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Options Glossary
Description: Options Glossary, Options Trading, Options, Stocks, Stocks Trading, Trading
A B C D E F G H I-J-K L M N O P Q R S T U V W-X-Y-ZCertain events such as a stock split or a stock dividend (e.g., a 3-for-2 stock split). An adjusted option may cover more than the usual one hundred shares. For example, after a 3-for-2 stock split, the adjusted option will represent 150 shares. For such options, the premium must be multiplied by a corresponding factor. Example: buying 1 call (covering 150 shares) at 4 would cost $600.
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).
See Also: Index
A type of option order which requires that the order be executed completely or not at all. An AON order may be either a day order or a GTC (good til cancel) order.
See Also: Order
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.
See Also: Change, Exchange, Stock
An option contract that can be exercised at any time between the date of purchase and the expiration date. Most exchange-traded options are American style.
See Also: Option
American Stock Exchange.
The paying off of debt in regular instalments over a period of time.
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 Percent
The historical earnings change between the most recently reported fiscal year earnings and the preceding.
See Also: Change
Annual Net Profit Margin Percent
The percentage that the company earned from gross sales for the most recently reported fiscal year.
The cost of credit that the consumer pays, expressed as a simple annual percentage.
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.
The simple rate of return earned by an investment for each year.
See Also: Return
A series of constant payments at uniform time intervals (for example, periodic interest payments on a bond).
The increase in value of an asset.
The simultaneous purchase and sale of two different, but related, securities with the intent of profiting by the price discrepancy.
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.
See Also: Arbitrage
The price at which a seller is offering to sell an option or stock.
See Also: Price
To transfer to another to whom the property is assigned.
Received notification of an assignment by The Options Clearing Corporation.
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. Assignment is a notification by The Options Clearing Corporation to a clearing member that an owner of an option has exercised his or her rights there under. For equity and index options, assignments are made on a random basis by The Options Clearing Corporation.
See Also: Assign
An option with an exercise price that is equal to the current market price of the underlying stock.
An order which specifies execution at the opening of the market or else it is cancelled.
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.
See Also: Market
The correlation between the values of a time series and previous values of the same series.
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.
See Also: Exercise
An mathematical representation of the behaviour of a specific sector or index of the market (for example, the Dow Jones Industrial Average).
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.)
See Also: Average
Buying more of a stock or an option at a lower price than the original purchase so as to reduce the average cost.
The futures or options on futures months being traded that are furthest from expiration.
The testing of a strategy based on historical data to see if the results are consistent.
A delta-neutral spread composed of more long options than short options on the same underlying instrument. This position generally profits from a large movement in either direction in the underlying instrument.
See Also: Spread
The difference between spot (cash) prices and the futures contract price.
An investor who acts on the belief that a security or the market is falling or is expected to fall.
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.
A declining stock market over a prolonged period of time usually caused by a weak economy and subsequent decreased corporate profits.
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.
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.
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: Bear
A measure of volatility that tells how much a stock moves in relation to an index or average. A beta of 1.5, for example, means that the stock may move 50%, either up or down, more than the Dow Jones industrials, or other indicator on which it is based.
The difference between the expected value of an estimator and the actual value to be estimated.
The highest price at which a floor broker, trader or dealer is willing to buy a security or commodity for a specified time.
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.
See Also: Bid
The price at which a buyer is willing to buy an option or a stock.
Demand for an asset drives up the price paid by buyers.
See Also: Bid
The difference between bid and asked prices constitute the bid-asked spread.
A model developed to estimate the market value of option contracts. This is the first widely-used model for option pricing. This formula can be used to calculate a theoretical value for an option using current stock prices, expected dividends, the option's strike price, expected interest rates, time to expiration and expected stock volatility. While the Black-Scholes model does not perfectly describe real-world options markets, it is still often used in the valuation and trading of options.
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.
A steep and rapid increase in price followed by a steep and rapid drop in price. This indicator is often used in technical analysis.
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.
See Also: Stock
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.
The smallest quantity of shares traded on an exchange at standard commission rates.
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.
Boston Options Exchange Group L.L.C.
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 is 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.
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.
The stock price(s) at which an option strategy results in neither a profit nor a loss. While a strategy's break-even point(s) are normally stated as of the option's expiration date, a theoretical option pricing model can be used to determine the strategy's break-even point(s) for other dates as well.
See Also: Points
When a tradable exits a trading range by trading at price levels that leaves a price area where no trading occurs on a bar chart. Typically, these gaps appear at the completion of important chart formations.
See Also: Gap
A rise in the price of an underlying instrument above its resistance level or a drop below the support level.
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.
An index designed to reflect the movement of the market as a whole. (For example, the S&P 100, the S&P 500, and the AMEX Major Market Index).
See Also: Index
A person acting as an agent for making securities transactions. An 'Account Executive' or a 'broker' at a brokerage firm deals directly with customers. A 'Floor Broker' on the trading floor of an exchange actually executes someone else's trading orders.
An individual or firm which charges a commission for executing buy and sell orders.
See Also: Broke
An investor who believes that a market is rising or is expected to rise.
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.
A rising stock market over a prolonged period of time usually caused by a strong economy and subsequent increased corporate profits.
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.
An option strategy that achieves its maximum potential if the underlying security rises far enough, and has its maximum risk if the security falls far enough. An option with a lower striking price is bought and one with a higher striking price is sold, both generally having the same expiration date. Either puts or calls may be used for the strategy. This is one of a variety of strategies involving two or more options (or options combined with an underlying stock position) that may potentially profit from a rise in the price of the underlying stock.
