📖 Reference
Glossary of Terms
Every term you need to master the Wheel Strategy — clearly defined.
100 terms defined
Ask Price
The lowest price a seller is willing to accept for a security or option.
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Assignment
Assignment happens when the option buyer exercises their right, obligating the seller to fulfill the contract terms (buy or sell shares).
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Bid Price
The highest price a buyer is willing to pay for a security or option.
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Breakeven Point
The price at which a trade neither makes nor loses money.
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Buy to Close (BTC)
An order to close a short position (one you sold) by buying it back.
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Cash Secured
Refers to having enough cash in the account to cover the cost of purchasing shares if assigned on a short put.
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Cash Secured Put
A cash-secured put (CSP) is an options trading strategy where you sell a put option while holding enough cash in your brokerage account to buy the stock if it drops below the strike price. It is the first step of the Wheel Strategy.
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Cost Basis
Cost basis is the original value of an asset for tax purposes, usually the purchase price, adjusted for stock splits, dividends, and return of capital distributions.
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Covered Call
A covered call is an income-generating strategy where you sell call options against stock you already own. You must own 100 shares for every contract sold.
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Delta
Delta measures the sensitivity of an option's price to a $1 change in the underlying stock price. It is also often used as a rough probability of the option expiring in-the-money.
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Exercise
To implement the right defined in the option contract to buy or sell the underlying security.
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Expiration Date (DTE)
The date on which an option contract expires. DTE stands for 'Days to Expiration'.
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Expiration Friday
The day on which monthly options contracts expire, usually the third Friday of the month.
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Extrinsic Value
The portion of an option's price that is not intrinsic value. It is strictly the value of time and volatility.
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Gamma
Gamma measures the rate of change of Delta. It indicates how much Delta will change for a $1 move in the underlying stock.
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Implied Volatility (IV)
Implied Volatility is a metric that captures the market's view of the likelihood of changes in a given security's price. Higher IV means higher option premiums.
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In The Money (ITM)
An option is ITM if it has intrinsic value. For a put, stock price < strike. For a call, stock price > strike.
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Intrinsic Value
The portion of an option's price that is 'In The Money'. For a call, it's Stock Price minus Strike Price. For a put, it's Strike Price minus Stock Price.
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Leaps
Long-Term Equity AnticiPation Securities. Options with expiration dates longer than one year.
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Liquidity
The ease with which an asset or security can be converted into ready cash without affecting its market price.
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Margin
Money borrowed from a brokerage firm to purchase an investment.
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Max Loss
The maximum amount of money a trade can lose.
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Max Profit
The maximum amount of money a trade can make.
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Naked Put
Selling a put option without having the cash to cover the assignment.
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Open Interest (OI)
The total number of outstanding option contracts that have not been settled.
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Out of The Money (OTM)
An option is OTM if it has no intrinsic value. For a put, stock price > strike. For a call, stock price < strike.
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Premium
The price paid by the buyer to the seller for an option contract. This is the income generated by Wheel Strategy traders.
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Probability of Profit (POP)
A statistical calculation of the chance that a trade will be profitable at expiration.
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Return on Capital (ROC)
A profitability ratio calculated by dividing the premium received by the capital risked (collateral).
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Rolling
Rolling an option means closing an existing position and simultaneously opening a new one with a different expiration date and/or strike price.
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Rollover
Closing a near-term option position and opening a later-term position.
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Sell to Open (STO)
An order to open a short position by selling an option contract.
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Standard Deviation
A measure of the amount of variation or dispersion of a set of values.
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Strike Price
The strike price is the set price at which an option contract can be exercised. For a put, it's the price you agree to buy at. For a call, it's the price you agree to sell at.
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The Wheel Strategy
The Wheel Strategy is a systematic options trading cycle designed to generate consistent income through premiums by alternating between selling cash-secured puts and covered calls.
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Theta
Theta measures the rate of time decay of an option's value. It represents how much value an option loses every day as it approaches expiration.
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Underlying
The stock, index, or ETF on which the option is based.
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Vega
Vega measures an option's sensitivity to changes in implied volatility (IV). It represents the amount an option's price changes for a 1% change in IV.
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Vertical Spread
An option strategy involving buying and selling options of the same underlying asset and expiration date but at different strike prices.
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Volatility Crush
A rapid decrease in implied volatility, usually after a known event like earnings.
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Yield
The income return on an investment.
