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Glossary for Options
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Adjustment
The process of buying or selling instruments to bring your position delta back to zero and increase profits.
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).
American Stock Exchange (AMEX)
A private, not-for-profit corporation, located in New York City, that handles approximately one-fifth of all securities trades within the United States.
American-Style Option
An option contract that may be exercised at any time between the date of purchase and the expiration date. Most exchange-traded options are American-style.
Amortization
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 (%)
The historical earnings change between the most recently reported fiscal year earnings and the preceding.
Annual Net Profit Margin (%)
The percentage that the company earned from gross sales for the most recently reported fiscal year.
Annual Percentage Rate (APR)
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.
Annuity
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 process in which professional traders simultaneously buy and sell the same or equivalent securities for a riskless profit. See also Risk Arbitrage.
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.
Ask Price
The price at which a seller is offering to sell an option or stock.
Assignment
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.
At-the-money
An option is at-the-money if the strike price of the option is equal to the market price of the underlying security.
At-the-Opening Order
An order which specifies execution at the opening of the market or else it is canceled.
ATM IV
A quadratic curve fit is made between the IV values and the strike prices for all the call options for a stock for a given expiration month. Likewise a curve fit is done for the puts. The option IV assigned for that option series fit is the constant coefficient of the polynomial. This constant coefficient is the point in the quadratic curve fit where the slope is zero and the option polynomial "smile" is at a minimum.
Auction Market
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.
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.
Average
An mathematical representation of the behavior of a specific sector or index of the market (for example, the Dow Jones Industrial Average).
Average Down
To buy more of a security at a lower price, thereby reducing the holder's average cost. (Average Up: to buy more at a higher price.)
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Back Months
The futures or options on futures months being traded that are furthest from expiration.
Backspread
A spread in which more options are purchased than sold and where all options have the same underlying and expiration date. Backspreads are usually delta neutral.
Back-Testing
The testing of a strategy based on historical data to see if the results are consistent.
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.
Bear Market
A declining stock market over a prolonged period of time usually caused by a weak economy and subsequent decreased corporate profits.
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.
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. See also Bull Spread.
Bearish
An adjective describing an opinion or outlook that expects a decline in price, either by the general market or by an underlying stock, or both. See also Bullish.
Beta
A measure of how a stock's movement correlates to the movement of the entire stock market. The Beta is not the same as volatility. See also Standard Deviation and Volatility.
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.
Bid-asked Spread
The difference between bid and asked prices constitute the bid-asked spread.
Bid Price
The price at which a buyer is willing to buy an option or stock.
Bid Up
Demand for an asset drives up the price paid by buyers.
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 Chips
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.
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 benefic ial investment attributes. On the downside, blue chip stocks tend to be quite expensive and often have little room for growth.
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 mat urity. 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 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--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.
Break-even
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.
Breakout
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. See also Narrow-Based.
Broker
An individual or firm which charges a commission for executing buy and sell orders.
Bull
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.
Bull Market
A rising stock market over a prolonged period of time usually caused by a strong economy and subsequent increased corporate profits.
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.
Bullish
Describing an opinion or outlook in which one expects a rise in price, either by the general market or by an individual security. See also Bearish.
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.
Buy IV Sell IV
Many options are spreads that have a buy option leg and a sell option leg. Buy IV is the implied volatility of the option leg with a buy component. Sell IV is the implied volatility of the option leg with a sell component.
Buy on Close
To buy at the end of a trading session at a price within the closing range.
Buy on Opening
To buy at the beginning of a trading session at a price within the opening range.
Buy Stop Order
An order to purchase a security entered at a price above the current offering price triggered when the market hits a specified price.
Buy-write
See also Covered Call.
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CAC 40 Index
A broad-based index of 40 common stocks on the Paris Bourse.
Calendar Spread
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.
Calendar Straddle or Combination
See Calendar Spread.
Call
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. See also Put.
Call Premium
The amount a call option costs.
Capital
The amount of money an individual or business has available.
Capital Gain
The profit realized when a capital asset is sold for a higher price than the purchase price.
Capital Loss
The loss incurred when a capital asset is sold for a lower price than the purchase price.
Capitalization
Refers to the current value of a corporation's outstanding shares in dollars.
Capitalization-Weighted Index
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. See also Float, Divisor.