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: Bull
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.
See Also: Spread
To buy at the end of a trading session at a price within the closing range.
See Also: Close
To buy at the beginning of a trading session at a price within the opening range.
See Also: Opening
An order to purchase a security entered at a price above the current offering price triggered when the market hits a specified price.
See Also: Order
A covered call position in which stock is purchased and an equivalent number of calls written at the same time. This position may be transacted as a combined order, with both sides (buying stock and writing calls) being executed simultaneously. Example: buying 500 shares XYZ stock, and writing 5 XYZ May 60 calls.
A broad-based index of 40 common stocks on the Paris Bourse.
See Also: Index
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.
See Also: Spread
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.
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).
The amount a call option costs.
The amount of money an individual or business has available.
The profit realized when a capital asset is sold for a higher price than the purchase price.
See Also: Capital
The loss incurred when a capital asset is sold for a lower price than the purchase price.
See Also: Capital
Refers to the current value of a corporation's outstanding shares in dollars.
See Also: Capital
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: Capital, Capitalization, Index
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.
See Also: Option
The interest expense on money borrowed to finance a securities position.
The interest expense on a debit balance created by establishing a position.
An account in which the customer is required to pay in full for all purchased securities.
A dividend paid in cash to a shareholder out of a corporation's profits.
See Also: Dividend
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.
See Also: Settlement
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.
See Also: Settlement
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.
The Chicago Board Options Exchange; the first national exchange to trade listed stock options.
The difference between the current price and the price of the previous day of a security.
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.
See Also: CBOE, Change, Exchange, Option
The simultaneous purchase and writing of options with either a different strike price or expiration date or combination of the two.
See Also: Spread
A term referring to all options of the same security type - either calls or puts - covering the same underlying security.
See Also: Option
An institution established separately from the exchanges to ensure timely payment and delivery of securities.
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.
The final price of a security at which a transaction was made.
See Also: Price
A transaction in which the purchaser's intention is to reduce or eliminate a short position in a given series of options.
The high and low prices recorded during the period designated as the official close.
A transaction in which the seller's intention is to reduce or eliminate a long position in a given series of options
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.
In Gann theory, a projected reversal point.
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.
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.
Any position involving both put and call options that is not a straddle.
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.
See Also: Combination, Spread
A service charge assessed by a broker and his/her investment company in return for arranging the purchase or sale of a security.
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.
See Also: Commission, Commodity, Futures
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.
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.'
A measure of price changes in consumer goods and services. This index is used to identify periods of economic inflation or deflation.
An order to execute a transaction in one security that depends on the price of another security.
See Also: Order
A unit of trading for a financial or commodity future, or option.
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.
See Also: Contract
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.
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: Arbitrage, Conversion
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.
A sudden decline in the price of a security after a period of market strength.
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.
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.
See Also: Cover
An option strategy in which a call option is written against long stock on a share-for-share basis.
See Also: Call, Cover, Covered
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.
See Also: Call, Cover, Covered, Option
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.
See Also: Combination, Cover, Covered
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.
See Also: Cover, Covered, Option
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).
A strategy in which one sells put options and simultaneously is short an equal number of shares of the underlying security.
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.
See Also: Cover, Covered, Straddle
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.
See Also: Cover, Covered, Straddle
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.
The spread between crude oil and it's products: heating oil and unleaded gasoline plays a major role in the trading process.
See Also: Spread
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.
The difference in value of two options, where the value of the one sold exceeds the value of the one purchased.
The current exchange rate between differing currencies.
A measure of the rate of change in an option's delta for a one-unit change in the price of the underlying stock.
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.
The difference between the high and low price of a security in one trading day.
A type of option order which instructs the broker to cancel any unfilled portion of the order at the close of trading on the day the order is first entered.
See Also: Order
A position (stock or option) that is opened and closed on the same day.
An approach to trading in which the same position is entered and exited within one day.
Money paid out from an account either from a withdrawal or a transaction that results in decreasing the cash balance. A debit transaction is one in which the net cost is greater than the net sale proceeds.
The difference in value of two options, where the value of the long position exceeds the value of the short position.
A term used to describe how the theoretical value of an option 'erodes' or reduces with the passage of time. Time decay is specifically quantified by theta.
A deep-in-the-money call option has the strike price of the option well below the current price of the underlying instrument. A deep-in-the-money put option has the strike price of the option well above the current price of the underlying instrument.
Quotes from a data service provider which are delayed up to 20 minutes from real time quotes.
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.
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).
See Also: Deliver
A measure of the rate of change in an option's theoretical value for a one-unit change in the price of the underlying security. 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.
A position arranged by selecting a calculated ratio of short and long positions that balance out to an overall position delta of zero.
A measure of option or underlying securities delta.
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.
An options strategy protecting an option against price changes in the option's underlying instrument by balancing the overall position delta to zero. These hedges are constructed by taking a position in the underlying instrument that is equal in magnitude but opposite in sign (+/-) to the option's delta.
This an "options/options" or "options/underlying instrument" position constructed so that it is relatively insensitive to the price movement of the underlying instruments. This is arranged by selecting a calculated ratio of offsetting short and long positions.
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.
Financial instruments based on the market value of an underlying asset.
A financial security whose value is determined in part from the value and characteristics of another security, the underlying security.
See Also: Derivative, SEC, Security
Financial contracts the value of which depends on the value of the underlying instrument - commodity, bond, equity, currency or a combination.
