101 signals were generated in 2017-20 97 delivered profit
Options Glossary - Most Used Terms
Adjustments
Certain events such as a stock split or a stock dividend (e.g., a 3-for-2 stock split). An adjusted option may cover more than the usual one hundred shares. For example, after a 3-for-2 stock split, the adjusted option will represent 150 shares. For such options, the premium must be multiplied by a corresponding factor. Example: buying 1 call (covering 150 shares) at 4 would cost $600.
All Ordinaries Index
The major index of Australian stocks. This index represents 280 of the most active listed companies or the majority of the equity capitalization (excluding foreign companies) listed on the Australia Stock Exchange (ASX).
A type of option order which requires that the order be executed completely or not at all. An AON order may be either a day order or a GTC (good til cancel) order.
A private, not-for-profit corporation, located in New York City, that handles approximately one-fifth of all securities trades within the United States.
An option contract that can be exercised at any time between the date of purchase and the expiration date. Most exchange-traded options are American style.
The paying off of debt in regular installments over a period of time.
Analyst
Employee of a brokerage or fund management house who studies companies and makes buy and sell recommendations on their stocks. Most specialize in a specific industry.
Annual Earnings Change Percent
The historical earnings change between the most recently reported fiscal year earnings and the preceding.
The cost of credit that the consumer pays, expressed as a simple annual percentage.
Annual Report
A report issued by a company to its shareholders at the end of the fiscal year containing a description of the firm's operations and financial statements.
Annual Return
The simple rate of return earned by an investment for each year.
A series of constant payments at uniform time intervals (for example, periodic interest payments on a bond).
Appreciation
The increase in value of an asset.
Arbitrage
The simultaneous purchase and sale of two different, but related, securities with the intent of profiting by the price discrepancy.
Arbitrageur
An individual or company that takes advantage of momentary disparities in prices between markets which enables them to lock in profits because the selling price is higher than the buying price.
The receipt of an exercise notice by an option writer (seller) that obligates him to sell (in the case of a call) or purchase (in the case of a put) the underlying security at the specified strike price. Assignment is a notification by The Options Clearing Corporation to a clearing member that an owner of an option has exercised his or her rights there under. For equity and index options, assignments are made on a random basis by The Options Clearing Corporation.
A market in which buyers enter competitive bids and sellers enter competitive offers simultaneously. Most stock and bond markets, including those on the NYSE, function this way.
The correlation between the values of a time series and previous values of the same series.
Automatic Exercise
A protection procedure whereby the Options Clearing Corporation attempts to protect the holder of an expiring in-the-money option by automatically exercising the option on behalf of the holder.
Buying more of a stock or an option at a lower price than the original purchase so as to reduce the average cost.
Back Months
The futures or options on futures months being traded that are furthest from expiration.
Back-Testing
The testing of a strategy based on historical data to see if the results are consistent.
Backspread
A delta-neutral spread composed of more long options than short options on the same underlying instrument. This position generally profits from a large movement in either direction in the underlying instrument.
The difference between spot (cash) prices and the futures contract price.
Bear
An investor who acts on the belief that a security or the market is falling or is expected to fall.
Bear Call Spread
A strategy in which a trader sells a lower strike call and buys a higher strike call to create a trade with limited profit and limited risk. A fall in the price of the underlying increases the value of the spread. Net credit transaction; Maximum loss = difference between the strike prices less credit; Maximum gain = credit; requires margin.
A strategy in which a trader sells a lower strike put and buys a higher strike put to create a trade with limited profit and limited risk. A fall in the price of the underlying increases the value of the spread. Net debit transaction; Maximum loss = difference between strike prices less the debit; no margin.
An option strategy that makes its maximum profit when the underlying stock declines and has its maximum risk if the stock rises in price. The strategy can be implemented with either puts or calls. In either case, an option with a higher striking price is purchased and one with a lower striking price is sold, both options generally having the same expiration date.
A measure of volatility that tells how much a stock moves in relation to an index or average. A beta of 1.5, for example, means that the stock may move 50%, either up or down, more than the Dow Jones industrials, or other indicator on which it is based.
Bias
The difference between the expected value of an estimator and the actual value to be estimated.
Bid
The highest price at which a floor broker, trader or dealer is willing to buy a security or commodity for a specified time.
Bid and Asked
The bid (the highest price a buyer is prepared to pay for a trading asset) and the asked (the lowest price acceptable to a prospective seller of the same security) together comprise a quotation, or quote.
A model developed to estimate the market value of option contracts. This is the first widely-used model for option pricing. This formula can be used to calculate a theoretical value for an option using current stock prices, expected dividends, the option's strike price, expected interest rates, time to expiration and expected stock volatility. While the Black-Scholes model does not perfectly describe real-world options markets, it is still often used in the valuation and trading of options.
Block Trade
A trade so large (for example, 10,000 shares of stock or $200,000 worth of bonds) that the normal auction market cannot absorb it in a reasonable time at a reasonable price.
Blow-Off Top
A steep and rapid increase in price followed by a steep and rapid drop in price. This indicator is often used in technical analysis.
Blue Chip Stock
A stock with solid value, good security, and a record of dividend payments or other desirable investment characteristics. Many times they have a record of consistent dividend payments, receive extensive media coverage and offer a host of other beneficial investment attributes. On the downside, blue chip stocks tend to be quite expensive and often have little room for growth.
This term is derived from poker where blue chips hold the most value. Blue chips in the stock market are stocks with the best market capitalization in the marketplace.
Board Lot
The smallest quantity of shares traded on an exchange at standard commission rates.
Bond
Financial instruments representing debt obligations issued by the government or corporations traded in the futures market. A bond promises to pay its holders periodic interest at a fixed rate (the coupon), and to repay the principal of the loan at maturity. Bonds are issued with a par or face value of $1,000. Bonds are traded based upon their interest rates - if the bond pays more interest than available elsewhere, its worth increases.
BOX
Boston Options Exchange Group L.L.C.
Box Spread
A type of option arbitrage in which both a bull spread and a bear spread are established for a near-riskless position. One spread is established using put options and the other is established using calls. The spread may both be debit spreads (call bull spread vs. put bear spread) or both credit spreads ( call bear spread vs. put bull spread). Break-Even Point is the stock price (or prices) at which a particular strategy neither makes nor loses money. It generally pertains to the result at the expiration date of the options involved in the strategy. A "dynamic" break-even point is one that changes as time passes.
The point at which gains equal losses. The market price that a stock or future must reach for an option to avoid loss if exercised. For a call, the break-even equals the strike price plus the premium paid. For a put, the break-even equals the strike price minus the premium paid.
Break-Even points
The stock price(s) at which an option strategy results in neither a profit nor a loss. While a strategy's break-even point(s) are normally stated as of the option's expiration date, a theoretical option pricing model can be used to determine the strategy's break-even point(s) for other dates as well.
When a tradable exits a trading range by trading at price levels that leaves a price area where no trading occurs on a bar chart. Typically, these gaps appear at the completion of important chart formations.
A rise in the price of an underlying instrument above its resistance level or a drop below the support level.
Broad-Based
Generally referring to an index, it indicates that the index is composed of a sufficient number of stocks or of stocks in a variety of industry groups.
Broad-Based Index
An index designed to reflect the movement of the market as a whole. (For example, the S&P 100, the S&P 500, and the AMEX Major Market Index).
A person acting as an agent for making securities transactions. An 'Account Executive' or a 'broker' at a brokerage firm deals directly with customers. A 'Floor Broker' on the trading floor of an exchange actually executes someone else's trading orders.
Broker
An individual or firm which charges a commission for executing buy and sell orders.
An investor who believes that a market is rising or is expected to rise.
Bull Call Spread
A strategy in which a trader buys a lower strike call and sells a higher strike call to create a trade with limited profit and limited risk. A rise in the price of the underlying increases the value of the spread. Net debit transaction; Maximum loss = debit; Maximum gain = difference between strike prices less the debit; no margin.
A strategy in which a trader sells a higher strike put and buys a lower strike put to create a trade with limited profit and limited risk. A rise in the price of the underlying increases the value of the spread. Net credit transaction; Maximum loss = difference between strike prices less credit; Maximum gain = credit; requires margin.