Capped-Style Option
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.
Carrying Cost
The interest expense on a debit balance created by establishing a position.
Cash Account
An account in which the customer is required to pay in full for all purchased securities.
Cash-Based
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.
Cash Dividend
A dividend paid in cash to a shareholder out of a corporation's profits.
Cash Settlement
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.
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 first national exchange to trade listed stock options and the largest options exchange in the United States.
Class
A term used to refer to all put and call contracts on the same underlying security.
Class of Options
Option contracts of the same type (call or put) and Style (American, European or Capped) that cover the same underlying security.
Clearinghouse
An institution established separately from the exchanges to ensure timely payment and delivery of securities.
Close
The price of the last transaction for a particular security each day.
Closing Purchase
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 trade that reduced an investor's position. Closing buy transactions reduce short positions and closing sell transactions reduce long positions. See also Opening Transaction.
Collateral
The loan value of marginable securities; generally used to finance the writing of uncovered options.
Combination
Any position involving both put and call options that is not a straddle.
Commission
A service charge assessed by a broker and his/her investment company in return for arranging the purchase or sale of a security.
Commodities
See Futures Contract.
Commodity Futures Trading Commission (CFTC)
The CFTC was created by the Commodity Futures Trading Commission Act of 1974 to ensure the open and efficient operation of the futures markets.
Condor
An options strategy involving the sale or purchase of two options with consecutive exercise prices, together with the sale or purchase of one option with an immediately lower exercise price and one option with an immediately higher exercise price.
Consumer Price Index (CPI)
A measure of price changes in consumer goods and services. This index is used to identify periods of economic inflation or deflation.
Contingent Order
An order which can be executed only if another event occurs; i.e. "sell Oct 45 call 7.25 with stock 52 or lower".
Contract
A unit of trading for a financial or commodity future, or option.
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. See also Reversal Arbitrage.
Conversion Ratio
See Convertible Security.
Converted Put
See Synthetic Put.
Convertible Security
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.
Correction
A sudden decline in the price of a security after a period of market strength.
Cover
To buy back as a closing transaction an option that was initially written.
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.
Covered Call
An option strategy in which a call option is written against long stock on a share-for-share basis.
Covered Call Option Writing
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.
Covered Put Write
A strategy in which one sells put options and simultaneously is short an equal number of shares of the underlying security.
Covered Straddle
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 asignment on the short put would require purchase of stock on margin. This method is also known as a covered combination.
Covered Straddle Write
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.
Credit
Money received in an account. 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. See also Debit.
Credit Spread
The difference in value between 2 options, where the value of the short position exceeds the value of the long position.
Cross Rate
The current exchange rate between differing currencies.
Cycle
The expiration dates applicable to various classes of options traded on option exchanges. There are three cycles: [January / April / July / October], [February / May / August /November], and [March / June / September / December].
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Daily Range
The difference between the high and low price of a security in one trading day.
Day Order
An order to buy or sell a security which expires if not filled by the end of the day.
Day Trade
The purchase and sale of a position in the same day.
Day Trading
An approach to trading in which the same position is entered and exited within one day.
Debit
An expense, or money paid out from an account. A debit transaction is one in which the net cost is greater than the net sale proceeds. See also Credit.
Debit Spread
The difference in value between two options, where the value of the long position exceeds the value of the short position.
Deep-in-the-Money
A deep-in-the-money call option has a strike price well below the current price of the underlying instrument. A deep-in-the-money put option has a strike price well above the current price of the underlying instrument. Both primarily consist of intrinsic value.
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).
Delta
The amount by which an option's price will change for a one-point change in price by the underlying entity. 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. See also Hedge Ratio.
Delta-Hedged
An options strategy protecting an option against price changes in the option's underlying instrument by balancing the overall position delta to zero.
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.
Delta Position
A measure of option or underlying securities delta.
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. See also Ratio Spread and Delta.
Depository Trust Corporation (DTC)
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.
Diagonal Spread
Any spread in which the purchased options have a longer maturity than do the written options as well as having different striking prices. Typical types of diagonal spreads are diagonal bull spreads, diagonal bear spreads, and diagonal butterfly spreads.
Discount
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. See also Intrinsic Value and Parity.
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). See also Discount.
Discount Brokers
Brokerage firms that offer lower commission rates than full service brokers, but do not offer services such as advice, research and portfolio planning.
