# 11. Glossary

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**Delta :**Measure of option price sensitivity to changes in stock price.**Gamma:**Measure of option price sensitivity to changes in Delta.**Theta:**Measures the time decay of an option as we move towards expiry.**Vega:**Measures the sensitivity of the option price to changes in volatility.**Volatility:**It is used in option pricing formulas to gauge the fluctuations in the returns of the underlying assets.**Options:**Contracts that give the right to buy or sell an amount of an underlying asset at a predetermined price before the contract expires.**Call Option:**This gives the holder the right to buy a stock**Put Option:**This gives the holder the right to sell a stock.**Daily Volatility Formula:**The formula for daily volatility is computed by finding out the square root of the variance of a daily stock price. Daily Volatility formula = √Variance**Debit:**the amount of money you paid to purchase a new long position, or the amount of money paid to close an existing short position.**Defined Risk:**This is a situation where you know precisely the maximum amount of money you can lose in any trade or spread.**In-the-money (ITM):**this refers to the strike price of the option relative to the current market price of the underlying.**Out-of-the-money (OTM):**this refers to the strike price of the option relative to the current market price of the underlying.**Spread:**any position that involves a combination of two or more unique options.**Theta Decay:**This describes the natural tendency for the value of options to lose a little bit of value every day.**Daily Volatility Formula:**The formula for daily volatility is computed by finding out the square root of the variance of a daily stock price. Daily Volatility formula = √Variance**Annualized Volatility Formula:**Annualized Volatility Formula = √252 * √Variance**Historical volatility:**It is based on past and concrete data, institutional investors follow a thumb rule when calculating it. It is measured using a variance.

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