option, hedge, cash-secured put
Put–call parity: The first law of options: call − put = stock − PV(strike), for European options sharing a strike and expiry. Calls and puts differ only by a stock position — so any violation is an arbitrage, not an opinion. See also: synthetic, arbitrage, forward price

Q

Quanto PRO: A cross-currency derivative whose payoff converts at a fixed exchange rate — a Nikkei option that pays in dollars one-for-one, whatever the yen does. The fixed conversion leaves the dealer holding equity–FX correlation risk, and pricing picks up a correction for it. See also: implied correlation, worst-of

R

Random walk: A path built from independent random steps — the base model for market prices. Its signature is the √t law: uncertainty grows with the square root of time, which is why a 16-vol stock moves about 1% on a typical day. See also: drift, volatility, rule of 16
Ratio spread: A spread with unequal legs — e.g. buy one $100 call, sell two $110 calls. The extra short option cheapens the entry (sometimes to a credit) and sweetens the payout at the short strike, but leaves naked risk beyond it. See also: vertical spread, butterfly spread
Realized volatility: The volatility a stock actually delivered, computed from historical returns and annualized (√252 trading days). It’s the settle-up counterpart to implied vol: long vol positions win when realized comes in above the implied you paid. See also: implied volatility, variance swap, vol cone
Replication: Manufacturing an option’s payoff from stock and cash, rebalanced through time. If a portfolio replicates the option, it must cost what the option costs — the no-arbitrage engine inside the binomial tree and Black–Scholes. See also: binomial model, Black–Scholes, delta hedging
Rho (ρ): Sensitivity to interest rates: the change in option value per one-point move in rates. The sleepiest Greek for short-dated equity options; it wakes up for long-dated LEAPS and runs the show in rates products. See also: vega, swaption
Risk-neutral pricing: The pricing trick at the heart of the course: because hedging removes direction, you may price as if every asset drifts at the risk-free rate, using “risk-neutral” probabilities. Those probabilities — like N(d₂) — are a pricing device, not a forecast of the real world. See also: replication, d₂, drift
Risk reversal: Sell an OTM put to finance an OTM call, or the reverse — e.g. short the 25-delta put, long the 25-delta call, near zero cost: synthetic bullishness. On vol desks “the 25-delta RR” also measures the smile’s tilt: call IV minus put IV at matched deltas — negative in equities, where the put wing trades rich. See also: skew, collar
Rule of 16: Annual vol ÷ 16 ≈ daily vol, because √252 ≈ 15.9. A 32-vol stock implies ±2% typical days; a stock moving 1.5% a day is running about 24 realized. The fastest mental-math tool on the desk. See also: volatility, implied move, breakeven move

S

SABR PRO: The workhorse stochastic-vol model (“stochastic alpha, beta, rho”) desks use to fit and interpolate smiles, especially in rates. Its parameters map to trader intuition: overall vol level, backbone behavior, spot–vol correlation (skew), and vol-of-vol (curvature). See also: smile, vol of vol
Sharpe ratio PRO: Return per unit of risk: excess return divided by the volatility of returns. The standard yardstick — and blind to skew, which is how short-vol strategies print beautiful Sharpes right up until the drawdown that erases them. See also: drawdown, variance risk premium
Short: Sold — and holding the obligation side of the trade. Short stock profits when price falls; short an option means you collected the premium and owe the payoff, with capped gain and (for calls) open-ended risk. The house side of the bet. See also: long, assignment, margin
Skew: The smile’s tilt: in equities, OTM puts trade at higher implied vol than same-distance OTM calls — fear has a price, and crash protection is structurally bid. Measured by the 25-delta risk reversal; it steepens when hedging demand surges. See also: smile, risk reversal, sticky strike
Slippage PRO: The gap between the price you modeled and the price you actually got — spreads, market impact, and queue position, compounded every time you re-hedge. The silent tax that turns fine backtests into mediocre live results. See also: bid–ask spread, liquidity, backtest
Smile: Plot implied vol against strike and it isn’t flat: wings trade over the ATM, curving like a smile (in equities, a lopsided smirk). It’s the market repricing Black–Scholes’ too-thin tails — the volatility surface’s first fact. See also: skew, volatility surface, butterfly spread
Sticky delta PRO: A rule of thumb for how the smile moves with spot: vol attaches to moneyness (delta), so the whole surface slides along with the stock. Typical of trending and FX-like regimes. Which stickiness rules changes what your true delta is. See also: sticky strike, volatility surface
Sticky strike PRO: The rival rule: each fixed strike keeps its implied vol as spot moves, so the ATM vol changes as the stock slides along the skew. Equity indices often behave this way in calm markets — and the sticky-strike vs sticky-delta question decides your real hedge ratio. See also: sticky delta, skew
Straddle: Long a call and a put at the same (ATM) strike: you’re not picking a direction, you’re buying movement. It costs ≈0.8·S·σ·√T, and its price divided by spot is the implied move; sold, it’s a pure bet on calm. See also: strangle, implied move, volatility
Strangle: The straddle’s cheaper cousin: long an OTM call and an OTM put — the $105 call plus the $95 put. It needs a bigger move before it pays but costs less to hold; sold, it’s the classic “income” trade with tails attached. See also: straddle, condor
Stress test PRO: Asking the portfolio what happens in specified disasters — “2008 replay”, “spot −10%, vol +15 points” — rather than in average wiggles. The grid version, P&L across spot × vol shocks, is the risk ladder every desk watches daily. See also: VaR, expected shortfall
Strike: The fixed price written into the option — where you may buy (call) or sell (put) the stock. Strikes are the kinks in every payoff diagram; pros quote them as a percent of spot or forward, or by delta. See also: moneyness, payoff diagram
Structured product PRO: A packaged note bundling bonds and options into a retail-friendly payoff — capital-protected notes, reverse convertibles, autocallables. The buyer gets a story; the dealer keeps the exotic risk and the margin. See also: autocallable, worst-of
Swaption PRO: An option on an interest-rate swap: the right to enter a swap paying fixed (a payer swaption — profits when rates rise) or receiving fixed (a receiver). The rates market’s vanilla vol instrument, quoted on a grid of option expiry × swap tenor. See also: cap & floor, normal vol
Synthetic: Rebuilding one payoff from other instruments via parity: long call + short put (same strike and expiry) = a synthetic long forward; stock + put = a synthetic call. When the synthetic and the real thing diverge, arbitrage closes the gap. See also: put–call parity, forward price