An option strategy that achieves its maximum potential if the underlying security rises far enough, and has its maximum risk if the security falls far enough. An option with a lower striking price is bought and one with a higher striking price is sold, both generally having the same expiration date. Either puts or calls may be used for the strategy. This is one of a variety of strategies involving two or more options (or options combined with an underlying stock position) that may potentially profit from a rise in the price of the underlying stock.
An option strategy that has both limited risk and limited profit potential, constructed by combining a bull spread and a bear spread. Three striking prices are involved, with the lower two being utilized in one spread and the higher two in the opposite spread. The strategy can be established with either puts or calls; there are four different ways of combining options to construct the same basic position.
A covered call position in which stock is purchased and an equivalent number of calls written at the same time. This position may be transacted as a combined order, with both sides (buying stock and writing calls) being executed simultaneously. Example: buying 500 shares XYZ stock, and writing 5 XYZ May 60 calls.
CAC 40 Index
A broad-based index of 40 common stocks on the Paris Bourse.
An option strategy in which a short-term option is sold and a longer-term option is bought, both having the same striking price. Either puts or calls may be used.
An Option contract that gives the holder the right to buy the underlying security at a specified price for a certain, fixed period of time.
Call Option
An option giving the buyer the right to purchase an underlying security at a fixed price (strike price) and within a specific period of time (expiry date).
A stock index which is computed by adding the capitalization (float times price) of each individual stock in the index, and then dividing by the divisor. The stocks with the largest market values have the heaviest weighting in the index.
A capped option is an option with an established profit cap or cap price. The cap price is equal to the option's strike price plus a cap interval for a call option or the strike price minus a cap interval for a put option. A capped option is automatically exercised when the underlying security closes at or above (for a call) or at or below (for a put) the Option's cap price.
The process by which the terms of an option contract are fulfilled through the payment or receipt in dollars of the amount by which the option is in-the-money as opposed to delivering or receiving the underlying stock.
The difference between the exercise price of the option being exercised and the exercise settlement value of the index on the day the index option is exercised.
Referring to an option or future that is settled in cash when exercised or assigned. No physical entity, either stock or commodity, is received or delivered.
CBOE
The Chicago Board Options Exchange; the first national exchange to trade listed stock options.
Change
The difference between the current price and the price of the previous day of a security.
Chicago Board of Trade (CBOT)
Established in 1886, the CBOT is the oldest commodity exchange in the United States and primarily lists grains, T-Bonds and notes, metals and indexes.
Chicago Board Options Exchange (CBOE)
The largest options exchange in the United States.
An institution established separately from the exchanges to ensure timely payment and delivery of securities.
Close
A reduction or an elimination of an open position by the appropriate offsetting purchase or sale. An existing long option position is closed by a selling transaction. An existing short option position is closed by a purchase transaction. This transaction will reduce the open interest for the specific option involved.
Closing Price
The final price of a security at which a transaction was made.
A transaction in which the purchaser's intention is to reduce or eliminate a short position in a given series of options.
Closing Range
The high and low prices recorded during the period designated as the official close.
Closing Sale
A transaction in which the seller's intention is to reduce or eliminate a long position in a given series of options
Closing Transaction
A reduction or an elimination of an open position by the appropriate offsetting purchase or sale. Basically this is a trade that reduces an investor's position. Closing buy transactions reduce short positions (an existing long option position is closed by a selling transaction) and closing sell transactions reduce long positions (an existing short option position is closed by a purchase transaction). This transaction will reduce the open interest for the specific option involved.
Coincidence
In Gann theory, a projected reversal point.
Collar
A protective strategy in which a written call and a long put are taken against a previously owned long stock position. The options may have the same strike price or different strike prices and the expiration months may or may not be the same. For example, if the investor previously purchased XYZ Corporation at $46 and it rose to $62, a 'collar' involving the purchase of a May 60 put and the writing of a May 65 call could be established as a way of protecting some of the unrealized profit in the XYZ Corporation stock position. The reverse is a long call combined with a written put that might also be used if the investor has previously established a short stock position in XYZ Corporation.
Collateral
The loan value of marginable securities; generally used to finance the writing of uncovered options. If the value of the securities (relative to the loan) declines to an unacceptable level, this triggers a margin call. As such, the investor is asked to post additional collateral or the securities are sold to repay the loan.
Combination
Any position involving both put and call options that is not a straddle.
Combination Spread
A technique involving a long call and a short put, or a short call and a long put. This technique is also called a fence strategy.
The sale or purchase of 2 options with consecutive exercise prices, together with the sale or purchase of 1 option with an immediately lower exercise price and 1 option with an immediately higher exercise price.
Condor Spread
A strategy involving four strike prices that has both limited risk and limited profit potential. A long call condor spread is established by buying one call at the lowest strike, writing one call at the second strike, writing another call at the third strike, and buying one call at the fourth (highest) strike. This spread is also referred to as a 'flat-top butterfly.'
A unit of trading for a financial or commodity future, or option.
Contract Size
The amount of the underlying asset covered by the option contract. This is 100 shares for one equity option unless adjusted for a special event, such as a stock split or a stock dividend, or otherwise special by the listing exchange.
A strategy in which a long put and a short call with the same strike price and expiration are combined with long stock to lock in a nearly risk less profit. The process of executing these three-sided trades is sometimes called conversion arbitrage.
Conversion Arbitrage
A riskless transaction in which the arbitrageur buys the underlying security, buys a put, and sells a call. The options have the same terms.
A security that is convertible into another security. Generally, a convertible bond or convertible preferred stock is convertible into the underlying stock of the same corporation. The rate at which the shares of the bond or preferred stock are convertible into the common is called the conversion ratio.
A sudden decline in the price of a security after a period of market strength.
Cover
To close out an open position - to buy back as a closing transaction an option that was initially written. This term is used to describe the purchase of an option or stock to close out an existing short position for either a profit or loss.
Covered
A written option is considered to be covered if the writer also has an opposing market position on a share-for-share basis in the underlying security. That is, a short call is covered if the underlying stock is owned, and a short put is covered (for margin purposes) if the underlying stock is also short in the account. In addition, a short call is covered if the account is also long another call on the same security, with a striking price equal to or less than the striking price of the short call. A short put is covered if there is also a long put in the account with a striking price equal to or greater than the striking price of the short put.
A strategy in which one sells call options while simultaneously owning an equivalent position in the underlying security or strategy in which one sells put options and simultaneously is short an equivalent position in the underlying security.
A strategy in which one call and one put with the same expiration, but different strike prices, are written against each 100 shares of the underlying stock. Example: writing 1 XYZ May 60 call and writing 1 XYZ May 55 put, and buying 100 shares of XYZ stock. In actuality, this is not a fully 'covered' strategy because assignment on the short put would require purchase of additional stock.
An open short option position that is fully offset by a corresponding stock or option position. That is, a covered call could be offset by long stock or a long call, while a covered put could be offset by a long put or a short stock position. This insures that if the owner of the option exercises, the writer of the option will not have a problem fulfilling the delivery requirements.
Cash secured put is an option strategy in which a put option is written against a sufficient amount of cash (or T-bills to pay for the stock purchase if the short option is assigned).
An option strategy in which one call and one put with the same strike price and expiration are written against 100 shares of the underlying stock. In actuality, this is not a "covered" strategy because assignment on the short put would require purchase of stock on margin. This method is also known as a covered combination.
The term used to describe the strategy in which an investor owns the underlying security and also writes a straddle on that security. This is not really a covered position.
Writing a call against a long position in the underlying stock. This is used to realize additional return on the underlying stock or gain some element of protection (limited to the amount of the premium less transactions costs) from a decline in the value of that underlying stock.
Money received in an account either from a deposit or a transaction that results in increasing the account's cash balance. A credit transaction is one in which the net sale proceeds are larger than the net buy proceeds (cost), thereby bringing money into the account.
Credit Spread
The difference in value of two options, where the value of the one sold exceeds the value of the one purchased.
The current exchange rate between differing currencies.
Curvature
A measure of the rate of change in an option's delta for a one-unit change in the price of the underlying stock.
Cycle
The expiration dates applicable to various classes of options. There are three cycles: January/April/July/October, February/May/August/November, and March/June/September/ December. Today, equity options expire on a hybrid cycle which involves a total of four option series: the two nearest-term calendar months and the next two months from the traditional cycle to which that class of options has been assigned. For example, on January 1, a stock in the January cycle will be trading options expiring in these months: January, February, April, and July. After the January expiration, the months outstanding will be February, March, April and July.