Discretion
Freedom given to the floor broker by an investor to use his 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. See Limit Order and Market Not Held Order.
Divergence
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.
Downside
The potential for prices to decrease.
Downside Protection
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. See also Covered Call Write.
Downside Risk
The potential risk one takes if prices decrease in directional trading.
Dynamic
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.
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Each Way
The commission made by a broker for the purchase and sale sides of a trade.
Early Exercise (assignment)
The exercise or assignment of an option contract before its expiration date.
End of Day
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 Options
Options on shares of an individual common stock. See also Non-Equity Option.
Escrow Receipt
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.
European Style Option
An option contract that can only be exercised only during a specified period of time just prior to its expiration.
Ex-Dividend
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
An area where an asset, option, future, stock or derivative is bought and sold.
Exchange Rate
The price at which one country's currency can be converted into another country's currency.
Execution
The process of completing an order to buy or sell securities.
Exercise
To implement the right under which the holder of an option is entitled to buy (in the case of a call) or sell (in the case of a put) the underlying security.
Exercise Limit
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.
Exercise price
The price at which the option holder may buy or sell the underlying security, as defined in the terms of his option contract. 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. See also Exercise.
Exercise settlement amount
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.
Expected Profit
The stock price is randomly projected into the future using the stock's 20-day statistical (historical) volatility (SV) in the Optionetics option trade ranker tool. The stock price projection stops at the expiration of the earlist expiring option leg. The stock price future statistical distribution at option expiration is used to compute possible profits and losses. Expected Profit is the predicted profits minus the predicted losses expressed in total dollars.
Expected Return
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.
Expiration
The date and time after which an option may no longer be exercised.
Expiration cycle
An expiration cycle relates to the dates on which options on a particular underlying security expire. A given option, other than LEAPS®, will be assigned to one of three cycles, the January cycle, the February cycle or the March cycle.
Expiration date
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. See also Expiration Time and Automatic Exercise.
Expiration time
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. See also Expiration Date.
Explosive
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.
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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. See also Hedge Ratio.
Fade
Selling a rising price or buying a falling price.
Fair Market Value
The value of an asset under normal conditions.
Fair Value
Normally, a term used to describe the worth of an option or futures contract as determined by a mathematical model. The theoretical value of what an option should be worth usually generated by an option pricing model such as the Black-Scholes option pricing model. Also sometimes used to indicate intrinsic value. See also Intrinsic Value and Model.
Fast Market
A stock with so much volume that the order entry systems have difficulty processing all of the orders.
Fill
An executed order.
Fill Order
An order that must be filled or canceled immediately.
Fill or Kill
Placing an order to buy or sell an exact number of units or none at all.
Financial Instruments
The term used for debt instruments.
Fixed Delta
A delta figure that does not change with the change in the underlying. A futures contract has a fixed delta of plus or minus 100.
FLEX Options
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.
Float
The number of shares outstanding of a particular common stock.
Floor
A purchase contract in which a floor price is guaranteed by the buyer while the seller may, but without the obligation, sell to the buyer at a price higher than the floor price. A call option which obliges the option writer to buy at a "floor" price for a fixed quantity of the underlying asset within a fixed period of time.
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.
Floor Ticket
A summary of the information on an order ticket.
Floor Trader
An exchange member who executes orders from the floor of the exchange only for his/her own account.
Fluctuation
A variation in the market price of a security.
Front Month
The first expiration month in a series of months.
Fundamental Analysis
A method of analyzing the prospects of a security by observing accepted accounting measures such as earnings, sales, assets, and so on. See also Technical Analysis.
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.
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Gamma
The rate of change in an option?s delta for a one-unit change in the price of the underlying security. See also Delta.
Gap
A day in which the daily range is completely above or below the previous day's daily range.
Go Long
To buy securities, options or futures.
Go Short
To sell securities, options or futures.
Going Ahead
Unethical brokerage activity whereby the broker trades first for his or her own account before filling the customer's order(s).
Good Until Canceled (GTC)
A designation applied to some types of orders, meaning the order remains in effect until it is either filled or canceled. See also Stop Limited and, Trading Limit.
Guts
A strangle where the call and the put are in-the-money.
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Hammering the Market
The intense selling of stocks by speculators who think the market is about to drop because they think prices are inflated.
