Options Trading Glossary

Description: Options Glossary, CAC 40 Index, Calendar Spread,Call,Call Option

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.

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.

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).

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.

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.

Carry/Carrying Cost

The interest expense on money borrowed to finance a securities position.

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 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.

Cash Settlement Amount

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.

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.

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.

Christmas Tree Spread

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

Class of Options

A term referring to all options of the same security type - either calls or puts - covering the same underlying security.

Clearinghouse

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.

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 reduction or an elimination of an open position by the appropriate offsetting purchase or sale. Basicaly 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.

Commission

A service charge assessed by a broker and his/her investment company in return for arranging the purchase or sale of a security.

Commodity

Any bulk good traded on an exchange (for example, metals, grains and meats).

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

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.'

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.

Contingency Order

An order to execute a transaction in one security that depends on the price of another security.

Contract

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.

Conversion

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.

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 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.

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 Combination

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.

Covered Option

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.

Covered Put

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).

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 assignment 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.

Covered Write

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.

Crack Spread

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

Credit

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.

Cross Rate

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.

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