Options Trading Glossary

Description: Options Glossary, Illiquid Market, Immediate-or-Cancel Order (IOC),Immediate/Cancel,Implied Volatility

Illiquid Market

Market which has no volume that subsequently creates a lot of slippage due to lack of trading volume.

Immediate-or-Cancel Order (IOC)

A type of option order which gives the trading crowd one opportunity to take the other side of the trade. After being announced, the order will be either partially or totally filled with any remaining balance immediately cancelled. An IOC order, which can be considered a type of day order, cannot be used as part of a GTC order since it will be cancelled shortly after being entered. The difference between fill-or-kill (FOK) orders and IOC orders is that a IOC order may be partially executed.

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.

In-the-Money

A term describing any option that has intrinsic value. A call option is in the money if the stock price is above the strike price. A put option is in the money if the stock price is below the strike price. If you were to exercise an option and it would general a profit at the time, it is known to be in the money.

In-the-Money option

An adjective used to describe an option with intrinsic value. A call option is in the money if the stock price is above the strike price. A put option is in the money if the stock price is below the strike price.

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

A compilation of the prices of several common entities (stocks) into a single number. An index is a group of stocks which can be traded as one portfolio, such as the S&P 500. Broad-based indexes cover a wide range of industries and companies and narrow-based indexes cover stocks in one industry or economic sector.

Index Option

An option whose underlying entity is an index. Most index options are cash-based. Index options allow investors to trade in a specific industry group or market without having to buy all the stocks individually.

Individual Volatility

The volatility percentage that justifies an option's price, as opposed to historic or implied volatility. A theoretical option pricing model can be used to generate an option's individual volatility when the five remaining quantifiable factors (stock price, time until expiration, strike price, interest rates, and cash dividends) are entered along with the price of the option itself.

Institution

A professional investment management company, probably very large, engaged in professional investing in securities. Normally a bank, insurance company, or mutual fund.

Inter-Market Analysis

Observing the price movement of one market for the purpose of evaluating a different market.

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 portion of an option's premium that is represented when the cash market price is greater that the exercise price; a known constant equal to the difference between the strike price and underlying market price. For call options, this is the difference between the stock price and the striking price, if that difference is a positive number, or zero otherwise. For put options it is the difference between the striking price and the stock price, if that difference is positive, and zero otherwise. 

Inverse Relationship

Two or more markets which act totally opposite of one another producing negative correlations.

Investment

Any purchase of an asset to increase future income.

Iron butterfly

An option strategy with limited risk and limited profit potential that involves both a long (or short) straddle, and a short (or long) combination. An iron butterfly contains four options as is an equivalent strategy to a regular butterfly spread which contains only three options. All options must have the same underlying and have the same expiration.

ISE

International Securities Exchange.

Kappa

A measure of the rate of change in an option's theoretical value for a one-unit change in the volatility assumption.

Lag

The number of data points that a filer, such as a moving average, follows or trails the input price data.

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