Hedge
Reducing the risk of loss by 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. See also Facilitation and Delta.
High (hi)
The highest price that was paid for a stock during a certain period.
High IV
This is the highest ATM IV found over a historical time period for the stock. The period chosen is a 6 month period.
High and Low
Refers to the high and low transactions prices that occur each trading day.
High Flyer
A speculative high-priced stock that moves up and down sharply over a short period of time.
High-tech Stock
Refers to the stock of companies involved in high-technology industries, such as computers, biotechnology, robotics, electronics, and semiconductors.
Historic Volatility
A measurement of how much a contract's price has fluctuated over a period of time in the past; usually calculated by taking a stand`ard deviation of price changes over a time period.
Holder
The purchaser of an option.
Horizontal Spread
An option strategy in which the options have the same striking price, but different expiration dates.
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Illiquid Market
Market which has no volume that subsequently creates a lot of slippage due to lack of trading volume.
Immediate/Cancel
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. See also Volatility.
In-the-Money
A term describing any option that has intrinsic value. A call option is in-the-money if the underlying security is higher than the striking price of the call. A put option is in-the-money if the security is below the striking price. See also Out-of-the-Money and Intrinsic Value.
In-the-Money Option
A "call" option is in-the-money if the strike price is less than the market price of the underlying security. A "put" option is in-the-money if the strike price is greater than the market price of the underlying security.
Incremental Return Concept
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.
Index
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 Options
Call options and put options on indexes of stocks are designed to reflect and fluctuate with market conditions. Index options allow investors to trade in a specific industry group or market without having to buy all the stocks individually. Most index options are cash-based.
Institution
An organization, 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.
Inter-market Spread
A spread consisting of opposing positions in instruments with two different markets.
Interest Rate
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 value of an option if it were to expire immediately with the underlying stock at its current price; the amount by which an option is in-the-money. 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. See also In-the-Money, Time Value Premium and Parity.
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
The combination of a long (short) straddle and a short (long) strangle. All options must have the same underlying and have the same expiration.
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- L -
Last Trading Day
The very last full day of open trading before an options expiration day, usually the third Friday of the expiration month.
LEAPS
Long-term stock or index options which are available with expiration dates up to three years in the future.
Leg
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.
Letter of Guarantee
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
In investments, the attainment of greater percentage profit and risk potential. 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
See Trading Limit.
Limit Move
The maximum daily price limit for an exchange traded contract.
Limit Order
An order to buy or sell securities at a specified price (the limit). 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.
Limit Up, Limit Down
Commodity exchange restrictions on the maximum upward or downward movements permitted in the price for a commodity during any trading session day.
Liquidity
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. See also Over-the-Counter Option.
Local
A trader on a futures exchange who buys and sells for his own account and may sometimes also fill public orders.
Locked Market
A market where trading has been halted because prices have reached their daily trading limit.
Lognormal Distribution
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 Position
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).
Low (lo)
This is the lowest price paid for a stock during a certain period.
Low IV
This is the lowest ATM IV found over a historical time period for the stock. The period chosen is a 6 month period.
Low Risk Investing
A trade which is hedged for purposes of limiting price loss as opposed to a directional trade where loss is unlimited.
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Make a Market
A market maker stands ready to buy or sell a particular security for his/her own account to keep the market liquid.
Margin
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.
Margin Account
A customer account in which a brokerage firm lends the customer part of the purchase price of a trade.
Margin Call
A call from a broker signaling the need for a trader to deposit additional money into a margin account to maintain a trade.
Margin Requirements (Options)
The amount of cash an uncovered (naked) option writer is required to deposit and maintain to cover his daily position price changes.
Mark-to-Market
The daily adjustment of margin accounts at the end of each business day for open positions to reflect profits and losses based on the settlement prices of the open positions. In this way, losses are never allowed to accumulate.
Market
A specific asset, security or commodity that is traded at an exchange.
Market Basket
A portfolio of common stocks whose performance is intended to simulate the performance of a specific index. See Index.
Market-If-Touched (M.I.T.)
A price order that automatically becomes a market order if the price is reached.
Market-Maker
An exchange member, independent trader or trading firm 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. See also Order Book Official and Specialist.
Market Not Held Order
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.
Market on Close
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.