Daily Range
The difference between the high and low price of a security in one trading day.
Day Order
A type of option order which instructs the broker to cancel any unfilled portion of the order at the close of trading on the day the order is first entered.
A position (stock or option) that is opened and closed on the same day.
Day Trading
An approach to trading in which the same position is entered and exited within one day.
Debit
Money paid out from an account either from a withdrawal or a transaction that results in decreasing the cash balance. A debit transaction is one in which the net cost is greater than the net sale proceeds.
Debit Spread
The difference in value of two options, where the value of the long position exceeds the value of the short position.
A term used to describe how the theoretical value of an option 'erodes' or reduces with the passage of time. Time decay is specifically quantified by theta.
Deep-in-the-Money
A deep-in-the-money call option has the strike price of the option well below the current price of the underlying instrument. A deep-in-the-money put option has the strike price of the option well above the current price of the underlying instrument.
Delayed Time
Quotes from a data service provider which are delayed up to 20 minutes from real time quotes.
Deliver
To take securities from an individual or firm and transfer them to another individual or firm. A call writer who is assigned must deliver stock to the call holder who exercised. A put holder who exercises must deliver stock to the put writer who is assigned.
Delivery
The process of satisfying an equity call assignment or an equity put exercise. In either case, stock is delivered. For futures, the process of transferring the physical commodity from the seller of the futures contract to the buyer. Equivalent delivery refers to a situation in which delivery may be made in any of various, similar entities that are equivalent to each other (for example, Treasury bonds with differing coupon rates).
A measure of the rate of change in an option's theoretical value for a one-unit change in the price of the underlying security. Call options have positive deltas, while put options have negative deltas. Technically, the delta is an instantaneous measure of the option's price change, so that the delta will be altered for even fractional changes by the underlying entity.
Delta Neutral
A position arranged by selecting a calculated ratio of short and long positions that balance out to an overall position delta of zero.
A ratio spread that is established as a neutral position by utilizing the deltas of the options involved. The neutral ratio is determined by dividing the delta of the purchased option by the delta of the written option.
An options strategy protecting an option against price changes in the option's underlying instrument by balancing the overall position delta to zero. These hedges are constructed by taking a position in the underlying instrument that is equal in magnitude but opposite in sign (+/-) to the option's delta.
This an "options/options" or "options/underlying instrument" position constructed so that it is relatively insensitive to the price movement of the underlying instruments. This is arranged by selecting a calculated ratio of offsetting short and long positions.
A corporation that will hold securities for member institutions. Generally used by option writers, the DTC facilitates and guarantees delivery of underlying securities if assignment is made against securities held in DTC.
Derivative
Financial instruments based on the market value of an underlying asset.
Derivative Security
A financial security whose value is determined in part from the value and characteristics of another security, the underlying security.
A strategy involving the simultaneous purchase and sale of two options of the same type that have different strike prices and different expiration dates. Typical types of diagonal spreads are diagonal bull spreads, diagonal bear spreads, and diagonal butterfly spreads.
An option is trading at a discount if it is trading for less than its intrinsic value. A future is trading at a discount if it is trading at a price less than the cash price of its underlying index or commodity.
Discount Arbitrage
A riskless arbitrage in which a discount option is purchased and an opposite position is taken in the underlying security. The arbitrageur may either buy a call at a discount and simultaneously sell the underlying security (basic call arbitrage) or may buy a put at a discount and simultaneously buy the underlying security (basic put arbitrage).
Brokerage firms that offer lower commission rates than full service brokers, but do not offer services such as advice, research and portfolio planning.
Freedom given by an investor through his or her Account Executive to use judgment regarding the execution of an order. Discretion can be limited, as in the case of a limit order that gives the floor broker.125 or.25 point from the stated limit price to use his judgment in executing the order. Discretion can also be unlimited, as in the case of a market-not-held-order.
Divergences
When two or more averages or indices fail to show confirming trends.
Dividend
A sum of money paid out to a shareholder from the stock's profits.
Divisor
A mathematical quantity used to compute an index. It is initially an arbitrary number that reduces the index value to a small, workable number. Thereafter, the divisor is adjusted for stock splits (price-weighted index) or additional issues of stock (capitalization-weighted index).
Dow Jones Industrial Average (DJIA)
Used as an overall indicator of market performance, this average is composed of 30 blue chip stocks which are traded daily on the New York Stock Exchange.
Generally used in connection with covered call writing, this is the cushion against loss, in case of a price decline by the underlying security, that is afforded by the written call option. Alternatively, it may be expressed in terms of the distance the stock could fall before the total position becomes a loss (an amount equal to the option premium), or it can be expressed as percentage of the current stock price.
For option strategies, describing analyses made during the course of changing security prices and during the passage of time. This is as opposed to an analysis made at expiration of the options used in the strategy. A dynamic break-even point is one that changes as time passes. A dynamic follow-up action is one that will change as either the security price changes or the option price changes or time passes.
Each Way
The commission made by a broker for the purchase and sale sides of a trade.
Early Exercise
A feature of American-style options that allows the owner to exercise an option at any time prior to its expiration date.
The close of the trading day when market prices settle.
EPS Rank
An Investor's Business Daily list of companies ranked from 0 to 100 by the strength of each company's earnings per share.
Equilibrium
A price level in a sideways market equal-distance from the resistance and support levels.
Equity
In a margin account, this is the difference between the securities owned and the margin loans owed. It is the amount the investor would keep after all positions have been closed and all margin loans paid off.
Equity Option
An option on shares of an individual common stock or exchange traded fund (ETF).
A strategy which has the same risk-reward profile as another strategy. For example, a long May 60-65 call vertical spread is equivalent to a short May 60-65 put vertical spread.
A receipt issued by a bank in order to verify that a customer (who has written a call) in fact owns the stock and therefore the call is considered covered.
Eurodollar
Dollars deposited in foreign banks, with the futures contract reflecting the rates offered between US banks and foreign banks.
European Exercise
A feature of an option that stipulates that the option may only be exercised at its expiration. Therefore, there can be no early assignment with this type of option.
The day before which an investor must have purchased the stock in order to receive the dividend. On the ex-dividend date, the previous day's closing price is reduced by the amount of the dividend (rounded up to the nearest eighth) because purchasers of the stock on the ex-dividend date will not receive the dividend payment. This date is sometimes referred to simply as the 'ex-date,' and can apply to other situations; for example, splits and distributions. If you purchase a stock on the ex-date for a split or distribution you are not entitled to the split stock or that distribution. However, the opening price for the stock will have been reduced by an appropriate amount, as on the ex-dividend date.
The process whereby a stock's price is reduced when a dividend is paid. The ex-dividend date (ex-date) is the date on which the price reduction takes place. Investors who own stock on the ex-date will receive the dividend, and those who are short stock must pay out the dividend.
Exchange traded funds (ETFs) are index funds or trusts that are listed on an exchange and can be traded in a similar fashion as a single equity. The first ETF came about in 1993 with the AMEX's concept of a tradable basket of stocks - the Standard & Poor's Depositary Receipt (SPDR). Today, the number of ETFs that trade options continues to grow and diversify. Investors can buy or sell shares in the collective performance of an entire stock portfolio - or a bond portfolio as a single security. Exchange traded funds allow some of the more favorable features of stock trading, such as liquidity and ease of equity style features to more traditional index investing.
The process of completing an order to buy or sell securities.
Exercise
Implementing an option's right to buy or sell the underlying security. In the case of a call, the option owner buys the underlying stock. In the case of a put, the option owner sells the underlying stock.
Exercise by Exception Processing
A procedure used by The Options Clearing Corporation as an operational convenience for it's clearing members. Under these proceedings, a clearing member is deeming to have tendered exercise notices for options that are in-the-money by threshold amounts, unless specifically instructed not to do so. This procedure protects the owner from losing the intrinsic value of the option because of failure to exercise. Unless instructed not to do so, all expiring equity options that are held in customer accounts will be exercised if they are in the money by a specified amount.
The limit on the number of contracts which a holder can exercise in a fixed period of time. Set by the appropriate option exchange, it is designed to prevent an investor or group of investors from "cornering" the market in a stock.
