Options Trading Glossary

Description: Options Glossary, Ratio Backspread, Ratio Calendar Combination,Ratio Calendar Spread,Ratio Call Spread

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. 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.

Realized gains and losses

The net amount received or paid when a closing transaction is made and matched together with an opening transaction.

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. Resistance is a price level at which rising prices have stopped rising and either moved sideways or reversed direction.

Return

The income profit made on an investment.

Return if Exersise

The return that a covered call writer would make if the underlying stock were called away.

Return on Investment

The percentage profit that one makes, or might make, on his investment.

Reversal Arbitrage

A riskless arbitrage that involves selling the stock short, writing a put, and buying a call. The options have the same terms.

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.

Reversal/Reverse conversion

An investment strategy used by professional option traders in which a short put and long call with the same strike price and expiration are combined with short stock to lock in a nearly riskless profit. For example, selling short 100 shares of XYZ stock, buying 1 XYZ May 60 call, and writing 1 XYZ May 60 put at favorable prices. The process of executing these three-sided trades is sometimes called 'reversal arbitrage.'

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.

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.

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

Substituting a far option for a near option on the same underlying instrument at the same strike price; also to roll forward or roll over.

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. 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. Variations of this include rolling up, rolling down, rolling out and diagonal rolling.

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.

Scalp

In commodities, purchasing and selling equal amounts so there is no net position at the end of the trading day; a speculative attempt to make a quick profit by buying at the initial offering price in the hope the issue will increase and cal be sold.

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