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Market Intelligence › Basic Terminologies
Lot, expiry, strike, premium, Greeks, IV — every essential F&O term, in plain language
Published by The Retail Trader · AUG 05, 2026 · Derivatives (F&O)
The language of derivatives feels the most confusing because three things run together: price, time and volatility. Every term needs to be clear here, because leverage is built into F&O — even a small misunderstanding quickly becomes a big one.
First, the structure on which all of F&O stands:
• Derivative — A contract whose value comes from something else. The value of a Nifty future comes from the Nifty.
• Underlying — The real thing on which the contract is based: a stock, an index, or a commodity.
• Contract — A standard agreement, in which the exchange decides the quantity and expiry — not you.
• Lot Size — How much quantity is in one contract. In F&O you do not trade 1 share, you trade a whole lot, and the exchange revises it from time to time.
• Expiry — The day the contract ends. The exchange keeps changing the expiry days and cycles, so always check a contract's expiry on the terminal.
• Weekly vs Monthly Contract — Weekly contracts with a short life decay quickly; monthly contracts are somewhat steadier.
• Contract Cycle — Near month, next month, far month — contracts of the same underlying with different expiries.
• Rollover — Moving a position out of the old expiry and into the next expiry. A large rollover means traders are sticking with the trend.
• Cash Segment vs Derivative Segment — In cash, actual shares are bought; in derivatives, contracts.
• Cash Settlement vs Physical Settlement — Index F&O settles in cash; stock F&O held until expiry can turn into actual delivery, so stock positions have to be handled carefully at expiry.
• Open Interest — How many contracts are open right now. This is the derivative market's own participation meter.
Futures are simpler than options — in one line: you are betting on direction.
• Futures Contract — An agreement to buy or sell at a fixed price on a future date.
• Long Futures — Buying in the belief that price will go up.
• Short Futures — Selling without holding the shares, in the belief that price will fall. Shorting in futures is easier than shorting in equity.
• Spot Price — The actual current price of the underlying.
• Basis — The difference between the futures price and the spot price.
• Premium / Discount — If futures trade above spot it is a premium, if below it is a discount.
• Cost of Carry — The effect of interest and dividend because of which futures stay slightly different from spot.
• SPAN + Exposure Margin — The margin that gets blocked to take a position. It can rise when volatility rises.
• Mark to Market (MTM) — Profit and loss being settled every day, not only at expiry.
• Margin Call — The margin in your account has fallen short, and you must either add money or reduce the position.
• Contango / Backwardation — If the later expiry is more expensive it is contango, if cheaper it is backwardation.
In options, one side has a right and the other side has an obligation — this is the core of the whole game:
• Option — A contract that gives the buyer the right, but not the obligation, to buy or sell at a fixed price.
• Call Option (CE) — An option that gains when price goes up.
• Put Option (PE) — An option that gains when price goes down.
• Strike Price — The fixed price on which the option is settled.
• Premium — The price of the option, which the buyer pays and the seller receives.
• Option Buyer — Pays the premium. The maximum loss is limited to the premium, but most options can also expire worthless.
• Option Seller / Writer — Takes the premium and takes on the obligation. The profit is limited but the loss can be very large, which is why margin is required.
• ITM (In the Money) — The option has intrinsic value of its own. For a call, spot is above the strike; for a put, below.
• ATM (At the Money) — The strike is roughly equal to spot. This is where time value is highest.
• OTM (Out of the Money) — No intrinsic value right now; only the price of hope. It looks cheap, which is why new traders get trapped here the most.
• Intrinsic Value — The part of the option's value that actually exists right now.
• Time Value / Extrinsic Value — The part of the premium that exists only for the remaining time and volatility. It goes to zero at expiry.
• Moneyness — The position of being ITM, ATM or OTM.
• Option Chain — A table showing the call and put price, OI and volume for every strike.
• Breakeven — The underlying price at which the option buyer has neither profit nor loss: strike + premium for a call, strike - premium for a put.
• Exercise / Assignment — The option being used, and the responsibility for it falling on the seller.
The Greeks tell you what will move the option's price and by how much — trading options without knowing them is walking in the dark:
• Delta — How much the option's price will move for a 1 point move in the underlying. An ATM option's delta is around 0.5.
• Gamma — How fast delta itself is changing. Near expiry gamma becomes very fast, so the price changes in jerks.
