Options Trading System

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.

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.

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.

Time Spread: 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.

Strategy: With respect to option investments, a preconceived, logical plan of position selection and follow-up action.

Spread Strategy: Any option position having both long options and short options of the same type on the same underlying security.

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.

Ratio Spread: 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.

Ratio Put Spread: 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.

Ratio Call Spread: 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.

Ratio Calendar Spread: Selling more near-term options than longer-term ones purchased, all with the same strike; either puts or calls.

Ratio Backspread: 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.

Point Spread: The price movement required for a security to go from one "full point" level to another (i.e. stock goes up or down $1).

Narrowing the Spread: The closing spread between the bid and asked prices of a security as a result of bidding and offering.

Narrowing the Spread: The closing spread between the bid and asked prices of a security as a result of bidding and offering.

Horizontal Spread: Spreads between options with the same exercise price but different expiration dates. Also known as calendar or time spreads.

Diagonal Spread: 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.

Delta Spread: 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.

Debit Spread: The difference in value of two options, where the value of the long position exceeds the value of the short position.

Credit Spread: The difference in value of two options, where the value of the one sold exceeds the value of the one purchased.

Crack Spread: The spread between crude oil and it's products: heating oil and unleaded gasoline plays a major role in the trading process.

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.'

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.

Christmas Tree Spread: The simultaneous purchase and writing of options with either a different strike price or expiration date or combination of the two.

Butterfly Spread: 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.

Bull Spread: 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.

Bull Put Spread: 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.

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.

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.

Bid-Asked Spread: The difference between bid and asked prices constitute the bid-asked spread.

Bear Spread: 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.

Bear Put Spread: 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 = d ifference between strike prices less the debit; no margin.