The price at which the owner of an option can purchase (call) or sell (put) the underlying stock. In other words, it is the price at which the call holder may exercise to buy the underlying security or the put holder may exercise to sell the underlying security. For listed options, the exercise price is the same as the Striking Price.
The difference between the exercise price of the option and the exercise settlement value of the index on the day an exercise notice is tendered, multiplied by the index multiplier.
A rather complex mathematical analysis involving statistical distribution of stock prices, it is the return which an investor might expect to make on an investment if he were to make exactly the same investment many times throughout history.
The date and time after which an option may no longer be exercised.
Expiration Cycle
Today, equity options (except LEAPS) expire on a hybrid cycle which involves a total of four option series: the two nearest-term calendar months and the next two months from the traditional cycle to which that class of options has been assigned. For example, on January 1, a stock in the January cycle will be trading options expiring in these months: January, February, April, and July. After the January expiration, the months outstanding will be February, March, April and July.
The day on which an option contract becomes void. The expiration date for listed stock options is the Saturday after the third Friday of the expiration month. Holders of options should indicate their desire to exercise, if they wish to do so, by this date.
The last business day prior to the option's expiration date during which purchases and sales of options can be made. For equity options, this is generally the third Friday of the expiration month. Note: If the third Friday of the month is an exchange holiday, the last trading day will be the Thursday immediately preceding the third Friday.
The time of day by which all exercise notices must be received on the expiration date. Technically, the expiration time is currently 5:00PM on the expiration date, but public holders of option contracts must indicate their desire to exercise no later than 5:30PM on the business day preceding the expiration date. The times are Eastern Time.
An opportunity that can yield large profits with usually a limited risk in a short amount of time.
Extrinsic Value
The price of an option less its intrinsic value. An out-of-the money option's worth consists of nothing but extrinsic or time value.
Facilitation
The process of providing a market for a security. Normally, this refers to bids and offers made for large blocks of securities, such as those traded by institutions. Listed options may be used to offset part of the risk assumed by the trader who is facilitating the large block order.
Normally, a term used to describe the worth of an option or futures contract as determined by a mathematical model. Also sometimes used to indicate intrinsic value.
Fast Markets
A declaration that market conditions, in the futures pit, are so disorderly temporarily to the extent that floor brokers are not held responsible for the execution of orders.
A protective strategy in which a written call and a long put are taken against a previously owned long stock position. The options may have the same strike price or different strike prices and the expiration months may or may not be the same. For example, if the investor previously purchased XYZ Corporation at $46 and it rose to $62, a 'collar' involving the purchase of a May 60 put and the writing of a May 65 call could be established as a way of protecting some of the unrealized profit in the XYZ Corporation stock position. The reverse is a long call combined with a written put that might also be used if the investor has previously established a short stock position in XYZ Corporation.
Fill
An executed order.
Fill or Kill
Placing an order to buy or sell an exact number of units or none at all.
A type of option order which requires that the order be executed completely or not at all. A fill-or-kill order is similar to an all-or-none (AON) order. The difference is that if the order cannot be completely executed (i.e., filled in its entirety) as soon as it is announced in the trading crowd, it is to be 'killed' (i.e., cancelled) immediately. Unlike an AON order, a FOK order cannot be used as part of a GTC order.
Exchange traded equity or index options, where the investor can specify within certain limits, the terms of the options, such as exercise price, expiration date, exercise type, and settlement calculation.
The number of shares outstanding of a particular common stock.
Floor Broker
A broker on the exchange floor who executes the orders of public customers or other investors who do not have physical access to the trading area. It is a trader on an exchange floor who executes trading orders for other people.
A method of analyzing the prospects of a security by observing accepted accounting measures such as earnings, sales, assets, dividends, management, products, services and so on.
Fungibility
Interchangeability resulting from standardization. Options listed on national exchanges are fungible, while over-the-counter options generally are not. Classes of options listed and traded on more than one national exchange are referred to as multiple-listed / multiple-traded options.
Futures
All contracts covering the purchase and sale of financial instruments or physical commodities for future delivery. These orders are transacted on a commodity futures exchange.
Futures Contract
A standardized contract calling for the delivery of a specified quantity of a commodity at a specified date in the future.
A conservative strategy used to limit investment loss by effecting a transaction which offsets an existing position. Hedging is taking a position through options or futures opposite to the current position they hold in the market.
Hedge Ratio
The mathematical quantity that is equal to the delta of an option. It is useful in that a theoretically neutral hedge can be established by taking offsetting positions in the underlying stock and its call options.
A position established with the specific intent of protecting an existing position. For example, an owner of common stock may buy a put option to hedge against a possible stock price decline.
A measure of actual stock price changes over a specific period of time; usually calculated by taking a standard deviation of price changes over a time period.
A type of option order which gives the trading crowd one opportunity to take the other side of the trade. After being announced, the order will be either partially or totally filled with any remaining balance immediately cancelled. An IOC order, which can be considered a type of day order, cannot be used as part of a GTC order since it will be cancelled shortly after being entered. The difference between fill-or-kill (FOK) orders and IOC orders is that a IOC order may be partially executed.
An order which must be filled immediately or canceled.
Implied Volatility
A measure of the volatility of the underlying stock, it is determined by using option prices currently existing in the market at the time rather than using historical data on the price changes of the underlying stock.
A term describing any option that has intrinsic value. A call option is in the money if the stock price is above the strike price. A put option is in the money if the stock price is below the strike price. If you were to exercise an option and it would general a profit at the time, it is known to be in the money.
In-the-Money option
An adjective used to describe an option with intrinsic value. A call option is in the money if the stock price is above the strike price. A put option is in the money if the stock price is below the strike price.
A strategy of covered call writing in which the investor is striving to earn an additional return from option writing against a stock position which he (she) has targeted to sell possibly at substantially higher prices.
A compilation of the prices of several common entities (stocks) into a single number. An index is a group of stocks which can be traded as one portfolio, such as the S&P 500. Broad-based indexes cover a wide range of industries and companies and narrow-based indexes cover stocks in one industry or economic sector.
Index Option
An option whose underlying entity is an index. Most index options are cash-based. Index options allow investors to trade in a specific industry group or market without having to buy all the stocks individually.
The volatility percentage that justifies an option's price, as opposed to historic or implied volatility. A theoretical option pricing model can be used to generate an option's individual volatility when the five remaining quantifiable factors (stock price, time until expiration, strike price, interest rates, and cash dividends) are entered along with the price of the option itself.
A professional investment management company, probably very large, engaged in professional investing in securities. Normally a bank, insurance company, or mutual fund.
Inter-Market Analysis
Observing the price movement of one market for the purpose of evaluating a different market.
The charge for the privilege of borrowing money, usually expressed as an annual percentage rate.
Interest Rate Driven
Refers to a point in the business cycle when interest rates are declining and bond prices are rising.
Intrinsic Value
The portion of an option's premium that is represented when the cash market price is greater that the exercise price; a known constant equal to the difference between the strike price and underlying market price. For call options, this is the difference between the stock price and the striking price, if that difference is a positive number, or zero otherwise. For put options it is the difference between the striking price and the stock price, if that difference is positive, and zero otherwise.
Inverse Relationship
Two or more markets which act totally opposite of one another producing negative correlations.
Investment
Any purchase of an asset to increase future income.
Iron butterfly
An option strategy with limited risk and limited profit potential that involves both a long (or short) straddle, and a short (or long) combination. An iron butterfly contains four options as is an equivalent strategy to a regular butterfly spread which contains only three options. All options must have the same underlying and have the same expiration.
ISE
International Securities Exchange.
Kappa
A measure of the rate of change in an option's theoretical value for a one-unit change in the volatility assumption.
Lag
The number of data points that a filer, such as a moving average, follows or trails the input price data.
Last Trading Day
The very last full day of open trading before an options expiration day, usually the third Friday of the expiration month. Note: If the third Friday of the month is an exchange holiday, the last trading day will be the Thursday immediately preceding the third Friday.
Leaps
Long-term Equity Anticipation Securities, which are options with maturities longer than one year.
Leg
One side of a spread. This is a risk-oriented method of establishing a two-sided position. Rather than entering into a simultaneous transaction to establish the position (a spread, for example), the trader first executes one side of the position, hoping to execute the other side at a later time and a better price. The risk materializes from the fact that a better price may never be available, and a worse price must eventually be accepted. This is, of course, a higher-risk method of establishing a spread position.