• Theta — Time decay: how much premium an option buyer loses automatically with each passing day. It works in the seller's favour.
• Vega — How much the premium will change for a change in volatility.
• Rho — The effect of the interest rate; it matters the least in retail trading.
• Implied Volatility (IV) — The market's expectation of how much volatility is coming ahead, derived from the option's price. High IV means expensive premiums.
• IV Crush — IV falling suddenly after a big event (such as a result), because of which the option's price falls even when the direction was right.
• Historical Volatility — A measure of how much price actually moved in the past.
• India VIX — The volatility index derived from Nifty options, called the market's fear gauge.
• Time Decay Curve — Theta's effect becomes faster near expiry; it does not run in a straight line.
These are only names, not recommendations — each has its own risk profile, which you must understand:
• Hedging — Taking an opposite position to reduce the risk of your existing position.
• Covered Call — You already hold the shares and sell a call against them.
• Protective Put — Buying a put to protect a holding, like an insurance.
• Long Straddle — Buying both a call and a put at the same strike, when a big move is expected but the direction is unknown.
• Long Strangle — The same idea at different strikes, a little cheaper but it needs a bigger move.
• Bull Call Spread — Buying one call and selling a higher call. Profit is limited and loss is limited.
• Bear Put Spread — The opposite, for a fall.
• Iron Condor — A multi-leg spread built on a range-bound expectation.
• Calendar Spread — A combination of two options with different expiries, which works on the difference in time decay.
• Naked Option Selling — Selling options without a hedge. The loss can theoretically be unlimited, so it falls in the riskiest category.
An option chain is not just a table of premiums — the whole story of positioning is written in it:
• Change in OI — How many new contracts were created or closed today. More than the total OI, this number tells you what is happening today.
• Highest OI Strike — The strike where the most contracts are open. On the call side it is often seen as resistance, and on the put side as support.
• OI Concentration — OI piling up at only a few strikes, which forms an expected range.
• PCR (Put-Call Ratio) — Put OI divided by call OI. It is read as a sentiment indicator, not as a signal.
• Max Pain — The strike at which option buyers' total loss would be the highest at expiry. It is an observation, not a prediction.
• Expected Move — The total premium of the ATM straddle, which is taken as the market's own estimate of how much the move could be by expiry.
• IV Skew / Smile — The IV of different strikes being different. Put-side IV is often higher than call-side, because the fear of a fall sells at a premium.
• Far Strike Liquidity — In far strikes the bid-ask spread is very wide; entry looks cheap there but exit turns out expensive.
• Theoretical vs Market Price — The difference between the model's price and the actual traded price, which is largest in illiquid strikes.
• Open Interest Buildup Table — The same price and OI combination chart that is in the Order Flow journal, but strike-wise.
The most expensive surprise in F&O is margin, because it can rise even after you have taken the position:
• Initial Margin — The minimum blocked when taking a position.
• Exposure Margin — An extra buffer on top of the initial, which the exchange sets according to volatility.
• MTM Margin — Additional money demanded to cover the day's loss.
• Additional / Ad-hoc Margin — The exchange can impose extra margin on a particular scrip, often because of volatility or surveillance.
• Margin Benefit — Lower margin on a hedged position (such as a spread), because the risk is lower. As soon as one leg is closed, this benefit disappears immediately — this is where people get trapped.
• Peak Margin Penalty — A penalty if a margin shortfall is found at random snapshots during the day.
• Physical Delivery Margin — In expiry week, the margin on stock F&O rises gradually, because the risk of delivery is coming closer.
• MWPL (Market Wide Position Limit) — The limit on total allowed F&O positions in a stock.
• F&O Ban Period — When the MWPL limit is crossed, only reducing positions is allowed in that stock; new ones cannot be created.
• Position Limit — The maximum contracts allowed for a client or broker.
• Square-Off on Shortfall — The risk team closing your position by itself when the margin is not met, without your consent.
The most important word in F&O is 'leverage', and it works both ways. Until the meaning of lot size, margin, expiry and theta is completely clear to you, keeping your size small is the most practical risk control.
This journal is for educational purposes only — it is not a buy or sell recommendation. Charges, margins, lot sizes and expiry rules are changed by the exchange from time to time, so always verify the final numbers with your broker or the exchange.