See Also: Derivative
A strategy involving the simultaneous purchase and sale of two options of the same type that have different strike prices and different expiration dates. Typical types of diagonal spreads are diagonal bull spreads, diagonal bear spreads, and diagonal butterfly spreads.
See Also: Spread
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.
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).
Brokerage firms that offer lower commission rates than full service brokers, but do not offer services such as advice, research and portfolio planning.
See Also: Broke, Broker, Discount
Freedom given by an investor through his or her Account Executive to use 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.
When two or more averages or indices fail to show confirming trends.
A sum of money paid out to a shareholder from the stock's profits.
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.
See Also: Average
The potential for prices to decrease.
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: Downside
The potential risk one takes if prices decrease in directional trading.
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.
The commission made by a broker for the purchase and sale sides of a trade.
A feature of American-style options that allows the owner to exercise an option at any time prior to its expiration date.
See Also: Exercise
The close of the trading day when market prices settle.
An Investor's Business Daily list of companies ranked from 0 to 100 by the strength of each company's earnings per share.
A price level in a sideways market equal-distance from the resistance and support levels.
In a margin account, this is the difference between the securities owned and the margin loans owed. It is the amount the investor would keep after all positions have been closed and all margin loans paid off.
An option on shares of an individual common stock or exchange traded fund (ETF).
A strategy which has the same risk-reward profile as another strategy. For example, a long May 60-65 call vertical spread is equivalent to a short May 60-65 put vertical spread.
See Also: Strategy
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.
Dollars deposited in foreign banks, with the futures contract reflecting the rates offered between US banks and foreign banks.
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.
See Also: Exercise
An option that can only be exercised on the expiration date.
See Also: Option
An option contract that may be exercised only during a specified period of time just prior to its expiration.
See Also: Option
The day before which an investor must have purchased the stock in order to receive the dividend. On the ex-dividend date, the previous day's closing price is reduced by the amount of the dividend (rounded up to the nearest eighth) because purchasers of the stock on the ex-dividend date will not receive the dividend payment. This date is sometimes referred to simply as the 'ex-date,' and can apply to other situations; for example, splits and distributions. If you purchase a stock on the ex-date for a split or distribution you are not entitled to the split stock or that distribution. However, the opening price for the stock will have been reduced by an appropriate amount, as on the ex-dividend date. Weekly financial publications, such as Barron's, ofte
See Also: 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.
See Also: Dividend
An area where an asset, option, future, stock or derivative is bought and sold.
See Also: Change
The price at which one country's currency can be converted into another country's currency.
Exchange traded funds (ETFs) are index funds or trusts that are listed on an exchange and can be traded in a similar fashion as a single equity. The first ETF came about in 1993 with the AMEX's concept of a tradable basket of stocks - the Standard & Poor's Depositary Receipt (SPDR). Today, the number of ETFs that trade options continues to grow and diversify. Investors can buy or sell shares in the collective performance of an entire stock portfolio - or a bond portfolio as a single security. Exchange traded funds allow some of the more favorable features of stock trading, such as liquidity and ease of equity style features to more traditional index investing.
The process of completing an order to buy or sell securities.
Implementing an option's right to buy or sell the underlying security. In the case of a call, the option owner buys the underlying stock. In the case of a put, the option owner sells the underlying stock.
Exercise by Exception Processing
A procedure used by The Options Clearing Corporation as an operational convenience for it's clearing members. Under these proceedings, a clearing member is deeming to have tendered exercise notices for options that are in-the-money by threshold amounts, unless specifically instructed not to do so. This procedure protects the owner from losing the intrinsic value of the option because of failure to exercise. Unless instructed not to do so, all expiring equity options that are held in customer accounts will be exercised if they are in the money by a specified amount.
See Also: Exercise
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.
See Also: Exercise
The price at which the owner of an option can purchase (call) or sell (put) the underlying stock. In other words, 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.
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.
See Also: Exercise, Settlement
Expected Profit is the predicted profits minus the predicted losses expressed in total dollars.
See Also: Profit
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.
See Also: Return
The date and time after which an option may no longer be exercised.
Today, equity options (except LEAPS) 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.
See Also: Cycle, Expiration
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
The last business day prior to the option's expiration date during which purchases and sales of options can be made. For equity options, this is generally the third Friday of the expiration month. Note: If the third Friday of the month is an exchange holiday, the last trading day will be the Thursday immediately preceding the third Friday.
See Also: Expiration
The month during which the expiration date occurs.
See Also: Expiration
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
An opportunity that can yield large profits with usually a limited risk in a short amount of time.
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.
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.
Selling a rising price or buying a falling price.
The value of an asset under normal conditions.
See Also: Market
Normally, a term used to describe the worth of an option or futures contract as determined by a mathematical model. Also sometimes used to indicate intrinsic value.
A declaration that market conditions, in the futures pit, are so disorderly temporarily to the extent that floor brokers are not held responsible for the execution of orders.
See Also: Market
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.
An executed order.
Placing an order to buy or sell an exact number of units or none at all.
See Also: Fill
An order that must be filled or canceled immediately.
A type of option order which requires that the order be executed completely or not at all. A fill-or-kill order is similar to an all-or-none (AON) order. The difference is that if the order cannot be completely executed (i.e., filled in its entirety) as soon as it is announced in the trading crowd, it is to be 'killed' (i.e., cancelled) immediately. Unlike an AON order, a FOK order cannot be used as part of a GTC order.
The term used for debt instruments.
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.
See Also: Delta
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.
See Also: Option
The number of shares outstanding of a particular common stock.
