40 essential options terms for UK retail traders, in alphabetical order. Each entry includes a plain-English definition + the UK-specific note (tax, wrapper, regulation) where relevant. For mainstream finance terms (Personal Allowance, NI etc.) see the main UK Tax Drag glossary.
A–C
- American option
- An option that can be exercised at any time before expiration. Most US single-stock options are American. UK tax treatment: gains taxed as CGT in GIA, tax-free in qualifying SIPP wrapper.
- Assignment
- What happens when a sold option is exercised against you. Cash-secured put assignment: you buy the shares at the strike. Covered call assignment: your shares are called away at the strike. UK tax: assigned shares' cost basis = strike − premium received.
- At-the-money (ATM)
- An option whose strike is at (or near) the current underlying price. Highest extrinsic value, delta around 0.50.
- Bid-ask spread
- The difference between the highest buy price (bid) and lowest sell price (ask). Wide spreads mean transaction cost. UK retail tip: trade only options with bid-ask spread under 5% of premium.
- Bull put spread (credit spread)
- Selling a put and buying a lower-strike put. Net credit received. Defined risk = width of strikes − credit. Bullish-neutral strategy. UK CGT: applies on net P&L at close.
- Cash-secured put
- Selling a put while holding cash equal to strike × 100. If assigned, you buy at the strike. The classic UK retail beginner strategy.
- Call option
- Right (not obligation) to BUY the underlying at the strike by expiration. Bullish bet.
- Covered call
- Selling a call while owning the underlying (100 shares per call). Generates income, caps upside. UK tax: premium added to share cost basis if not assigned; if assigned, share gain calculated using original cost. UK ISA note: some brokers (HL) permit covered calls on ISA-held shares.
- Credit spread
- Any spread where you receive net premium. Bull put spread, bear call spread, iron condor. Defined risk and reward.
D–I
- Debit spread
- Any spread where you pay net premium. Bull call spread, bear put spread. Defined risk = debit paid.
- Delta (Δ)
- Sensitivity of option price to underlying price. A 0.50 delta call moves 50p for every £1 stock move. Also approximates probability of finishing in the money.
- European option
- An option that can ONLY be exercised at expiration. FTSE 100 options are European. UK index options generally European.
- Exercise
- The act of using your option right. For a call: buy the underlying at the strike. For a put: sell at the strike. Most retail traders close positions before expiration rather than exercising.
- Expiration / Expiry
- The date the option contract ends. After expiration, in-the-money options are auto-exercised; out-of-the-money expire worthless.
- Extrinsic value
- The portion of option price beyond intrinsic value. Made up of time premium and volatility premium. Decays toward zero at expiration.
- FTSE 100 options
- UK index options trading on ICE Futures Europe. £10 per index point. Monthly expiry only (3rd Friday). UK tax: CGT applies to GIA, tax-free in some SIPPs.
- Gamma (Γ)
- The rate of change of delta. High gamma = delta can swing rapidly. Highest near expiration for ATM options.
- GIA (General Investment Account)
- UK unwrapped account. All options strategies permitted. Gains subject to CGT (18%/24% in 2026/27 above £3k allowance).
- Implied volatility (IV)
- The market's expected future price volatility, embedded in option premium. High IV = expensive options. IV spikes before earnings, crashes after.
- In-the-money (ITM)
- For a call: strike below current price. For a put: strike above current price. ITM options have intrinsic value.
- Intrinsic value
- The in-the-money portion. ATM and OTM options have zero intrinsic value.
- Iron condor
- Selling an OTM call AND OTM put, buying further-OTM call and put for protection. Profits if underlying stays in a range. Defined-risk strategy.
- ISA (Individual Savings Account)
- UK tax-free wrapper. Standard options trading not permitted. Specific covered-call writing permitted at some brokers (HL) on ISA-held shares.
L–S
- Leg / Multi-leg
- A single component of a multi-option strategy. An iron condor has 4 legs.
- Liquidity
- Ease of buying/selling at fair price. Measured by open interest, daily volume, and bid-ask spread. UK retail should only trade options with daily volume > 100 contracts per strike.
- Long
- Buying an option (paying premium). Long call = bullish bet; long put = bearish bet.
- Margin (selling options)
- Capital required to sell options. Naked option sales require margin equal to a percentage of underlying value. Cash-secured puts require 100% of strike × 100 in cash.
- Moneyness
- Whether an option is ITM, ATM, or OTM. Affects delta, premium composition, and assignment probability.
- Naked option
- Selling an option without owning the underlying (naked call) or holding cash collateral (naked put). Unlimited or extreme downside risk. Most UK retail brokers prohibit or heavily margin naked options.
- Open interest
- Total number of contracts outstanding for a specific strike+expiry. Indicator of liquidity. Higher = more liquid.
- Out-of-the-money (OTM)
- For a call: strike above current price. For a put: strike below current price. OTM options have only extrinsic value.
- Premium
- The price paid (long) or received (short) for an option contract. Premium = intrinsic + extrinsic value.
- Put option
- Right (not obligation) to SELL the underlying at the strike. Bearish bet or insurance on owned shares.
- Rho (ρ)
- Sensitivity of option price to interest rate changes. Usually minor for short-dated options; significant for LEAPS (long-dated options).
- Short
- Selling an option (collecting premium). Short call/put = bearish/bullish bet respectively. Brings obligation to deliver if exercised.
- SIPP options trading
- Tax-free options trading inside a Self-Invested Personal Pension. Permitted by some brokers (Saxo, IBKR with limits). Most SIPP brokers (HL etc.) only allow covered calls.
- Spread
- A position with multiple options. Bull/bear, vertical/horizontal, credit/debit. Defined risk vs naked positions.
- Strike (price)
- The price at which the option holder can exercise. £100 call = right to buy at £100.
T–W
- Theta (Θ)
- Time decay — how much value the option loses per day. Negative for long positions, positive for short positions. Accelerates close to expiration.
- UK Income Tax on options
- For UK residents trading in a GIA: gains generally taxed as CGT (not income tax). Frequent professional trading may be reclassified as income — see HMRC trading guidance.
- UK 30-day rule
- Selling and re-buying the same option within 30 days disallows the CGT loss. Same rule as for shares. See the 30-day rule guide.
- Vega (ν)
- Sensitivity of option price to changes in implied volatility. Long options have positive vega. Short options have negative vega (profit from IV decreases).
- Volatility crush (IV crush)
- Rapid drop in implied volatility — typically after earnings. Can wipe out gains on directionally correct long options.
- W-8BEN
- US tax form UK residents complete to claim reduced 15% withholding (vs 30%) on US dividends. Required for trading US options at most brokers. Valid 3 years.
- Wheel strategy
- Repeated cash-secured put → assignment → covered call → assignment → cash-secured put. Generates premium income across multiple cycles. Best in SIPP if permitted.
Sources and methodology
Definitions follow standard options industry usage with UK tax/wrapper context added from HMRC guidance and FCA-regulated broker rules. For complex options tax questions, see the tax adviser editorial recommendation. The methodology page documents sources.
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