Leg Out
In rolling forward in futures, a method that would result in liquidating a position.
A letter from a bank to a brokerage firm which states that a customer (who has written a call option) does indeed own the underlying stock and the bank will guarantee delivery if the call is assigned. Thus the call can be considered covered. Not all brokerage firms accept letters of guarantee. Also: letter issued to O.C.C. by member firms covering a guarantee of any trades made by one of its customers, (a trader or broker on the exchange floor).
Leverage
A term describing the greater percentage of profit or loss potential when a given amount of money controls a security with a much larger face value. For example, a call option enables the owner to assume the upside potential of 100 shares of stock by investing a much smaller amount than that required to buy the stock. If the stock increases by 10 percent, for example, the option might double in value. Conversely, a 10 percent stock price decline might result in the total loss of the purchase price of the option. A call holder has leverage with respect to a stock holder - the former will have greater percentage profits and losses than the latter, for the same movement in the underlying stock.
Limit Move
The maximum daily price limit for an exchange traded contract.
Limit Order
A trading order placed with a broker to buy or sell stock or options at a specific price. A limit order may also be placed "with discretion". In this case, the floor broker executing the order may use his (her) discretion to buy or sell at a set amount beyond the limit if he (she) feels it is necessary to fill the order.
Commodity exchange restrictions on the maximum upward or downward movements permitted in the price for a commodity during any trading session day.
Liquid Market
A trading environment characterized by high trading volume, a narrow spread between the bid and ask prices, and the ability to trade larger sized orders without significant price changes.
The ease with which an asset can be converted to cash in the marketplace. A large number of buyers and sellers and a high volume of trading activity provide high liquidity.
Listed Option
A put or call option that is traded on a national options exchange. Listed options have fixed striking prices and expiration dates.� In contrast, over-the-counter options usually have non-standard or negotiated terms.
A statistical distribution that is often applied to the movement of stock prices. It is a convenient and logical distribution because it implies that stock prices can theoretically rise forever but cannot fall below zero.
Long
The term used to describe the buying of a security, contract, commodity, or option.
Long Option Position
The position of an option purchaser (owner) which represents the right to either buy stock (in the case of a call) or to sell stock (in the case of a put) at a specified price (the strike price) at or before some date in the future (the expiration date). It results from an opening purchase transaction e.g., long call or long put.
A position wherein an investor's interest in a particular series of options is as a net holder (i.e., the number of contracts bought exceeds the number of contracts sold).
In English, this means calls and puts with an expiration as long as thirty-nine months. Currently, equity LEAPS have two series at any time with a January expiration. For example, in October 2000, LEAPS are available with expirations of January 2002 and January 2003.
A deposit contributed by a customer as a percentage of the current market value of the securities held in a margin account is thus the margin amount. This amount changes as the price of the investment changes. basically, margin is a buying a security by borrowing funds from a brokerage house.
Margin Account
A customer account in which a brokerage firm lends the customer part of the purchase price of a trade.
The minimum equity required to support an investment position, the maximum percentage of the investment that can be loaned by the brokerage firm - is set by the Federal Reserve Board. To buy on margin refers to borrowing part of the purchase price of a security from a brokerage firm.
An accounting process by which the price of securities held in account are valued each day to reflect the last sale price or market quote if the last sale is outside of the market quote. The result of this process is that the equity in an account is updated daily to properly reflect current security prices. Market-to-market is the daily adjustment of margin accounts to reflect profits and losses. In this way, losses are never allowed to accumulate.
At the end of each business day the open positions carried in an account held at a brokerage firm are credited or debited funds based on the settlement price of the open positions that day.
An independent trader or trading firm that is prepared to buy and sell shares or contracts in a designated market. Market makers must make a 2-sided market (bid and ask) in order to facilitate trading.
Also a market order, but the investor is allowing the floor broker who is executing the order to use his own discretion as to the exact timing of the execution. If the floor broker expects a decline in price and he is holding a "market not held buy order", he (she) may wait to buy, figuring that a better price will soon be available. There is no guarantee that a "market not held order" will be filled.
An order specification that requires the broker to get the best price available on the close of trading, usually during the last five minutes of trading.
An order to buy or sell securities at the current market. The order will be filled as long as there is a market for the security. A market order is to be executed immediately at the best available price, and is the only order that guarantees execution.
A quotation of the current best bid / ask prices for an option or stock in the marketplace (an exchange trading floor). This information is usually obtained by the investor from someone at a brokerage firm. However, for listed options and stocks, these quotes are widely disseminated and available through various commercial quotation services.
The price at which investors buy or sell a share of common stock or a bond at a given time. Market value is determined by the interaction between buyers and sellers.
An exchange member whose function is to aid in the making of a market, by making bids and offers for his account in the absence of public buy or sell orders. Several market-makers are normally assigned to a particular security. The market-maker system encompasses the market-makers, floor brokers, and order book officials.
A method of supplying liquidity in options markets by having market makers in competition with one another. An alternative to a specialist system. They are similarly charged with making fair and orderly markets in a given class of options.
A type of option order which requires that an order be executed at or near the close of trading on the day the order is entered. A MOC order, which can be considered a type of day order, cannot be used as part of a GTC order.
The simultaneous purchase of stock and the corresponding number of put options. This is a limited risk strategy during the life of the puts because the stock can be sold at the strike price of the puts.
The simultaneous purchase of stock and put options representing an equivalent number of shares when the position is designated at that time as a hedge. This is a limited risk strategy during the life of the puts because the stock can always be sold for at least the strike price of the purchased puts.
Usually solidly established medium growth firms with less than 100 billion in assets. They provide better growth potential than blue-chip stocks, but do not offer as wide a variety of investment attributes.
A mathematical formula used to calculate the theoretical value of an option. This is a mathematical formula designed to price an option as a function of certain variables - generally stock price, striking price, volatility, time to expiration, dividends to be paid, and the current risk-free interest rate. The Black-Scholes model is one of the more widely used models.
Momentum
When a market continues in the same direction for a certain time frame, the market is said to have momentum.
Momentum Indicator
A technical indicator utilizing price and volume statistics for predicting the strength or weakness of a current market.
The moving average is probably the best known, and most versatile, technical indicator. A mathematical procedure in which the sum of a value plus a selected number of previous values are divided by the total number of values. Used to smooth or eliminate t he fluctuations in data and to assist in determining when to buy and sell.
A short option position that is not fully collateralized if notification of assignment is received. A short call position is uncovered if the writer does not have a long stock or long call position. A short put position is uncovered if the writer is not short stock or long another put.
The National Association of Securities Dealers is an industry association of broker/dealers in the over-the-counter securities business. The NASD is a self-regulatory body and administers the NASDAQ stock market.
National Association of Securities Dealers Automated Quotations system - a computerized system providing brokers and dealers with price quotations for securities traded over-the-counter as well as for many New York Stock Exchange listed securities.
Near-the-Money
An option with a strike price close to the current price of the underlying tradable.
Net Change
The daily change from time frame to time frame. For example, the change from the close of yesterday to the close of today.
An adjective describing the belief that a stock or the market in general will neither rise nor decline significantly.
Neutral strategy
Describing an opinion that is neither bearish nor bullish. Neutral option strategies are generally designed to perform best if there is little or no net change in the price of the underlying stock or index. This is an option strategy (or stock and option position) expected to benefit from a neutral market outcome.
A conservative option strategy in which an investor buys Treasury bills (or other liquid assets) with 90 percent of his or her funds, and buys call options (or put options or a mixture of both) with the balance. The proportions of this strategy are subject to change based on prevailing interest rates.
An option whose underlying entity is not common stock; typically refers to options on physical commodities and index options. At the same time non-equity options include options on futures, foreign currencies, Treasury security yields, etc.
A type of order which releases normal obligations implied by the other terms of the order. For example, a limit order designated as 'not-held' allows discretion to the floor trader in filling the order when the market trades at the limit price of the order. In this case, there is no obligation to provide the customer with an execution if the market trades through the limit price on the order.
A short-term debt security, usually maturing in five years or less.
Notice Period
The time during which the buyer of a futures contract can be called upon to accept delivery. Typically, the 3 to 6 weeks preceding the expiration of the contract.
NYSE
New York Stock Exchange.
