PsyOptions Documentation

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Glossary

Option

An option is a contract that gives the owner the right to buy (in the case of a call) or sell (in the case of a put) a number of the underlying asset at a predetermined price(strike price) on or before a fixed expiration date.

Call

Buyers of call options generally expect the underlying asset to increase in value, whereas sellers of calls expect a decrease in value or for the value to remain the same.

Buying a call gives you the right, but not the obligation, to buy the contract size amount of the underlying asset at the option's strike price. The value of a call option should increase as the price of the underlying asset increases.

Put

Buyers of put options generally expect the underlying asset to decrease in value, whereas sellers of puts expect an increase in value or for the value to remain the same.

Buying a put gives you the right, but not the obligation, to sell the contract size amount of underlying asset at the option's strike price. The value of the put option should increase as the price of the underlying asset decreases.

Underlying Asset

The financial asset upon which a derivatives price is based.

Quote Asset

The asset used to price the underlying asset.

Contract Size

The amount of the underlying asset the option holder can exercise for.

Bid

The price at which a buyer is willing to buy an option, meaning the price at which a seller can immediately sell an option.

Ask

The price at which a seller is willing to sell an option, meaning the price at which a buyer can immediately purchase an option.

Strike Price

The price in which the exerciser may exchange quote asset for the locked underlying asset.

Expiration

The last date where the option may be exercised.

Exercise

Exercise means to put into effect the right to buy or sell the underlying asset specified in an options contract. When a call option owner exercises their contract, they will buy the underlying assets from the option writer at the agreed upon strike price. When a put option owner exercises their contract, they will sell the underlying asset to the option writer at the agreed upon strike price.

IV

Implied Volatility(IV) is an estimate of the volatility of the underlying asset that is derived from the market value of an option. It is essentially the market's forecast of a likely movement in an underlying asset's price.

In the Money

An In the Money(ITM) option is one with a strike price that has already been surpassed by the price of the underlying asset.

Out of the Money

An Out of the Money(OTM) option is one with a strike price that the price of the underlying asset has yet to reach.

At the Money

An At the Money(ATM) option is one with a strike price that is equal to the current price of the underlying asset.

The Greeks

Trying to predict what will happen to the price of a single option or a position involving multiple options as the market changes can be a difficult undertaking. Because the option price does not always appear to move in conjunction with the price of the underlying asset, it is important to understand what factors contribute to the movement in the price of an option and the effect they have.

Options traders often refer to the delta, gamma, vega, and theta of their option positions. Collectively, these terms are known as the Greeks, and they provide a way to measure the sensitivity of an option's price to quantifiable factors.

Beta

Beta is a measure of the volatility of an asset compared to the overall market. In addition to being a measure of the volatility of an asset compared to the overall market, beta can also be used to assess the risk of a coin in comparison to a benchmark.

Example: If you took the entire crypto market and compared it against itself you would get a beta value of 1. However, if you take a specific coin such as SOL and compare it against the crypto market, you will likely get a beta value that is higher or lower than 1.

Beta values higher than 1 indicate that a coin is more volatile than the overall market while also being correlated to the overall market. On the other hand, beta values lower than 1 indicate that a coin is less volatile in comparison to the market, or that it is not correlated to the market.

Delta

Delta measures an option's sensitivity to a change in price of the underlying asset. Delta is measuring the rate of change between the optionโs price and a $1 change in the underlying asset's price.

Example: A delta of 0.40 means that in theory, the option's price will move $0.40 for every $1 move in the underlying asset's price.

Delta can be a number between -1 and 1, depending on the type of contract. Call options can range from 0 to 1, while put options can range from -1 to 0.

Gamma

Gamma is the rate of change in an option's delta per 1 point move in the underlying asset price. When an option's price is deep ITM or OTM, it's gamma is near zero. When the option's price is ATM, it's gamma is large. All long options have a positive gamma, while all short options have a negative gamma.

Vega

Vega measures an options sensitivity to implied volatility.

Example: The value of an option is 5.00, implied volatility is at 20, and the option has a vega of .12. If implied volatility moved to 21.5, the option's price would increase by 1.5 x .12 = .18 making the new value 5.18

Theta

Theta, also known as time decay, is an option's sensitivity to time. It is the amount your option's value decreases as it gets closer to it's expiration date. Theta is typically represented as a negative number because once you purchase an option and time starts to move towards the expiration date, the potential for the option to be profitable begins to decrease.

However, when you sell an option, theta usually increases. This is because as a seller of an option, it is typically more beneficial to you if the option expires without being exercised. This is why selling options are often referred to as "positive theta trades".

Last modified 1mo ago