Glossary

An option that can be exercised at any time before expiration, not only at expiration itself. Standard equity options in the United States, including the calls a covered call writer sells, are American-style. In practice early exercise is uncommon, because exercising throws away the option's remaining time value. The main exception is a call that is deep in the money just before an ex-dividend date, where the holder may exercise early to capture the dividend.

Premium expressed as a percentage of the stock price, then scaled up as if you could repeat the trade for a full year. It makes different expirations look comparable, but treat it with care: it assumes you can redeploy the same capital into an equally good trade every period, which rarely holds. The honest number for a single trade is its holding-period return, what you actually made over the days you were in it.

When the option buyer exercises their right and your shares are called away at the strike price. For covered call sellers, assignment means selling your shares at the strike, capping upside but keeping the premium collected.

When the strike price equals (or is very close to) the current stock price. ATM options have the highest time value and the most sensitivity to stock movement. Covered call sellers typically avoid ATM strikes, too much assignment risk for the premium.

The difference between the highest price a buyer will pay (bid) and the lowest a seller will accept (ask). Wide spreads mean poor liquidity: you lose money on both entry and exit. On covered calls, a wide spread can quietly eat a large share of the premium you collect.

The foundational mathematical model for pricing European options. Uses 5 inputs: stock price, strike price, time to expiration, risk-free interest rate, and implied volatility. The model calculates a theoretical "fair value" for an option.

The stock price at which your covered call position results in zero profit or loss at expiration. Calculated as: cost basis minus premium collected. Below this price, you're losing money on the position overall.

Closing an existing short option position by buying it back before expiration. You sold to open (STO), buying to close ends the obligation. Common when you want to lock in profits early or avoid assignment risk.

A contract giving the buyer the right (not obligation) to purchase 100 shares of a stock at the strike price before expiration. Covered call sellers are on the other side, they've sold this right and collected the premium.

Selling a put option while holding enough cash to buy 100 shares at the strike price if assigned. The first leg of the wheel strategy. You collect premium upfront and either keep the cash (if put expires worthless) or buy shares at a discount (if assigned).

The rate at which delta changes over time, specifically, how much delta moves per day as expiration approaches. Also called "delta decay." As expiration nears, OTM options approach delta 0 faster. Charm accelerates in the final 2 weeks.

Selling someone the right to buy your shares at a fixed price (strike) before a set date (expiration). You collect premium upfront. If the stock stays below the strike, the option expires worthless and you keep both the premium and your shares.

Measures how much an option's price moves for every $1 move in the stock. Also approximates the probability the option finishes in the money. Call deltas range from 0 to 1. OTM covered call sellers want low delta, lower probability of assignment.

How many calendar days remain until the option expires. It drives theta: the closer to expiration, the faster premium decays. Many covered-call writers favor the 25 to 45 DTE range, where time decay is quick relative to the days remaining.

When an American-style option is exercised before expiration. Rare for covered calls, buyers rarely exercise early unless the option is deep ITM and the stock is about to go ex-dividend. Worth monitoring when your call is deep ITM near an ex-dividend date.

The risk that an earnings announcement or dividend ex-date causes an unexpected price move inside your trade window. Earnings landing inside the holding period is one of the most common covered-call traps: a single report can blow a stock past your strike.

The date you must own shares to receive the next dividend payment. If you own covered call positions, the stock price typically drops by the dividend amount on ex-dividend date. Also triggers early assignment risk, covered call buyers may exercise to capture the dividend.

The portion of an option's premium that exceeds its intrinsic value. Entirely the product of time remaining and implied volatility. What covered call sellers are collecting, extrinsic value decays to zero at expiration. You want to sell options with maximum extrinsic value.

The date the option contract expires worthless (or gets assigned). Standard equity options expire on the third Friday of each month. Weekly options expire every Friday. After expiration, the option has zero value, your obligation ends.

The rate of change of delta per $1 move in the stock. High gamma means delta is unstable, a small stock move dramatically changes your assignment probability. Gamma is highest ATM and spikes sharply near expiration. Covered call sellers prefer low gamma, stable, predictable delta.

The market's expectation of future price movement, expressed as an annualized percentage. Derived backwards from the option's market price using the Black-Scholes model. High IV means expensive options, more premium for sellers. Low IV means cheap options, less premium for sellers.

The sharp drop in implied volatility after a major event (usually earnings). Options are priced for the uncertainty before the event, once the event passes, uncertainty disappears and IV collapses. Covered call sellers who hold through earnings often see IV crush reduce their option value rapidly.

A call option is ITM when the strike price is below the current stock price. ITM options have intrinsic value and high assignment probability. Covered call sellers generally avoid ITM strikes, the premium doesn't compensate for the high assignment risk.

The immediate exercise value of an option, the amount it's in the money. OTM options have zero intrinsic value. ITM options have intrinsic value equal to the stock price minus the strike (for calls). At expiration, intrinsic value is all that remains.

Implied volatility normalized against a stock's own 52-week high/low IV range. Tells you if IV is high or low relative to THIS stock's own history. Far more useful than raw IV for covered call decisions. IV Rank 80 = IV near its 52-week high.

The percentage of trading days in the past year where IV was lower than today's level. Different from IV Rank, percentile looks at the distribution of daily IV readings, not just the high/low range. Both measure relative expensiveness of options.

How easily you can enter and exit an option position at a fair price. Measured by bid-ask spread width, daily volume, and open interest. Poor liquidity means wide spreads, bad fills, and difficulty closing, all of which quietly erode returns on covered calls.