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. It is a trader on an exchange floor who executes trading orders for other people.
A summary of the information on an order ticket.
See Also: Tick
An exchange member on the trading floor who buys and sells for his or her own account.
See Also: Trader
A variation in the market price of a security.
The first expiration month in a series of months.
A method of analyzing the prospects of a security by observing accepted accounting measures such as earnings, sales, assets, dividends, management, products, services and so on.
Interchangeability resulting from standardization. Options listed on national exchanges are fungible, while over-the-counter options generally are not. Classes of options listed and traded on more than one national exchange are referred to as multiple-listed / multiple-traded options.
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.
A standardized contract calling for the delivery of a specified quantity of a commodity at a specified date in the future.
The rate of change in an option's delta for a one-unit change in the price of the underlying security.
A day in which the daily range is completely above or below the previous day's daily range.
To buy securities, options or futures.
See Also: Long
To sell securities, options or futures.
See Also: Short
Unethical brokerage activity whereby the broker trades first for his or her own account before filling the customer's order(s).
A designation applied to some types of orders, meaning the order remains in effect until it is either filled or cancelled.
A strangle where the call and the put are in-the-money.
The intense selling of stocks by speculators who think the market is about to drop because they think prices are inflated.
See Also: Market
A conservative strategy used to limit investment loss by effecting a transaction which offsets an existing position. Hedging is taking a position through options or futures opposite to the current position they hold in the market.
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: Hedge
A position established with the specific intent of protecting an existing position. For example, an owner of common stock may buy a put option to hedge against a possible stock price decline.
The highest price that was paid for a stock during a certain period.
Refers to the high and low transactions prices that occur each trading day.
A speculative high-priced stock that moves up and down sharply over a short period of time.
Refers to the stock of companies involved in high-technology industries, such as computers, biotechnology, robotics, electronics, and semiconductors.
See Also: Stock
A measure of actual stock price changes over a specific period of time; usually calculated by taking a stand`ard deviation of price changes over a time period.
See Also: Volatility
The purchaser of an option.
Spreads between options with the same exercise price but different expiration dates. Also known as calendar or time spreads.
See Also: Spread
Market which has no volume that subsequently creates a lot of slippage due to lack of trading volume.
See Also: Market
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.
See Also: Order
An order which must be filled immediately or canceled.
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
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.
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.
See Also: Option
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.
See Also: Return
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.
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.
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.
See Also: Volatility
A professional investment management company, probably very large, engaged in professional investing in securities. Normally a bank, insurance company, or mutual fund.
Observing the price movement of one market for the purpose of evaluating a different market.
See Also: Market
A spread consisting of opposing positions in instruments with two different markets.
The charge for the privilege of borrowing money, usually expressed as an annual percentage rate.
Refers to a point in the business cycle when interest rates are declining and bond prices are rising.
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.
Two or more markets which act totally opposite of one another producing negative correlations.
Any purchase of an asset to increase future income.
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.
International Securities Exchange.
A measure of the rate of change in an option's theoretical value for a one-unit change in the volatility assumption.
The number of data points that a filer, such as a moving average, follows or trails the input price data.
The very last full day of open trading before an options expiration day, usually the third Friday of the expiration month. Note: If the third Friday of the month is an exchange holiday, the last trading day will be the Thursday immediately preceding the third Friday.
Long-term Equity Anticipation Securities, which are options with maturities longer than one year.
One side of a spread. Thi is 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. This is, of course, a higher-risk method of establishing a spread position.
In rolling forward in futures, a method that would result in liquidating a position.
See Also: Leg
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).
A term describing the greater percentage of profit or loss potential when a given amount of money controls a security with a much larger face value. For example, a call option enables the owner to assume the upside potential of 100 shares of stock by investing a much smaller amount than that required to buy the stock. If the stock increases by 10 percent, for example, the option might double in value. Conversely, a 10 percent stock price decline might result in the total loss of the purchase price of the option. 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.
The maximum daily price limit for an exchange traded contract.
A trading order placed with a broker to buy or sell stock or options at a specific price. 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.
See Also: Order
Commodity exchange restrictions on the maximum upward or downward movements permitted in the price for a commodity during any trading session day.
A trading environment characterized by high trading volume, a narrow spread between the bid and ask prices, and the ability to trade larger sized orders without significant price changes.
See Also: Market
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.
A put or call option that is traded on a national options exchange. Listed options have fixed striking prices and expiration dates. In contrast, over-the-counter options usually have non-standard or negotiated terms.
See Also: Option
A trader on a futures exchange who buys and sells for his own account and may sometimes also fill public orders.
A market where trading has been halted because prices have reached their daily trading limit.
See Also: Market
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.
The term used to describe the buying of a security, contract, commodity, or option.
The position of an option purchaser (owner) which represents the right to either buy stock (in the case of a call) or to sell stock (in the case of a put) at a specified price (the strike price) at or before some date in the future (the expiration date). It results from an opening purchase transaction e.g., long call or long put.
See Also: Long, Option, 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).
A position in which an investor has purchased and owns stock.
See Also: Long, Position, Stock
In English, this means calls and puts with an expiration as long as thirty-nine months. Currently, equity LEAPS have two series at any time with a January expiration. For example, in October 2000, LEAPS are available with expirations of January 2002 and January 2003.
This is the lowest price paid for a stock during a certain period.
A trade which is hedged for purposes of limiting price loss as opposed to a directional trade where loss is unlimited.
See Also: Risk
A market maker stands ready to buy or sell a particular security for his/her own account to keep the market liquid.