Market Order
Buying or selling securities at the price given at the time the order reached the market. A market order is to be executed immediately at the best available price, and is the only order that guarantees execution.
Market Price
The most recent price at which a security transaction took place.
Market Value
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.
Married Put and Stock
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.
Married Put Strategy
A put and stock are considered to be married if they are bought on the same day, and the position is designated at that time as a hedge.
Max Loss
The maximum amount of losses possible from the option trade in the Optionetics option trade ranker tool.
Max Profit
The maximum amount of net profit possible from the option trade in the Optionetics option trade ranker tool.
Mid-cap Stocks
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.
Model
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.
Model Profit
The Optionetics option trade ranker tool software uses an option mathematical model ( the Bjerksund Stensland American option model) to fairly price the option. The Optionetics software computes what the profit of the option strategy would be using the mathematical model option prices. The profit value is called the Model Profit. If this "model profit", when the trade is formed, is close to the profit of 0.0 ( a new trade should start with no profit ) then we are confident the option data being used for the trade is good. Model profits that exceed $200 likely are caused by incorrect option data.
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.
Momentum Trading
Investing with (or against) the momentum of the market in hopes of profiting from it.
Moving Averages
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.
Mutual Fund
An open end investment company that pools investors' money to invest in a variety of stocks, bonds, or other securities.
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Naked Option
See Uncovered Option.
Naked writer
See Uncovered call writing and Uncovered put writing.
Narrow-Based
Generally referring to an index, it indicates that the index is composed of only a few stocks, generally in a specific industry group. See also broad-based.
Narrowing the Spread
The closing spread between the bid and asked prices of a security as a result of bidding and offering.
NASDAQ
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.
Net Profit
The overall profit of a trade.
Neutral
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. See also Bearish and Bullish.
New York Stock Exchange (NYSE)
The largest stock exchange in the United States.
Non-Equity Option
An option whose underlying entity is not common stock; typically refers to options on physical commodities and index options.
"Not Held"
See Market Not Held Order.
Note
A medium-term debt security, usually maturing in between one years to 10 years.
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.
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OEX
This term, pronounced as three separate letters, is Wall Street shorthand for Standard & Poor's 100 stock index.
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 earlist expiring option leg.
Offer Down
The change of the offer of the market related to a downward price movement at that specific time.
Offer
The lowest price at which a person is willing to sell.
Off-floor Trader
A trader who does not trade on the actual floor of an organized futures of stock exchange.
Offset
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).
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Open Order
An order to buy or sell a security at a specified price, valid until executed or canceled.
Open Outcry
A system of trading 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.
Opening Price
The range of prices at which the first bids and offers were made or first transactions were completed.
Opening Purchase
A transaction in which the purchaser's intention is to create or increase a long position in a given series of options.
Opening Sale
A transaction in which the seller's intention is to create or increase a short position in a given series of options.
Opening Transaction
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. See also Closing Transaction.
Opportunity Costs
The theoretical cost of using your capital for one investment versus another.
Option
A security 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.
Option Holder
The buyer of either a call or put option.
Option Pricing Curve
A graphical representation of the projected price of an option at a fixed point in time. 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. See also Delta, Hedge Ratio, and Model.
Option Premium
This is the price of an option.
Option Writer
The seller of either a call or put option.
Options Clearing Corporation (OCC)
The issuer of all listed option contracts that are trading on the national option exchanges.
Order
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. See also Market-Maker and Specialist.
Order Flow
The volume of orders being bought or sold on the exchanges.
Out-of-the-money
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 (OTM)
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 securi ty.
Over-the-Counter Option (OTC)
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. See also Listed Stock Option and Secondary Market.
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. See also Fair Value and Undervalued.
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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. See also Discount and Intrinsic Value.
Payoff Diagram
See Profit Graph.
Physical Option
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. See also equity option, index option.
Perceived Risk
The theoretical risk of a trade in a specific time frame.
Performance Based
A system of compensation in which a broker receives fees based on their performance in the marketplace
Points
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.
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).
Position
As a noun, specific securities in an account or strategy. (A covered call writing position might be long 1,000 XYZ and short 10 XYZ January 30 calls). As a verb, to facilitate; to buy or sell - generally a block of securities - thereby establishing a position. See also Facilitation and Strategy.
Position Delta
The sum of all positive and negative deltas in a hedged position.
