Terry grew up in Portland, Texas and idolized Houston Astros outfielder César Cedeño as a youth. He attended Gregory-Portland High School in Portland where he played baseball and basketball. Although only 5 ft 5 in (1.65 m) tall as a senior, he could still dunk a basketball.
Terry played college baseball at Southwestern University, during which time he grew approximately six inches taller. His rapid growth spurt left him bow-legged and required multiple knee surgeries.
He was drafted by the Reds in the 12th round of the 1980 amateur draft as an outfielder. Terry played his first professional season with their Class A-Advanced Tampa Tarpons in 1983. After struggling in the minor leagues for a few years and making a few successful appearances on the mound during blowout games, Reds executive Sheldon Bender suggested converting him to a pitcher. He prospered in the new role and rose quickly through the minors.

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