Options Trading Glossary

Description: Options Glossary, Variable Delta, Variable Ratio Write,Vega,Vertical Spread

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

The amount by which the price of an option changes when the volatility changes. A measure of the rate of change in an option's theoretical value for a one-unit change in the volatility assumption. Also referred to as volatility.

Vertical Spread

(1) A stock option spread based on simultaneous purchase and sale of options on the same underlying stock with the same expiration months but different strike prices. (2) It is also used to describe a delta-neutral spread in which more options are sold than are purchased.

Volatility

A measure of the fluctuation in the market price of the underlying security. Mathematically, volatility is the annualized standard deviation of returns (annualized standard deviation of a stock's daily price changes). Volatility is a primary determinant in the valuation of options premiums and time value. There are two basic kinds of volatility, implied and historical (statistical). Implied volatility is calculated by using an option pricing model (Black-Scholes for stocks and indices and Black for futures). Historical volatility is calculated by using the standard deviation of underlying asset price changes from clos e to close trading going back 21 to 23 days.

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.

Wasting

A term depicting how an option's value decreases over time.

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