The midpoint between the bid and ask price. Used as the estimated fair value for an option when no recent trade has occurred. Most brokers allow limit orders between the bid and ask, targeting the mid is a standard entry strategy.

The total number of outstanding option contracts that haven't been settled or closed. Higher OI = more liquid market, tighter spreads, easier fills. OI increases when new contracts are created and decreases when existing contracts are closed or expire.

A call option is OTM when the strike price is above the current stock price. OTM options have zero intrinsic value, they're pure time premium. The standard for covered call selling, you want the stock to stay below your strike so the option expires worthless.

The percentage distance between the current stock price and the strike. A larger buffer gives the stock more room to move against you before assignment becomes a real risk. Paired with the premium collected, it tells you how much cushion you actually have below your cost basis.

The uncertainty that occurs when a stock closes exactly at your strike price on expiration day. You don't know if you'll be assigned until after hours. If you're not assigned but the stock gaps up over the weekend, you lost out on premium without getting called away at a favorable price.

The cash the option buyer pays you for the right to buy your shares at the strike. It is credited to your account the moment the trade fills, and it is yours to keep no matter what the stock does afterward. Premium is compensation for giving up the gains above your strike for the life of the contract.

The option premium expressed as a percentage of the stock price, NOT annualized. The raw return for the specific DTE period. Useful for comparison between strikes on the same expiration, but not across different expirations.

The estimated likelihood the option expires worthless and you keep the full premium. It is derived from delta: POP is roughly 1 minus delta. A cornerstone of judging any covered call, since it captures how often the trade simply works.

A fundamental pricing relationship: a call option and put option with the same strike and expiration must be priced consistently relative to the stock price and risk-free rate. Arbitrage keeps them in line. Used to derive theoretical option prices and understand how puts and calls are related.

A contract giving the buyer the right to sell 100 shares at the strike price before expiration. Sellers of puts are obligated to buy shares if assigned, the foundation of the cash-secured put (first leg of the wheel). Put sellers are bullish or neutral.

How much a stock has actually moved in the past, measured statistically. Contrast with implied volatility which reflects future expectations. When IV is significantly higher than realized volatility, options are expensive, a favorable environment for sellers.

Measures an option's sensitivity to changes in the risk-free interest rate. The least important Greek for short-term covered call traders. Rho matters more for longer-dated options (LEAPS). Rising rates increase call values slightly, decrease put values slightly.

Closing an existing covered call and simultaneously opening a new one, typically at a later expiration (roll out) or higher strike (roll up). The goal is to collect additional premium while avoiding or delaying assignment.

The order type used to initiate a short option position, selling a call you don't already own (as a covered call, against your long stock). This creates your obligation. The counterpart to Buy to Close when exiting.

The difference between the expected fill price and the actual fill price. Caused by wide bid-ask spreads and illiquid markets. A $0.50 spread means you lose $0.25 relative to mid on both entry and exit, potentially $50/contract in hidden costs.

The fixed price at which your shares would be called away if the buyer exercises. The most important decision in covered call selling, it determines your premium, assignment probability, OTM buffer, and upside cap. Higher strikes = lower premium but more upside potential.

A set of risk measures for options positions, each named after a Greek letter. Delta, Gamma, Theta, Vega, and Rho are the primary Greeks. They describe how an option's price changes in response to different market variables. Understanding the Greeks is essential for managing covered call positions.

How implied volatility varies across different expiration dates for the same underlying stock. Normally upward sloping (longer = higher IV). Can invert before major events. Covered call sellers monitor term structure to find the expirations offering the best relative premium.

The daily time decay of an option's value, how much the option loses per day with all else equal. Theta is negative for option buyers (they lose time value) and effectively positive for sellers (they earn time decay). Theta accelerates dramatically in the final 30 days before expiration.

How fast an option's theta decays relative to its total premium. A $5 option shedding $0.50 a day is far more efficient than a $5 option shedding $0.10 a day: same premium, five times the daily income rate. It is a useful lens most retail screeners ignore.

Synonymous with extrinsic value, the portion of an option's premium attributable to time remaining. Decays to zero at expiration. For OTM covered call sellers, the entire premium is time value. What you're collecting when you sell covered calls.

A systematic income strategy built on two option-selling legs: sell cash-secured puts, get assigned, then sell covered calls, and repeat. It generates continuous premium income on positions you are comfortable holding long term.

The pattern where options at different strikes have different implied volatilities. For equities, puts typically have higher IV than calls (downside protection demand). Skew affects covered call premium, strikes with elevated skew offer more premium than Black-Scholes would theoretically suggest.

The rate of change of delta with respect to implied volatility (also: rate of change of vega with respect to stock price). Advanced Greek used by institutional traders. When IV rises, delta of OTM options increases, your assignment probability changes with vol moves, not just price moves.

Measures an option's sensitivity to changes in implied volatility. Vega is positive for option buyers (they benefit from rising IV) and negative for sellers (rising IV hurts short option positions). Covered call sellers are short vega, a spike in IV increases the value of your short call.

The rate of change of vega with respect to implied volatility, the "second derivative" of option price with respect to IV. High volga means vega itself is sensitive to IV moves. Relevant for institutional vol traders; less directly applicable to covered call income strategies.

The persistent tendency for implied volatility to exceed realized volatility over time. This is the structural edge for covered call and short premium strategies, the market consistently overprices future uncertainty, and sellers harvest that overpricing.

The number of option contracts traded on a given day. High volume signals active interest and usually means tighter spreads and easier fills. Don't confuse with open interest, volume resets to zero each day, OI accumulates over time.