Reference

Derivatives Glossary

The 20 terms every derivatives beginner should know — options, futures, and swaps vocabulary explained in plain English. Link straight to any term with its anchor.

Underlying Asset: The financial instrument (stock, commodity, currency, index) from which a derivative derives its value.
Strike Price: The price at which an option holder can buy (call) or sell (put) the underlying asset. Also called the exercise price.
Premium: The price paid by the option buyer to acquire the right. The seller receives this upfront regardless of what happens.
Expiration Date: The date on which the derivative contract expires. After this date, the option or contract is void.
In the Money (ITM): A call is ITM when the stock price is greater than the strike price. A put is in the money when the stock price is less than the strike price.
Out of the Money (OTM): A call is OTM when the stock price is less than the strike price. A put is OTM when the stock price is greater than the strike price.
At the Money (ATM): When the current market price is approximately equal to the strike price.
Intrinsic Value: The real, tangible value of an option if exercised immediately. It's the difference between market price and strike price (if positive).
Time Value: The extra premium paid above intrinsic value, reflecting the probability that the option becomes more valuable before expiry.
Delta (Δ): How much the option price changes for a $1 move in the underlying. A delta of 0.5 means the option gains $0.50 when the stock rises $1.
Gamma (Γ): The rate of change of delta. High gamma means delta changes quickly — options near-the-money have high gamma.
Theta (Θ): Time decay — how much value an option loses each day as expiry approaches. Theta is negative for buyers, positive for sellers.
Vega (ν): Sensitivity to volatility. High vega means the option price moves a lot when implied volatility changes.
Implied Volatility (IV): The market's forecast of how much the underlying will move, baked into the option's price. High IV = expensive options.
Hedge: A position taken to reduce risk. Buying a put option on a stock you own is a basic hedge strategy. If the stock price goes down the put option value increases, therefore the movement in one is offset by the movement in another.
Leverage: Controlling a large position with a small amount of capital. Derivatives are inherently leveraged — both gains and losses are amplified. One option contract controls 100 shares. If the option price is $5, then the total cost is $500. If the stock price is $50 then the same 100 shares cost $5,000.
Mark to Market: Revaluing a derivatives position daily based on current market prices. Losses may trigger margin calls.
Margin Call: A demand from a broker to deposit more funds when a leveraged position has lost value below the maintenance margin.
Open Interest: The total number of outstanding derivative contracts that haven't been settled. A measure of market activity.
Notional Value: The total face value of a derivative position. A futures contract worth $100,000 notional controls that dollar amount, even if you only put up $5,000.

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