Position Limit
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.
Premium
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.
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 / Earnings Ratio (PE)
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 earnin gs per share.
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. See also Capitalization-weighted index, Divisor.
Principal
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 earlist expiring option leg.
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.
Profit Range
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. See also Break-Even Point.
Profit Table
A table of results of a particular strategy at some point in time. This is usually a tabular compilation of the data drawn on a profit graph. See also Profit Graph.
Protected Strategy
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). See also Combination and Straddle.
Public Book (of orders)
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). See also Order Book Official, Market-Maker, and Specialist.
Public Company
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. See also Call.
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Quickie
An order that must be filled as soon as it reaches the trading floor at the price specified, or be canceled immediately.
Quote
The price being offered or bid by a market maker or broker-dealer for a particular security.
Quoted Price
Refers to the price at which the last sale and purchase of a particular security or commodity took place.
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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.
Ratio Calendar Combination
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.
Ratio Calendar Spread
Selling more near-term options than longer-term ones purchased, all with the same strike; either puts or calls.
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 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 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.
Ratio Strategy
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.
Ratio Write
Selling of call options in a ratio higher than 1 to 1 against the stock that is owned.
Real-time
Data received from a quote service as the prices change.
Relative Strength
A stock's price movement over the past year as compared to a market index.
Relative Strength Index (RSI)
An indicator used to identify price tops and bottoms.
Resistance
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. See also Support.
Return (on investment)
The percentage profit that one makes, or might make, on his investment.
Return if Exercised
The return that a covered call writer would make if the underlying stock were called away.
Reversal Arbitrage
A riskless arbitrage that involves selling the stock short, writing a put, and buying a call. The options have the same terms. See also Conversion Arbitrage.
Reversal Stop
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.
Reward-Risk Ratio
The mathematical relationship between the maximum potential risk and maximum potential reward of a trade.
Rho
The expected change in an option?s theoretical value for a 1 percent change in interest rates. See also Theoretical Value.
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. See also Dividend Arbitrage.
Risk Graph
A graphic representation of risk and reward on a given trade as prices change.
Risk Manager
A person who manages risk of trades in a portfolio by hedging their trades.
Risk Profile
A graphic determination of risk on a trade. This would include the profit and loss of a trade at any given point for any given time frame.
Roll Down
Close out options at one strike and simultaneously open other options at a lower strike.
Roll Forward (Out)
Close-out options at a near-term expiration date and open options at a longer-term expiration date.
Roll Up
Close out options at a lower strike and open options at a higher strike.
Rolling
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. See also Roll Down, Roll Forward, and Roll Up.
Round-turn
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.
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Seasonal Market
A market with a consistent but short-lived rise or drop in market activity due to predictable changes in climate or calendar.
Seat
The traditional term for membership in a stock exchange.
Secondary Market
A market that provides for the purchase or sale of previously sold or bought options through closing transactions.
Securities and Commodities Exchanges
Organized exchanges where securities, options and futures contracts are traded.
Securities and Exchange Commission (SEC)
Commission created by Congress to regulate the securities markets and protect investors.
Security
A trading instrument such as stocks, bonds, and short-term investments.
Selling Short
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.
Series (options)
All option contracts of the same class that also have the same unit of trade, expiration date and strike price.
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. See also Mark-to-market.
Shares
Certificates representing ownership of stock in a corporation or company.
Short
The selling of a security, contract or commodity not owned by the seller..
Short Position
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).
Short Premium
Expectation that a move of the underlying in either direction will result in a theoretical decrease of the value of an option.
Short Selling
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.
Small-cap Stocks
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.
Smoothing
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. 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.
Spread
(1) The difference between the bid and the ask prices of a security. (2) 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.
Spread Strategy
Any option position having both long options and short options of the same type on the same underlying security.
Standard & Poor's Corporation (S&P)
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 measure of the volatility of a stock. It is a statistical quantity measuring the magnitude of the daily price changes of that stock.
"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.
Stochastic Indicator
Based on the observation that as prices increase, closing prices tend to accumulate ever closer to the highs for the period.
Stock
A share of a company's stock translates into ownership of part the company.
Stock Exchange or Stock Market
organized marketplace where buyers and sellers are brought together to buy and sell stocks.
Stock Split
An increase in the number of a stock's shares that results in decreasing the par value of its stock.