T

Tail hedge PRO: A small, always-on budget spent on far-OTM protection — deep puts, VIX calls — designed to pay off convexly in a crash. It bleeds a known trickle in calm years; the craft is minimizing the bleed while keeping the explosion. See also: convexity, skew, hedge
Term structure: Implied vol plotted against expiry for a fixed moneyness. Usually gently upward-sloping in calm markets and inverted in stress; a scheduled event shows up as a bump at its date, and forward vols live in the gaps between points. See also: forward volatility, calendar spread, volatility surface
Theta (Θ): Time decay: the value an option loses per calendar day with everything else frozen — the rent. An ATM option’s theta accelerates into expiry (value shrinks like √T), and theta is precisely what short-option sellers collect for housing gamma risk. See also: gamma, time value, carry
Time value: The part of the premium above intrinsic value — the price of possibility. It’s largest at the money, melts to zero at expiry on theta’s clock, and exists because more time means more chances for the option to finish deeper in the money. See also: intrinsic value, theta

V

Vanna PRO: The cross-Greek: how delta changes per vol point — equivalently, how vega changes with spot. Vanna is why a vol crush reshuffles hedges even with the stock unchanged, and a key driver of dealer flows around events and expirations. See also: volga, charm, GEX
VaR (value at risk) PRO: A percentile loss line: “95% one-day VaR of $1m” means about one day in twenty should lose more than $1m. A useful summary with a notorious blind spot — it says nothing about how much worse the beyond-VaR days get. See also: expected shortfall, stress test
Variance risk premium PRO: The persistent tendency of implied vol to exceed subsequently realized vol — the compensation option sellers earn for eating tail risk and mark-to-market pain. It’s why “short vol” is a carry trade, and why it works until it very much doesn’t. See also: carry, realized volatility, variance swap
Variance swap PRO: A contract that pays (realized variance − strike) × notional: pure exposure to how much the stock actually moves, no delta hedging required. It’s replicated by a strip of options across all strikes — the same construction the VIX is computed from. See also: VIX, realized volatility, forward volatility
Vega: Sensitivity to implied volatility: the change in option value per one vol-point move (25% → 26%). Long options are long vega; it concentrates in longer expiries near the money, and it’s the Greek that pays — or punishes — when uncertainty itself reprices. See also: implied volatility, volga, theta
Vertical spread: Buy one option and sell another of the same type and expiry at a different strike — the $100/$110 bull call spread, the bear put spread, and friends. Selling the far strike cheapens the view and caps both profit and loss: direction on a budget. See also: ratio spread, diagonal spread, condor
VIX: The 30-day implied-vol index on the S&P 500, computed variance-swap-style from a strip of SPX options and quoted in annual vol points. VIX at 20 implies daily moves of about 1.25% (20 ÷ 16); you trade it only via futures and options on the index itself. See also: variance swap, rule of 16, vol of vol
Vol cone PRO: Percentile bands of realized vol computed over rolling windows of different lengths (1m, 3m, 6m…), drawn as a cone that narrows with horizon. Overlay today’s implied vol and you see instantly whether you’re paying the 90th percentile or the 10th for movement. See also: realized volatility, z-score
Vol of vol PRO: How much volatility itself jumps around — visible in indices like VVIX, priced into smile curvature, and modeled as ν in SABR. High vol-of-vol makes wings and other convex vol structures rich. See also: volga, SABR, VIX
Volatility: The size of the wiggle: the standard deviation of returns, annualized and quoted in percent. It’s the one Black–Scholes input you can’t look up — the entire volatility business is an argument about this number. See also: realized volatility, implied volatility, rule of 16
Volatility surface: Implied vol as a function of both strike and expiry — the market’s full 3-D quote for uncertainty, with the smile running one way and term structure the other. Professionals trade its shape and its movements, not just its level. See also: smile, term structure, sticky strike
Volga PRO: Vega’s convexity: how vega itself changes per vol point. Wing-heavy structures are long volga — they gain vega as vol rises — which is exactly why far-OTM options trade rich when vol-of-vol is high. See also: vanna, vol of vol, vega
Volume: Contracts traded today — flow, not stock. Compare it with open interest to tell fresh positioning from unwinds; unusual volume at one strike is the tape announcing that somebody new has arrived. See also: open interest, option chain

W

Worst-of PRO: A payoff keyed to the worst performer in a basket — worst-of puts and worst-of autocallables are workhorses of the structured-product street. Sellers end up short correlation: as correlations rise, the basket’s worst member drags everything with it. See also: structured product, implied correlation

Z

Z-score PRO: Distance from average, measured in standard deviations: (x − mean) ÷ σ. The screener’s universal normalizer — “3-month skew at z = +2.1” says rich versus its own history without any argument about units. See also: vol cone, backtest