Odds
Odds is the predicted profits divided by the predicted losses obtained by projecting the stock price randomly into the future using the Statistical Volatility (SV). The prediction stops at the expiration of the earliest expiring option leg.
OEX
This term, pronounced as three separate letters, is Wall Street shorthand for Standard & Poor's 100 stock index.
Off-Floor Trader
A trader who does not trade on the actual floor of an organized futures of stock exchange.
To liquidate a futures position by entering an equivalent but opposite transaction. To offset a long position, a sale is made; to offset a short position, a purchase is made.
On-the-Money
The option in question is trading at its exercise price (also referred to as at-the-money).
One-Cancels-Other Order (OCO)
A type of option order which treats two or more option orders as a package, whereby the execution of any one of the orders causes all the orders to be reduced by the same amount. For example, the investor would enter an OCO order if he/she wished to buy 10 May 60 calls or 10 June 60 calls or any combination of the two which when summed equaled 10 contracts. An OCO order may be either a day order or a GTC order.
A system or trading method where an auction of verbal bids and offers is performed on the trading floor. This method is slowly disappearing as exchanges become automated.
Open Trades
A current trades that is still held active in a customer's account.
Opening
The period at the beginning of the trading session at an exchange.
Opening Call
A period at the opening of a futures market in which the price for each contract is established by outcry.
A trade which adds to the net position of an investor. An opening buy transaction adds more long securities to the account. An opening sell transaction adds more short securities. An opening option transaction increases that option's open interest.
The theoretical cost of using your capital for one investment versus another.
Option
A contract that gives the owner the right, but not the obligation, to buy or sell a particular asset (the underlying stock) at a fixed price (the strike price) for a specific period of time (until expiration) . The contract also obligates the writer to meet the terms of delivery if the contract right is exercised by the owner.
Option Contract
A contract that represents the right, but not the obligation, to buy or sell a specified amount of an underlying security (stock, bond, futures contract, etc.) at a specified price within a specified time.
A graphical representation of the estimated theoretical value of an option at one point in time, at various prices of the underlying stock. It reflects the amount of time value premium in the option for various stock prices, as well. The curve is generated by using a mathematical model. The delta (or hedge ratio) is the slope of a tangent line to the curve at a fixed stock price.
The first widely-used model for option pricing is the Black Scholes. This formula can be used to calculate a theoretical value for an option using current stock prices, expected dividends, the option's strike price, expected interest rates, time to expiration and expected stock volatility. While the Black-Scholes model does not perfectly describe real-world options markets, it is still often used in the valuation and trading of options.
The seller of either a call or put option. The seller is obligated to meet the terms of delivery if the option owner exercises his or her right. This seller has made an opening sale transaction, and has not yet closed that position.
A registered clearing agency whose shares are owned by the exchanges that trade listed equity options, OCC is an intermediary between option buyers and sellers. OCC issues and guarantees all listed option contracts.
The issuer of all listed option contracts that are trading on the national option exchanges. OOC is the registered clearing agency whose shares are owned by the exchanges that trade listed equity options, OCC is an intermediary between option buyers and sellers. OCC issues and guarantees all listed option contracts.
A ticket or voucher representing long or short securities and options.
Order Book Official
The exchange employee in charge of keeping a book of public limit orders on exchanges utilizing the "maker-maker" system, as opposed to the "specialist system", of executing orders.
An over-the-counter option is one which is traded in the over-the-counter market. OTC options are not listed on an options exchange and do not have standardized terms. These are to be distinguished from exchange-listed and traded equity options with NASD stocks as the underlying equity issue, which are standardized.
A call option is out-of-the-money if the strike price is greater than the market price of the underlying security. A call option is out-of-the-money if the strike price is greater than the market price of the underlying security. A put option is out-of-the-money if the strike price is less than the market price of the underlying security.
Out-of-the-Money Option
An adjective used to describe an option that has no intrinsic value, i.e., all of its value consists of time value. A call option is out-of-the-money if the strike price is greater than the market price of the underlying security. A put option is out-of-the-money if the strike price is less than the market price of the underlying security.
A call option is out-of-the-money if its exercise or strike price is above the current market price of the underlying security. A put option is out-of-the-money if its exercise or strike price is below the current market price of the underlying security.
An option traded off-exchange, as opposed to a listed stock option. The OTC option has a direct link between buyer and seller, has no secondary market, and has no standardization of striking prices and expiration dates.
A national association having many characteristics of an exchange. Rather than a floor or physically central market place, trading takes place via computer terminals.
Market prices that have risen too steeply or too fast.
Oversold
Market prices that have decline too steeply and too fast.
Overvalued
Describing a security trading at a higher price than it logically should. Normally associated with the results of option price predictions by mathematical models. If an option is trading in the market for a higher price than the model indicates, the option is said to be overvalued.
Overwrite
An option strategy involving the writing of call options (wholly or partially) against existing long stock positions. This is different from the buy-write strategy which involves the simultaneous purchase of stock and writing of a call.
Owner
Any person who has made an opening purchase transaction, call or put, and has that position in a brokerage account.
Paper Trading
The ability to simulate a trade without actually putting up the money for the purpose of gaining additional trading experience.
Par
The stated or "nominal" value of a bond (typically $1,000) that is paid to the bondholder at maturity.
Parity
Describing an in-the-money option trading for its intrinsic value; that is, an option trading at parity with the underlying stock. Also used as a point of reference - an option is sometimes said to be trading at a half-point over parity or at a quarter-point under parity. An option trading under parity is a discount option. For example, when an option's theoretical value is equal to its intrinsic value, it is said to be 'worth parity.' When an option is trading for only its intrinsic value, it is said to be 'trading for parity.' Parity may be measured against the stock's last sale, bid, or offer.
A chart of the profits and losses for a particular options strategy prepared in advance of the execution of the strategy. The diagram is plot of expected profit or loss against the price of the underlying security.
PCX
Pacific Stock Exchange.
Perceived Risk
The theoretical risk of a trade in a specific time frame.
A system of compensation in which a broker receives fees based on their performance in the marketplace.
PHLX
Philadelphia Stock Exchange.
Physical Delivery Option
An option whose underlying entity is a physical good or commodity, like a common stock or a foreign currency. When that option is exercised by its owner, there is delivery of that physical good or commodity from one brokerage or trading account to another.
An option whose underlying security is a physical commodity that is not stock or futures. The physical commodity itself (a currency, treasury debt issue, commodity) - underlies that option contract.
The risk to an investor (option writer) that the stock price will exactly equal the strike price of a written option at expiration; i.e., that option will be exactly at the money. The investor will not know how many of his/her written (short) options he/she will be assigned. The risk is that on the following Monday he/she might have an unexpected long (in the case of a written put) or short (in the case of a written call) stock position, and thus be subject to the risk of an adverse price move.
Points apply to security prices. In the case of shares, one point indicates $1.00 per share. For bonds, , one point means 1% of par value. Commodities differ from market to market.
Position
The total of a trader's open contracts - the combined total of a trader's open option contracts (calls and/or puts) and long or short stock.
Position Delta
The sum of all positive and negative deltas in a hedged position.
The maximum number of put or call contracts on the same side of the market that can be held in any one account or group of related accounts. Short puts and long calls are on the same side of the market. Short calls and long puts are on the same side of the market. Some exchanges express the limit in terms of option contracts on the same side of the market and others express it in terms of total long or short or short delta.
The price of an option contract, determined in the competitive marketplace, which the buyer of the option pays to the option writer for the rights conveyed by the option contract. Often this word is used to mean the same as time value.
Price
Price of a share of common stock on the date shown. Highs and lows are based on the highest and lowest intra-day trading price.
Price-Weighted Index
A stock index which is computed by adding the prices of each stock in the index, and then dividing by the divisor.
A technical analysis tool for comparing the prices of different common stocks by assessing how much the market is willing to pay for a share of each corporation's earnings. PE is calculated by dividing the current market price of a stock by the earnings per share.
The initial purchase price of a bond on which interest is earned.
Private Company
A company that issues private stock and is not publicly traded.
Probability of Profit
Probability of Profit is the probability that the predicted stock price falls within the option trade's profit zones. The predicted stock price distribution is computed by projecting the stock price randomly into the future using the SV. The prediction stops at the expiration of the earliest expiring option leg.
The range within which a particular position makes a profit. Generally used in reference to strategies that have two break-even points - an upside break-even and a downside break-even. The price range between the two break-even points would be the profit range.