See Also: Market
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. basicaly, margin is a buying a security by borrowing funds from a brokerage house.
A customer account in which a brokerage firm lends the customer part of the purchase price of a trade.
See Also: Margin
A call from a broker signaling the need for a trader to deposit additional money into a margin account to maintain a trade.
The minimum equity required to support an investment position, the maximum percentage of the investment that can be loaned by the brokerage firm - is set by the Federal Reserve Board. To buy on margin refers to borrowing part of the purchase price of a security from a brokerage firm.
See Also: Margin
Margin Requirement (for options)
The amount an uncovered (naked) option writer is required to deposit and maintain to cover a position. The margin requirement is calculated daily.
An accounting process by which the price of securities held in account are valued each day to reflect the last sale price or market quote if the last sale is outside of the market quote. The result of this process is that the equity in an account is updated daily to properly reflect current security prices. Market-to-market is the daily adjustment of margin accounts to reflect profits and losses. In this way, losses are never allowed to accumulate.
See Also: Market
At the end of each business day the open positions carried in an account held at a brokerage firm are credited or debited funds based on the settlement price of the open positions that day.
See Also: Market
A specific asset, security or commodity that is traded at an exchange.
A portfolio of common stocks whose performance is intended to simulate the performance of a specific index.
See Also: Market
An independent trader or trading firm that is prepared to buy and sell shares or contracts in a designated market. Market makers must make a 2-sided market (bid and ask) in order to facilitate trading.
See Also: Market
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.
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.
An order to buy or sell securities at the current market. The order will be filled as long as there is a market for the security. A market order is to be executed immediately at the best available price, and is the only order that guarantees execution.
The most recent price at which a security transaction took place.
A quotation of the current best bid / ask prices for an option or stock in the marketplace (an exchange trading floor). This information is usually obtained by the investor from someone at a brokerage firm. However, for listed options and stocks, these quotes are widely disseminated and available through various commercial quotation services.
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.
See Also: Market
A price order that automatically becomes a market order if the price is reached.
See Also: Market
An exchange member 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: Market
Market-Maker System, (competing)
A method of supplying liquidity in options markets by having market makers in competition with one another. An alternative to a specialist system. They are similarly charged with making fair and orderly markets in a given class of options.
See Also: Market
A type of market order which allows the investor to give discretion to the floor broker regarding the price and/or time at which a trade is executed.
A type of option order which requires that an order be executed at or near the close of trading on the day the order is entered. A MOC order, which can be considered a type of day order, cannot be used as part of a GTC order.
See Also: Close, Market, Order
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.
The simultaneous purchase of stock and put options representing an equivalent number of shares when the position is designated at that time as a hedge. This is a limited risk strategy during the life of the puts because the stock can always be sold for at least the strike price of the purchased puts.
The maximum amount of losses possible from the option trade.
The maximum amount of net profit possible from the option trade.
See Also: Profit
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.
See Also: Stock
A mathematical formula used to calculate the theoretical value of an option. This is 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.
When a market continues in the same direction for a certain time frame, the market is said to have momentum.
A technical indicator utilizing price and volume statistics for predicting the strength or weakness of a current market.
See Also: Momentum
Investing with (or against) the momentum of the market in hopes of profiting from it.
See Also: Momentum
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.
See Also: Average
Any option contract that is listed and traded on more than one national options exchange.
See Also: Option
An open end investment company that pools investors' money to invest in a variety of stocks, bonds, or other securities.
An option written (sold) without an underlying hedge position.
See Also: Option
A securities position not hedged from market risk.
See Also: Position
A short option position that is not fully collateralized if notification of assignment is received. A short call position is uncovered if the writer does not have a long stock or long call position. A short put position is uncovered if the writer is not short stock or long another put.
See Also: Cover, Covered, Option
Generally referring to an index, it indicates that the index is composed of only a few stocks, generally in a specific industry group.
The closing spread between the bid and asked prices of a security as a result of bidding and offering.
See Also: Spread
NASD (National Association of Securities Dealers)
The National Association of Securities Dealers is an industry association of broker/dealers in the over-the-counter securities business. The NASD is a self-regulatory body and administers the NASDAQ stock market.
See Also: SEC
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.
An option with a strike price close to the current price of the underlying tradable.
The daily change from time frame to time frame. For example, the change from the close of yesterday to the close of today.
See Also: Change
The overall profit of a trade.
See Also: Profit
An adjective describing the belief that a stock or the market in general will neither rise nor decline significantly.
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. This is an option strategy (or stock and option position) expected to benefit from a neutral market outcome.
New York Stock Exchange (NYSE)
The largest stock exchange in the United States.
See Also: Change, Exchange, NYSE, Stock
A conservative option strategy in which an investor buys Treasury bills (or other liquid assets) with 90 percent of his or her funds, and buys call options (or put options or a mixture of both) with the balance. The proportions of this strategy are subject to change based on prevailing interest rates.
See Also: Strategy
An option whose underlying entity is not common stock; typically refers to options on physical commodities and index options. At the same time non-equity options include options on futures, foreign currencies, Treasury security yields, etc.
A type of order which releases normal obligations implied by the other terms of the order. For example, a limit order designated as 'not-held' allows discretion to the floor trader in filling the order when the market trades at the limit price of the order. In this case, there is no obligation to provide the customer with an execution if the market trades through the limit price on the order.
See Also: Order
A short-term debt security, usually maturing in five years or less.
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.
New York Stock Exchange.
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.
This term, pronounced as three separate letters, is Wall Street shorthand for Standard & Poor's 100 stock index.
