Covered Call
Owning the underlying asset and selling a call option against it to generate premium income.
Covered call: long stock + short call. The investor caps upside at K + premium but reduces effective cost basis to S − premium. Maximum profit = K − S + premium (if stock rises above K). Maximum loss = S − premium (if stock falls to zero). Breakeven = S − premium. Used by investors who are neutral to mildly bullish and want yield enhancement. The short call is 'covered' because the stock can be delivered if assigned. CFA notes the payoff is equivalent to a short put (same shape by put-call parity).
Put-Call Parity
The no-arbitrage relationship between European call and put prices: C − P = S·e^(−δT) − K·e^(−rT).
Delta (Δ)
The sensitivity of an option's price to a $1 change in the underlying spot price.
Protective Put
Owning the underlying and buying a put option as insurance against downside loss.
Black-Scholes-Merton Model (BSM)
The foundational option pricing formula that gives the fair value of a European call or put as a function of spot, strike, rate, volatility, and time.
Gamma (Γ)
The rate of change of delta with respect to the spot price — the curvature of the option's value.
Theta (Θ)
The rate at which an option loses value as time passes — time decay per calendar day.