Here you can review a short list of the jargon unique to the world of options. You’ll find in most cases that these terms apply not just to Options on Futures, but to all types of options – like those for stocks and even real estate.

Definitions are not intended to suggest the correct legal significance or exact meaning. They were collected from several sources to help in your understanding of the futures and options industry.

Black-Scholes Model
A mathematical formula for calculating the value of an option. Initially developed by F. Black and M. Scholes for securities options and later refined by Black for options on futures.

Butterfly Spread
A three-legged spread in futures or options. In the option spread, the options have the same expiration date but differ in strike prices. For example, a butterfly spread in soybean call options might consist of two short calls at a $6.00 strike price, one long call at a $6.50 strike price, and one long call at a $5.50 strike price.

Call
An option contract giving the buyer the right but not the obligation to purchase the commodity or to enter into a long futures position.

Called
Another term for “exercised” when the option is a call. The writer of a call must deliver the indicated underlying commodity when the option is exercised or called.

Covered Call
An option spread position where Calls are sold against a long position in the underlying instrument. In essence, the trader is limiting his profit on the long position in exchange for receiving the option premium. On option expiration day, the breakeven on the long futures is lower by the amount of option premium received, less commissions.

Covered Option
A short call or put option position which is covered by the sale or purchase of the underlying futures contract or physical commodity. For example, in the case of options on futures contracts, a covered call is a short call position combined with a long futures position. A covered put is a short put position combined with a short futures position. Also called a Covered Write. See also Covered Call and Covered Put.

Covered Put
An option spread position where Puts are sold against a short position in the underlying instrument. In essence, the trader is limiting his profit on the short position in exchange for receiving the option premium. On option expiration day, the breakeven on the short futures is raised by the amount of option premium received, less commissions.

Delta
A measure of how much an option premium changes, given a unit change in the underlying futures price. Delta often is interpreted as the probability that the option will be in-the-money by expiration.

Exercise
The action taken by the holder of a call option if he wishes to purchase the underlying futures contract or by the holder of a put option if he wishes to sell the underlying futures contract.

Exercise Price
The price at which the futures contract underlying a call or put option can be purchased (if a call) or sold (if a put). Also referred to as Strike Price.

Expiration Date
The last day that an option may be exercised into the underlying futures contract. Also, the last day of trading for a futures contract.

Extrinsic Value
(See Time Value).

Gamma
A measurement of how fast Delta changes, given a unit change in the underlying futures price.

Grant
(See Write.)

Grantor
(See Option Seller.)

Holder
One who purchases an option.

Horizontal Spread
The purchase of either a call or put option and the simultaneous sale of the same type of option with typically the same strike price but with a different expiration month. Also referred to as a calendar spread.

In-the-money Option
An option with intrinsic value. A call option is in-the-money if its strike price is below the current price of the underlying futures contract. A put option is in-the-money if its strike price is above the current price of the underlying futures contract. See Intrinsic Value.

Intrinsic Value
The amount by which an option is in-the-money. See In-the-Money Option.

Long Options Value
It is the combined value of all options purchased. It is marked-to-market. Options marked to the last reported price.

Naked Option
The sale of a call or put option without holding an offsetting position in the underlying commodity.

Net Options Value
The credit or debit value of all option positions combined. It is marked-to-market.

Option
A contract giving the holder the right, but not the obligation, hence, “option,” to buy (call option) or sell (put option) a futures contract in a given commodity at a specified price at any time between now and the expiration of the option contract.

Option Buyer
The purchaser of either a call or put option. Option buyers receive the right, but not the obligation, to assume a futures position. Also referred to as the holder.

Option Premium
The price of an option. The sum of money that the option buyer pays and the option seller receives for the rights granted by the option.

Option Seller
The person who sells an option in return for a premium and is obligated to perform when the holder exercises his right under the option contract. Also referred to as the Writer or Grantor.

Option Spread
The simultaneous purchase and sale of one or more options contracts, futures, and/or cash positions.

Out-of-the-Money Option
An option with no intrinsic value, i.e., a call whose strike price is above the current futures price or a put whose strike price is below the current futures price. Its value is solely time related.

Premium
(See Option Premium).

Put
An option to sell a commodity, security, or futures contract at a specified price at any time between now and the expiration of the option contract. In particular, a Put gives the option buyer the right but not the obligation to sell (go “short”) the underlying futures contract at the strike price on or before the expiration date.

Ratio Hedge
The number of options compared to the number of futures contracts bought or sold in order to establish a hedge that is risk neutral.

Ratio Spread
This strategy, which applies to both puts and calls, involves buying or selling options at one strike price in greater number than those bought or sold at another strike price.

Short Options Value
The total cost of purchasing back all short options. It is marked-to-market. Market movement may cause bids and offers to be away from the last reported price.

Spread
(See Option Spread).

Straddle
An option position consisting of the purchase (or sale) of both calls and puts having the same expiration and the same Strike Price.

Strangle
An option position consisting of the purchase (or sale) of both puts and calls having the same expiration but different Strike Prices.

Strike Price
(See Exercise Price).

Synthetic Futures
A position created by combining call and put options. A synthetic long futures position is created by combining a long call option and a short put option for the same expiration date and the same strike price. A synthetic short futures is created by combining a long put and a short call with the same expiration date and the same strike price.

Theta
A measure of the sensitivity of the value of the option to the passage of time. In math terms, Theta is the derivative of the option price equation with respect to the remaining time to expiration of the option.

Time Value
The amount of money option buyers are willing to pay, above the intrinsic value, for an option in the anticipation that, over time, a change in the underlying futures price will cause the option to increase in value. In general, an option premium is the sum of time value and intrinsic value. Any amount by which an option premium exceeds the option’s intrinsic value can be considered time value. Also referred to as Extrinsic Value.

Writer
(See Option Seller).