A trader who does not trade on the actual floor of an organized futures of stock exchange.
See Also: Trader
The lowest price at which a person is willing to sell.
The change of the offer of the market related to a downward price movement at that specific time.
See Also: Offer
In the options business this means the same as ask / ask price, or the price at which a seller is offering to sell an option or a stock.
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.
The option in question is trading at its exercise price (also referred to as at-the-money).
A type of option order which treats two or more option orders as a package, whereby the execution of any one of the orders causes all the orders to be reduced by the same amount. For example, the investor would enter an OCO order if he/she wished to buy 10 May 60 calls or 10 June 60 calls or any combination of the two which when summed equaled 10 contracts. An OCO order may be either a day order or a GTC order.
See Also: Order
The total number of outstanding option contracts in the exchange market or in a particular class or series.
An order to buy or sell a security at a specified price, valid until executed or canceled.
See Also: Order
A system or trading method where an auction of verbal bids and offers is performed on the trading floor. This method is slowly disappearing as exchanges become automated.
A current trades that is still held active in a customer's account.
The period at the beginning of the trading session at an exchange.
A period at the opening of a futures market in which the price for each contract is established by outcry.
The range of prices at which the first bids and offers were made or first transactions were completed.
A transaction in which the purchaser's intention is to create or increase a long position in a given series of options.
See Also: Opening
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. An opening option transaction increases that option's open interest.
See Also: Opening
The theoretical cost of using your capital for one investment versus another.
A contract that gives the owner the right, but not the obligation, to buy or sell a particular asset (the underlying stock) at a fixed price (the strike price) for a specific period of time (until expiration) . The contract also obligates the writer to meet the terms of delivery if the contract right is exercised by the owner.
A contract 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.
The buyer of either a call or put option.
The time from when an option contract is created by a writer of that option to the expiration date; sometimes referred to as an option's 'lifetime.'
See Also: Option
This is the price of an option.
A graphical representation of the estimated theoretical value of an option at one point in time, at various prices of the underlying stock. 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: Option
The first widely-used model for option pricing is the Black Scholes. This formula can be used to calculate a theoretical value for an option using current stock prices, expected dividends, the option's strike price, expected interest rates, time to expiration and expected stock volatility. While the Black-Scholes model does not perfectly describe real-world options markets, it is still often used in the valuation and trading of options.
The seller of either a call or put option. The seller is obligated to meet the terms of delivery if the option owner exercises his or her right. This seller has made an opening sale transaction, and has not yet closed that position.
A stock on which listed options are traded.
A registered clearing agency whose shares are owned by the exchanges that trade listed equity options, OCC is an intermediary between option buyers and sellers. OCC issues and guarantees all listed option contracts.
See Also: Option
Options Clearing Corporation (OCC)
The issuer of all listed option contracts that are trading on the national option exchanges. OOC is the registered clearing agency whose shares are owned by the exchanges that trade listed equity options, OCC is an intermediary between option buyers and sellers. OCC issues and guarantees all listed option contracts.
See Also: Option
A ticket or voucher representing long or short securities and options.
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: Order
The volume of orders being bought or sold on the exchanges.
See Also: Order
An over-the-counter option is one which is traded in the over-the-counter market. OTC options are not listed on an options exchange and do not have standardized terms. These are to be distinguished from exchange-listed and traded equity options with NASD stocks as the underlying equity issue, which are standardized.
See Also: Option
A call option is out-of-the-money if the strike price is greater than the market price of the underlying security. 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.
An adjective used to describe an option that has no intrinsic value, i.e., all of its value consists of time value. 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.
See Also: Option
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.
See Also: Option
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: Option
Over-the-Counter/Over-the-Counter Market
A national association having many characteristics of an exchange. Rather than a floor or physically central market place, trading takes place via computer terminals.
See Also: Market
Market prices that have risen too steeply or too fast.
Market prices that have decline too steeply and too fast.
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.
An option strategy involving the writing of call options (wholly or partially) against existing long stock positions. This is different from the buy-write strategy which involves the simultaneous purchase of stock and writing of a call.
Any person who has made an opening purchase transaction, call or put, and has that position in a brokerage account.
The ability to simulate a trade without actually putting up the money for the purpose of gaining additional trading experience.
The stated or "nominal" value of a bond (typically $1,000) that is paid to the bondholder at maturity.
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. For example, when an option's theoretical value is equal to its intrinsic value, it is said to be 'worth parity.' When an option is trading for only its intrinsic value, it is said to be 'trading for parity.' Parity may be measured against the stock's last sale, bid, or offer.
See Also: Par
A chart of the profits and losses for a particular options strategy prepared in advance of the execution of the strategy. The diagram is plot of expected profit or loss against the price of the underlying security.
Pacific Stock Exchange.
The theoretical risk of a trade in a specific time frame.
See Also: Risk
A system of compensation in which a broker receives fees based on their performance in the marketplace.
Philadelphia Stock Exchange.
An option whose underlying entity is a physical good or commodity, like a common stock or a foreign currency. When that option is exercised by its owner, there is delivery of that physical good or commodity from one brokerage or trading account to another.
See Also: Deliver, Delivery, 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: Option
The risk to an investor (option writer) that the stock price will exactly equal the strike price of a written option at expiration; i.e., that option will be exactly at the money. The investor will not know how many of his/her written (short) options he/she will be assigned. The risk is that on the following Monday he/she might have an unexpected long (in the case of a written put) or short (in the case of a written call) stock position, and thus be subject to the risk of an adverse price move.