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Zero DTE (0DTE)
Options that expire on the same trading day.
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At The Money (ATM)
An option is at the money when its strike is very close to the current underlying price.
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Call Option
A call option gives the buyer the right to buy 100 shares at the strike price before expiration.
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Put Option
A put option gives the buyer the right to sell 100 shares at the strike price before expiration.
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Option Contract
A standardized derivatives contract controlling shares of an underlying security, usually 100 shares.
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Contract Multiplier
The factor used to convert option prices into dollar value, usually 100 for equities.
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Buy to Open (BTO)
An order used to open a new long option position.
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Sell to Close (STC)
An order used to close an existing long option position.
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Moneyness
The relationship between strike price and current stock price: ITM, ATM, or OTM.
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Rho
Rho measures an option price’s sensitivity to changes in interest rates.
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IV Rank
A measure showing where current implied volatility sits versus its 52-week high-low range.
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IV Percentile
The percentage of days in a lookback period where implied volatility was below current levels.
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Implied Move
The expected price range implied by option prices for a specific time period.
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Skew
The pattern of different implied volatilities across strikes on the same expiration.
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Volatility Smile
A curve showing implied volatility differences across strikes, often higher at far OTM and ITM strikes.
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Realized Volatility
Actual historical volatility observed from past price changes.
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Option Chain
A table listing all available strikes, expirations, and quote data for an underlying.
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Limit Order
An order that executes only at a specified price or better.
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Market Order
An order that executes immediately at the best available market price.
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Pin Risk
Uncertainty near expiration when stock price is very close to a strike.
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Early Assignment Risk
The risk that short options are assigned before expiration.
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Ex-Dividend Date
The first date a stock trades without rights to the next dividend.
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Dividend Risk
The risk that dividend mechanics affect assignment outcomes and pricing.
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American Style Option
An option that can be exercised any time before expiration.
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European Style Option
An option that can only be exercised at expiration.
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Physically Settled Option
An option settled by delivery of shares rather than cash.
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Cash-Settled Option
An option settled in cash instead of share delivery.
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Strike Selection
The process of choosing strike prices based on risk and return objectives.
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Expiration Cycle
The schedule and frequency of available option expirations.
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Weekly Options
Options with short expirations listed every week.
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Monthly Options
Standard options that typically expire on the third Friday of the month.
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Buying Power Reduction
The amount of account buying power reserved by an open position.
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Capital Efficiency
How effectively deployed capital produces risk-adjusted returns.
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Notional Value
Total dollar exposure represented by an options position.
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Position Sizing
Determining contract count based on account size and risk limits.
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Concentration Risk
Risk created by allocating too much capital to one name or sector.
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Correlation Risk
Risk that multiple positions move together due to shared market drivers.
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Expected Value (EV)
Probability-weighted average outcome of a trade across many repetitions.
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Average Credit
The mean premium collected per contract across a sample of trades.
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Net Credit
Total credits received after openings, closings, and rolls.
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Net Debit
Total amount paid when adjustment costs exceed credits received.
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Called Away
When covered-call shares are sold at strike due to assignment.
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Return If Called
Projected return if shares are assigned away at the covered-call strike.
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Return If Unchanged
Projected return if the stock price remains near current levels through expiration.
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Trade Journal
A structured record of entries, adjustments, exits, and rationale.
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Setup Quality
A score or assessment of how well a trade matches predefined criteria.
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Assignment Probability
Estimated chance that a short option will be assigned.
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Put-Call Ratio
A sentiment measure comparing put volume to call volume.
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Max Pain
A theoretical strike where aggregate option buyer payouts are minimized at expiration.
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Credit Spread
A defined-risk spread opened for net premium credit.
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Debit Spread
A defined-risk spread opened for net premium debit.
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Bull Put Spread
A bullish credit spread selling a higher-strike put and buying a lower-strike put.
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Bear Call Spread
A bearish credit spread selling a lower-strike call and buying a higher-strike call.
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Iron Condor
A neutral strategy combining a call credit spread and a put credit spread.
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Collar Strategy
A stock hedge using a protective put plus a covered call.
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Calendar Spread
A spread using the same strike with different expirations.
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Diagonal Spread
A spread using different strikes and different expirations.
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Poor Man’s Covered Call
A strategy using a long-dated call plus short calls instead of owning 100 shares.
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Synthetic Covered Call
A position designed to replicate covered-call behavior through options combinations.
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