Profit Graph
A graphical representation of the potential outcomes of a strategy. Dollars of profit or loss are graphed on the vertical axis, and various stock prices are graphed on the horizontal axis. Results may be depicted at any point in time, although the graph usually depicts the results at expiration of the options involved in the strategy. in the strategy.
A graphical presentation of the profit and loss possibilities of an investment strategy at one point in time (usually option expiration), at various stock prices.
A position that has limited risk. A protected short sale (short stock, long call) has limited risk, as does a protected straddle write (short straddle, long out-of-the-money combination).
Book (of The orders to buy or sell, entered by the public, that are generally away from the current market. The order book official or specialist keeps the public book. Market-Makers on the CBOE can see the highest bid and lowest offer at any time. The specialist's book is closed (only he knows at what price and in what quantity the nearest public orders are).
A company that issues stocks to be traded on the public market.
Put
An option contract that gives the holder the right to sell the underlying security at a specified price for a certain fixed period of time.
Put Option
An option contract that gives the owner the right to sell the underlying stock at a specified price (its strike price) for a certain, fixed period of time (until its expiration). For the writer of a put option, the contract represents an obligation to buy the underlying stock from the option owner if the option is assigned. The put option buyer hopes the price of the shares will drop by a specific date while the put option seller (or writer) hopes that the price of the shares will rise, remain stable, or drop by an amount less than their profit on the premium by the specified date.
A delta neutral spread where an uneven amount of contracts are bought and sold with a ratio less than 2 to 3. Optimally no net credit or net debit occurs.
A strategy consisting of a simultaneous position of a ratio calendar spread using calls and a similar position using puts, where the striking price of the calls is greater than the striking price of the puts.
A bearish or stable strategy in which a trader buys 2 higher strike calls and sell1 lower strike call. This strategy offers limited risk and unlimited profit potential.
A bullish or stable strategy ion which a trader buys 1 higher strike put and sells two lower strike puts. This strategy offers limited risk and unlimited profit potential.
Constructed with either puts or calls, the strategy consists of buying a certain amount of options and then selling a larger quantity of more out-of-the-money options. money options.
A strategy in which one has an unequal number of long securities and short securities. Normally, it implies a preponderance of short options over either long options or long stock.
A term in technical analysis indicating a price area higher than the current stock price where an abundance of supply exists for the stock and therefore the stock may have trouble rising through the price. Resistance is a price level at which rising prices have stopped rising and either moved sideways or reversed direction.
Return
The income profit made on an investment.
Return if Exercise
The return that a covered call writer would make if the underlying stock were called away.
A stop that, when hit, is a signal to reverse the current trading position, i.e., from long to short. Also known as stop and reverse.
Reversal/Reverse conversion
An investment strategy used by professional option traders in which a short put and long call with the same strike price and expiration are combined with short stock to lock in a nearly riskless profit. For example, selling short 100 shares of XYZ stock, buying 1 XYZ May 60 call, and writing 1 XYZ May 60 put at favorable prices. The process of executing these three-sided trades is sometimes called 'reversal arbitrage.'
The expected change in an option's theoretical value for a 1 percent change in interest rates.
Rich
Priced higher than expected.
Risk
The potential financial loss inherent in the investment.
Risk Arbitrage
A form of arbitrage that has some risk associated with it. Commonly refers to potential takeover situations where the arbitrageur buys the stock of the company about to be taken over and sells the stock of the company that is effecting the takeover.
A follow-up action in which the strategist closes options currently in the position and opens other options with different terms, on the same underlying stock. Variations of this include rolling up, rolling down, rolling out and diagonal rolling.
Procedure by which a long or short position is offset by an opposite transaction.
Running Stops
Something which when quoted, floor traders use to move the market. When stops are bunched together, traders may move the market in order to activate stop orders and propel the market further.
In commodities, purchasing and selling equal amounts so there is no net position at the end of the trading day; a speculative attempt to make a quick profit by buying at the initial offering price in the hope the issue will increase and can be sold.
Seasonal Market
A market with a consistent but short-lived rise or drop in market activity due to predictable changes in climate or calendar.
The traditional term for membership in a stock exchange.
SEC
The Securities and Exchange Commission. The SEC is an agency of the federal government which is in charge of monitoring and regulating the securities industry.
Secondary Market
A market that provides for the purchase or sale of previously sold or bought options through closing transactions.
An option strategy in which a put option is written against a sufficient amount of cash (or T-bills) to pay for the stock purchase if the short option is assigned.
The practice of could borrowing a stock, future or option from a broker and selling it because the investor forecasts that the price of a stock is going down.
The process by which the underlying stock is transferred from one brokerage account to another when equity option contracts are exercised by their owners and the inherent obligations assigned to option writers.
Settlement Price
The official price at the end of a trading session. This price is established by The Options Clearing Corporation and is used to determine changes in account equity, margin requirements, and for other purposes.
The selling of a security, contract or commodity not owned by the seller.
Short option position
The position of an option writer which represents an obligation on the part of the option's writer to meet the terms of the option if it is exercised by its owner. The writer can terminate this obligation by buying back (cover or close) the position with a closing purchase transaction.
A position wherein a person's interest in a particular series of options is as a net writer (i.e., the number of contracts sold exceeds the number of contracts bought).
The sale of shares or futures that a seller does not currently own. The seller borrows them (usually from a broker) and sells them with the intent to replace what s/he has sold through later repurchase in the market at a lower price.
A strategy that profits from a stock price decline. It is initiated by borrowing stock from a broker-dealer and selling it in the open market. This strategy is closed (covered) at a later date by buying back the stock and returning it to the lending broker-dealer.
Up-and-comer companies that offer big rewards and higher risks. They tend to cost less than mid-caps and have lower liquidity. However, small amounts of media coverage can prompt big gains.
A mathematical technique that removes excess data in order to maintain a correct evaluation of the underlying trend.
Specialist
An exchange member whose function it is to both make markets - buy and sell for his own account in the absence of public orders - and to keep the book of public orders. As a rule this is accomplished by managing the limit order book and making bids and offers for his/her/their own account in the absence of opposite market side orders. Most stock exchanges and some option exchanges utilize the specialist system of trading.
Speculator
A trader who hopes to profit from a directional move in the underlying instrument. The speculator has no interest in making or taking delivery.
Spike
A sharp price rise in one or two days indicating the time for an immediate sale.
Spin-Off
A stock dividend issued by one company in shares of another corporate entity, such as a subsidiary corporation of the company issuing the dividend.
Spread
A trade in which two related contracts/stocks/bonds/options are traded to exploit the relative difference in price change between the two. A trading strategy in which a trader offsets the purchase of one trading unit against another.
Spread Order
An order to simultaneously transact two or more option trades. Typically, one option would be bought while another would simultaneously be sold. Spread orders may be limit orders, not held orders, or orders with discretion. They cannot be stop orders, however.
A company that rates stocks and corporate and municipal bonds according to risk profiles and that produces and tracks the S&P indexes.
Standard deviation
A statistical measure of price fluctuation. It is a statistical quantity measuring the magnitude of the daily price changes of that stock. One use of the standard deviation is to measure how stock price movements are distributed about the mean.
Standardization
Interchangeability resulting from standardization. Options listed on national exchanges are fungible, while over-the-counter options generally are not. Classes of options listed and traded on more than one national exchange are referred to as multiple-listed / multiple-traded options.
Static Return
The return that an investor would make on a particular position if the underlying stock were unchanged in price at the expiration of the options in the position.
An increase in the number of outstanding shares by a corporation, through the issuance of a set number of shares to a shareholder for a set number of shares that the shareholder already owns. For example, a corporation might declare a '2-for-1 stock split.' This means that for every share of stock an investor owns, he/she will be given another, thus owning 2 shares instead of 1. There will be a corresponding reduction in equity value per share. In this case, the new shares (post-split) will be worth one-half their previous value but the investor will own twice as many shares.
An order (often erroneously known as a 'stop-loss' order), placed away from the current market, that becomes a market order if the security trades at the price specified on the stop order. Buy stop orders are placed above the market while sell stop orders are placed below.
Similar to a stop order, the stop-limit order becomes a limit order, rather than a market order, when the security trades at the price specified on the stop.
Buy stops are orders that are placed at a specified price over the current price of the market. Sell stops are orders that are placed with a specified price below the current price.