See Also: Risk
A specific location on the trading floor of an exchange designated for the trading of a specific option class or stock.
The price movement required for a security to go from one "full point" level to another (i.e. stock goes up or down $1).
See Also: Spread
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.
The total of a trader's open contracts - the combined total of antrader's open option contracts (calls and/or puts) and long or short stock.
The sum of all positive and negative deltas in a hedged position.
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. Some exchanges express the limit in terms of option contracts on the same side of the market and others express it in terms of total long or short or short delta.
See Also: Position
An investing strategy in which open positions are held for an extended period of time.
See Also: Position
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. Often this word is used to mean the same as time value.
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.
A stock index which is computed by adding the prices of each stock in the index, and then dividing by the divisor.
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.
See Also: Price
For securities that are traded in more than one market, the primary market is usually the exchange where trading volume in that security is highest.
See Also: Market
The initial purchase price of a bond on which interest is earned.
A company that issues private stock and is not publicly traded.
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.
See Also: Profit
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.
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. in the strategy.
See Also: Profit
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
A graphical presentation of the profit and loss possibilities of an investment strategy at one point in time (usually option expiration), at various stock prices.
See Also: Profit
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: Strategy
Book (of 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
A company that issues stocks to be traded on the public market.
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.
An option contract that gives the owner the right to sell the underlying stock at a specified price (its strike price) for a certain, fixed period of time (until its expiration). For the writer of a put option, the contract represents an obligation to buy the underlying stock from the option owner if the option is assigned. The put option buyer hopes the price of the shares will drop by a specific date w hile the put option seller (or writer) hopes that the price of the shares will rise, remain stable, or drop by an amount less than their profit on the premium by the specified date.
An order that must be filled as soon as it reaches the trading floor at the price specified, or be canceled immediately.
The price being offered or bid by a market maker or broker-dealer for a particular security.
Refers to the price at which the last sale and purchase of a particular security or commodity took place.
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.
See Also: Backspread, Spread
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.
See Also: Combination
Selling more near-term options than longer-term ones purchased, all with the same strike; either puts or calls.
See Also: 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.
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.
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.
See Also: Spread
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.
See Also: Strategy
Selling of call options in a ratio higher than 1 to 1 against the stock that is owned.
Data received from a quote service as the prices change.
The net amount received or paid when a closing transaction is made and matched together with an opening transaction.
A stock's price movement over the past year as compared to a market index.
An indicator used to identify price tops and bottoms.
See Also: Index
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.
The income profit made on an investment.
The return that a covered call writer would make if the underlying stock were called away.
The percentage profit that one makes, or might make, on his investment.
See Also: Investment, Return
A riskless arbitrage that involves selling the stock short, writing a put, and buying a call. The options have the same terms.
See Also: Arbitrage
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.
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.'
See Also: Conversion
The mathematical relationship between the maximum potential risk and maximum potential reward of a trade.
See Also: Risk
The expected change in an option's theoretical value for a 1 percent change in interest rates.
Priced higher than expected.
The potential financial loss inherent in the investment.
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.
A graphic representation of risk and reward on a given trade as prices change.
See Also: Risk
A person who manages risk of trades in a portfolio by hedging their trades.
See Also: Risk
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.
See Also: Risk
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.
Close out options at one strike and simultaneously open other options at a lower strike.
See Also: Roll
Close-out options at a near-term expiration date and open options at a longer-term expiration date. expiration date.
See Also: Roll
Close out options at a lower strike and open options at a higher strike.
See Also: Roll
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.
See Also: Roll
Procedure by which a long or short position is offset by an opposite transaction.
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.
See Also: Stops
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.
A market with a consistent but short-lived rise or drop in market activity due to predictable changes in climate or calendar.
See Also: Market
The traditional term for membership in a stock exchange.
The Securities and Exchange Commission. The SEC is an agency of the federal government which is in charge of monitoring and regulating the securities industry.
A market that provides for the purchase or sale of previously sold or bought options through closing transactions.
An index that measure the performance of a narrow market segment, such as biotechnology or small capitalization stocks.
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.
Securities and Commodities Exchanges
Organized exchanges where securities, options and futures contracts are traded.
See Also: Change, Exchange, SEC
Securities and Exchange Commission (SEC)
Commission created by Congress to regulate the securities markets and protect investors.
See Also: Change, Commission, Exchange, SEC
A trading instrument such as stocks, bonds, and short-term investments.
See Also: SEC
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.
See Also: Short
All option contracts of the same class that also have the same unit of trade, expiration date and strike price.
Option contracts on the same class having the same strike price and expiration month. For example, all XYZ May 60 calls constitute a series.
The process by which the underlying stock is transferred from one brokerage account to another when equity option contracts are exercised by their owners and the inherent obligations assigned to option writers.
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: Price, Settlement
The selling of a security, contract or commodity not owned by the seller.
The position of an option writer which represents an obligation on the part of the option's writer to meet the terms of the option if it is exercised by its owner. The writer can terminate this obligation by buying back (cover or close) the position with a closing purchase transaction.
See Also: Option, Position, Short
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).
Expectation that a move of the underlying in either direction will result in a theoretical decrease of the value of an option.
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.
See Also: Short
A strategy that profits from a stock price decline. It is initiated by borrowing stock from a broker-dealer and selling it in the open market. This strategy is closed (covered) at a later date by buying back the stock and returning it to the lending broker-dealer.
See Also: Position, Short, Stock
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.
See Also: Stock
A mathematical technique that removes excess data in order to maintain a correct evaluation of the underlying trend.