Stop-Limit Order
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. See also Stop Order.
Stop Order
An 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.
Stops
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 equal number of puts and calls having the same terms.
Strangle
A position consisting of a long (short) call and a long (short) put where both options have the same underlying, the same expiration date, but different strike prices. Most strangles involve OTM options.
Strategy
With respect to option investments, a preconceived, logical plan of position selection and follow-up action.
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.
Striking Price Interval
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.
Sub-Index
See narrow-based index.
Suitable
Describing a strategy or trading philosophy in which the investor is operating in accordance with his (her) financial means and investment objectives.
Suitability
A requirement that any investing strategy fall within the financial means and investment objectives of an investor.
Support
A term in technical analysis indicating a price area 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. See also Resistance.
Swings
The measurement of price movement between extreme highs and lows.
Synthetic Long Call
A long put and a long stock or future.
Synthetic Long Put
A strategy equivalent in risk to purchasing a put option where an investor sells stock short and buys a call.
Sythetic Short Call
A short put and a s short sale in the underlying stock.
Synthetic Short Put
A short call and a long in the underlying stock.
Synthetic Stock
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.
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Technical Analysis
The method of predicting future stock price movements based on observation of historical stock price movements.
Terms
The collective name denoting the expiration date, striking price, and underlying stock of an option contract.
Theoretical Value
The price of an option, or a combination of options, as computed by a mathematical model.
Theta
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. See Time Decay.
Tick
A minimum upward or downward movement in the price of a security. For example, bonds trade in 32nds, while most stocks trade in eighths.
Time Decay
A term used to describe how the theoretical value of an option "erodes" or reduces with the passage of time. Time decay is especially quantified by Theta..
Time Premium
The additional value of an option due to the volatility of the market and the time remaining until expiration.
Time Spread
See Calendar Spread.
Time Value
The portion of the option premium that is attributable to the amount of time remaining until the expiration of the option contract. Time value is whatever value the option has in addition to its intrinsic value.
Time Value Premium
The amount by which an option's total premium exceeds its intrinsic value.
Total Return Concept
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.
Tracking Error
The amount of difference between the performance of a specific portfolio of stocks and a broad-based index with which they are being compared. See also market basket.
Trader
An investor or professional who makes frequent purchases and sales.
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.
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.
Treasury Bond (T-Bond)
A fixed-interest U.S. government debt security with a maturity of 10 years or more.
Treasury Note (T- Note)
A fixed-interest U.S. government debt security with a maturity of between one and ten years.
Triple Witching Day
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.
- U -
Uncovered Call Writing
A short call option position in which the writer does not own an equivalent position in the underlying security represented by his option contracts.
Uncovered Option
A written option is considered to be uncovered if the investor does not have an offsetting position in the underlying security. See also Covered.
Uncovered Put Writing
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.
Underlying Security
The security subject to being purchased or sold upon exercise of the option contract.
Undervalued
Describing a security that is trading at a lower price than it logically should. Usually determined by the use of a mathematical model. See also Overvalued and Fair Value.
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.
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Variable Delta
A delta that can change due to the change of an underlying asset or a change in time expiration of an option.
Variable Ratio Write
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
A measure of the rate of change in an option's theoretical value for a one-unit change in the volatility assumption.
Vertical Spread
(1)Most commonly used to describe the purchase of one option and sale of another where both are of the same type and same expiration, but have different strike prices. (2) It is also used to describe a delta-neutral spread in which more options are sold than are purchased.
Volatility
A measure of the fluctuation in the market price of the underlying security. Mathematically, volatility is the annualized standard deviation of returns.
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 tra der an edge in estimating an option's worth.
Volume (Vol)
The amount of shares bought and sold on a stock exchange.
- W -
Whipsaw
Losing money on both sides of a price swing.
Wide Opening
Refers to an unusually large spread between the bid and asked prices.
Wilshire 5000 Equity Index
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.
Witching Day
A day on which two or more classes of options and futures expire.
Write
To sell an option. The investor who sells is called the writer.
Writer
An individual who sells an option.
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- Y -
Yellow Sheets
A daily publication of the National Quotation Bureau detailing bid and asked prices.
Yield
The rate of return on an investment.
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Zeta
The percentage change in an options price per 1% change in implied volatility.
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