Straddle
The purchase or sale of an equivalent number of puts and calls on the underlying stock with the same exercise price and expiration date.
Strangle
The purchase or sale of an equivalent number of puts and calls on the underlying stock with the same expiration date but a different exercise price. Usually, the put has a low strike price and the call has a higher strike price.
Strategy
With respect to option investments, a preconceived, logical plan of position selection and follow-up action.
Strike
The price at which the owner of an option can purchase (call) or sell (put) the underlying stock. Used interchangeably with striking price, strike, or exercise price.
Strike Price
The stated price per share for which the underlying security may be purchased (in the case of a call) or sold (in the case of a put) by the option holder upon exercise of the option contract or over the specified period.
The normal price differential between option strike prices. Equity options generally have $2.50 strike price intervals (if the underlying stock price is below $25), $5.00 intervals (from $25 to $200), and $10 intervals (above $200). LEAPS generally start with one at-the-money, one in-the-money, and one out-of-the-money strike price. The latter two are usually set 20%-25% away from the former.
The distance between striking prices on a particular underlying security. Normally, the interval is 2.50 points for stocks under $25, 5 points for stocks selling over $25 per share, and 10 points (or greater) is acceptable for stocks over $200 per share. There are, however, exceptions to this general guideline.
A requirement that any investing strategy fall within the financial means and investment objectives of an investor or trader.
Suitable
Describing a strategy or trading philosophy in which the investor is operating in accordance with his (her) financial means and investment objectives.
Support
A historical price level at which falling prices have stopped falling and either moved sideways or reversed direction. "Support" in technical analysis indicates a price area that is lower than the current price of the stock, where demand is thought to exist. Thus a stock would stop declining when it reached a support area.
Swings
The measurement of price movement between extreme highs and lows.
Synthetic Long Call
A long stock position combined with a long put of the same series as that call.
An option strategy that is equivalent to the underlying stock. A long call and a short put is synthetic long stock. A long put and a short call is synthetic short stock.
A long (short) call together with a short (long) put. Both options have the same underlying, the same strike price and the same expiration date.
Technical Analysis
A method of predicting future stock price movements based on observation of historical market data such as (among others) the prices themselves, trading volume, open interest, the relation of advancing issues to declining issues, and short selling volume.
Terms
The collective name denoting the expiration date, striking price, and underlying stock of an option contract.
Theoretical Option Pricing Model
The first widely-used model for option pricing. This formula can be used to calculate a theoretical value for an option using current stock prices, expected dividends, the option's strike price, expected interest rates, time to expiration and expected stock volatility. While the Black-Scholes model does not perfectly describe real-world options markets, it is still often used in the valuation and trading of options.
The estimated value of an option, or a combination of options, as computed by a mathematical model to determine what an option is really worth.
Theta
The measurement of the time decay of a position - a measure of the rate of change in an option's theoretical value for a one-unit change in time to the option's expiration date.
Tick
The smallest unit price change allowed in trading a security. For listed stock, this is generally 1/8th of a point. For a listed option under $3 in price, this is generally 1/16th of a point. For a listed option over $3, this is generally 1/8th of a point.
Time Decay
The amount of time premium movement within a certain time frame on an option due to the passage of time in relation to the expiration of the option itself. Time decay is used to describe how the theoretical value of an option reduces with the passage of time. Time decay is especially quantified by Theta.
An option strategy which generally involves the purchase of a farther-term option (call or put) and the writing of an equal number of nearer-term options of the same type and strike price. Example: buying 1 XYZ May 60 call (far-term portion of the spread) and writing 1 XYZ March 60 call (near-term portion of the spread). Also known as calendar spread or horizontal spread.
The portion of the option premium that is attributable to the amount of time remaining until the expiration of the option contract. The difference between the premium paid for an option and the intrinsic value (whatever value the option has in addition to its intrinsic value ). As an option approaches expiration, the time value erodes, eventually to zero.
Time Value Premium
The amount by which an option's total premium exceeds its intrinsic value.
A covered call writing strategy in which one views the potential profit of the strategy as the sum of capital gains, dividends, and option premium income, rather than viewing each one of the three separately.
The amount of difference between the performance of a specific portfolio of stocks and a broad-based index with which they are being compared.
Trader
(1) Any investor who makes frequent purchases and sales. (2) A member of an exchange who conducts his or her buying and selling on the trading floor of the exchange.
Trading Account
An account opened with a brokerage firm from which to place trades.
Trading Limit
The exchange-imposed maximum daily price change that a futures contract or futures option contract can undergo.
Trading pit
A specific location on the trading floor of an exchange designated for the trading of a specific option class or stock.
Transaction costs
All of the charges associated with executing a trade and maintaining a position. These include brokerage commissions, fees for exercise and/or assignment, exchange fees, SEC fees, and margin interest. In academic studies, the spread between bid and ask is taken into account as a transaction cost.
Treasury Bill (T-Bill)
These are short-term government securities with maturities of no more than one year.
Treasury Bill/Option Strategy
(90/10 strategy) a method of investment in which one places approximately 90% of his funds in risk-free, interest-bearing assets such as Treasury bills, and buys options with the remainder of his assets.
The third Friday in March, June, September and December when U.S. options, index options and futures contracts all expire simultaneously often resulting in massive trades.
Type
The classification of an option contract as either a put or a call.
Type of options
The classification of an option contract as either a put or a call.
Uncovered Option is also known as a naked option - a written option is considered to be uncovered if the investor does not have an offsetting position in the underlying security. This is a much riskier strategy than a covered option.
A short put option position in which the writer does not have a corresponding short position in the underlying security or has not deposited, in a cash account, cash or cash equivalents equal to the exercise value of the put.
A short put option position in which the writer does not have a corresponding short position in the underlying security or has not deposited, in a cash account, cash or cash equivalents equal to the exercise value of the put.
Describing a security that is trading at a lower price than it logically should. Usually determined by the use of a mathematical model.
Unit of Trading
The minimum quantity or amount allowed when trading a security. The normal minimum for common stock is 1 round lot or 100 shares. The normal minimum for options is one contract (which normally covers 100 shares of stock).
Upside
The potential for prices to move up. Upside break-even The upper price at which a trade breaks-even.
Variable Delta
A delta that can change due to the change of an underlying asset or a change in time expiration of an option.
An option strategy in which the investor owns 100 shares of the underlying security and writes two call options against it, each option having a different striking price.
Vega
The amount by which the price of an option changes when the volatility changes. A measure of the rate of change in an option's theoretical value for a one-unit change in the volatility assumption. Also referred to as volatility.
Vertical Spread
(1) A stock option spread based on simultaneous purchase and sale of options on the same underlying stock with the same expiration months but different strike prices. (2) It is also used to describe a delta-neutral spread in which more options are sold than are purchased.
A measure of the fluctuation in the market price of the underlying security. Mathematically, volatility is the annualized standard deviation of returns (annualized standard deviation of a stock's daily price changes). Volatility is a primary determinant in the valuation of options premiums and time value. There are two basic kinds of volatility, implied and historical (statistical). Implied volatility is calculated by using an option pricing model (Black-Scholes for stocks and indices and Black for futures). Historical volatility is calculated by using the standard deviation of underlying asset price changes from clos e to close trading going back 21 to 23 days.
Volatility Skew
The theory that options that are deeply out-of-the-money tend to have higher implied volatility levels that at-the-money options. Volatility skew measures and accounts for the limitation found in most options pricing models and uses it to give the trader an edge in estimating an option's worth.
A market index of approximately 6,500 U.S. based equities traded on the American Stock Exchange, the New York Stock Exchange and the NASDAQ stock market.
A day on which two or more classes of options and futures expire.
Write
To sell an option that is not owned through an opening sale transaction. While this position remains open, the writer is subject to fulfilling the obligations of that option contract; i.e., to sell stock (in the case of a call) or buy stock (in the case of a put) if that option is assigned.
Writer
An investor who so sells an option is called the writer, regardless of whether the option is covered or uncovered.
XYZ/XYZ Corporation
A fictitious company used as the underlying stock throughout The Options Toolbox.
Yellow Sheets
A daily publication of the National Quotation Bureau detailing bid and asked prices.
Yield
The rate of return on an investment.
Zeta
The percentage change in an options price per 1% change in implied volatility.