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. As a rule this is accomplished by managing the limit order book and making bids and offers for his/her/their own account in the absence of opposite market side orders. Most stock exchanges and some option exchanges utilize the specialist system of trading.
A trader who hopes to profit from a directional move in the underlying instrument. The speculator has no interest in making or taking delivery.
A sharp price rise in one or two days indicating the time for an immediate sale.
A stock dividend issued by one company in shares of another corporate entity, such as a subsidiary corporation of the company issuing the dividend.
A trade in which two related contracts/stocks/bonds/options are traded to exploit the relative difference in price change between the two. A trading strategy in which a trader offsets the purchase of one trading unit against another.
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.
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.
A statistical measure of price fluctuation. It is a statistical quantity measuring the magnitude of the daily price changes of that stock. One use of the standard deviation is to measure how stock price movements are distributed about the mean.
Interchangeability resulting from standardization. Options listed on national exchanges are fungible, while over-the-counter options generally are not. Classes of options listed and traded on more than one national exchange are referred to as multiple-listed / multiple-traded options.
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.
See Also: Return
Based on the observation that as prices increase, closing prices tend to accumulate ever closer to the highs for the period.
A share of a company's stock translates into ownership of part the company.
A dividend paid in shares of stock rather than cash.
Stock Exchange or Stock Market
An organized marketplace where buyers and sellers are brought together to buy and sell stocks.
See Also: Change, Exchange, Market, Stock
An increase in the number of outstanding shares by a corporation, through the issuance of a set number of shares to a shareholder for a set number of shares that the shareholder already owns. For example, a corporation might declare a '2-for-1 stock split.' This means that for every share of stock an investor owns, he/she will be given another, thus owning 2 shares instead of 1. There will be a corresponding reduction in equity value per share. In this case, the new shares (post-split) will be worth one-half their previous value but the investor will own twice as many shares.
See Also: Stock
An order (often erroneously known as a 'stop-loss' 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.
See Also: 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: Order
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.
The purchase or sale of an equivalent number of puts and calls on the underlying stock with the same exercise price and expiration date.
The purchase or sale of an equivalent number of puts and calls on the underlying stock with the same expiration date but a different exercise price. Usually, the put has a low strike price and the call has a higher strike price.
With respect to option investments, a preconceived, logical plan of position selection and follow-up action.
The price at which the owner of an option can purchase (call) or sell (put) the underlying stock. Used interchangeably with striking price, strike, or exercise 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 or over the specified period.
The normal price differential between option strike prices. Equity options generally have $2.50 strike price intervals (if the underlying stock price is below $25), $5.00 intervals (from $25 to $200), and $10 intervals (above $200). LEAPS generally start with one at-the-money, one in-the-money, and one out-of-the-money strike price. The latter two are usually set 20%-25% away from the former.
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.
See Also: Price
A requirement that any investing strategy fall within the financial means and investment objectives of an investor or trader.
Describing a strategy or trading philosophy in which the investor is operating in accordance with his (her) financial means and investment objectives.
A historical price level at which falling prices have stopped falling and either moved sideways or reversed direction. "Support" in technical analysis indicates a price area that is 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.
The measurement of price movement between extreme highs and lows.
A long stock position combined with a long put of the same series as that call.
A short stock position combined with a long call of the same series as that put.
A long call position combined with a short put of the same series.
A strategy involving two or more instruments that has the same risk-reward profile as a strategy involving only one instrument.
See Also: Position
A strategy equivalent in risk to purchasing a put option where an investor sells stock short and buys a call.
See Also: Put
A short stock position combined with a short put of the same series as that call.
A long stock position combined with a short call of the same series as that put.
A short call position combined with a long put of the same series.
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.
See Also: Stock
Futures and options combined to create a delta neutral trade.
See Also: Straddle
A long (short) call together with a short (long) put. Both options have the same underlying, the same strike price and the same expiration date.
A method of predicting future stock price movements based on observation of of historical market data such as (among others) the prices themselves, trading volume, open interest, the relation of advancing issues to declining issues, and short selling volume.
The collective name denoting the expiration date, striking price, and underlying stock of an option contract.
Theoretical Option Pricing Model
The first widely-used model for option pricing. This formula can be used to calculate a theoretical value for an option using current stock prices, expected dividends, the option's strike price, expected interest rates, time to expiration and expected stock volatility. While the Black-Scholes model does not perfectly describe real-world options markets, it is still often used in the valuation and trading of options.
The estimated value of an option, or a combination of options, as computed by a mathematical model to determine what an option is really wort.
The measurement of the time decay of a position - 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.
The smallest unit price change allowed in trading a security. For listed stock, this is generally 1/8th of a point. For a listed option under $3 in price, this is generally 1/16th of a point. For a listed option over $3, this is generally 1/8th of a point.
The amount of time premium movement within a certain time frame on an option due to the passage of time in relation to the expiration of the option itself. Time decay is used to describe how the theoretical value of an option reduces with the passage of time. Time decay is especially quantified by Theta.
See Also: Decay
The additional value of an option due to the volatility of the market and the time remaining until expiration.
See Also: Premium
An option strategy which generally involves the purchase of a farther-term option (call or put) and the writing of an equal number of nearer-term options of the same type and strike price. Example: buying 1 XYZ May 60 call (far-term portion of the spread) and writing 1 XYZ March 60 call (near-term portion of the spread). Also known as calendar spread or horizontal spread.
See Also: Spread
The portion of the option premium that is attributable to the amount of time remaining until the expiration of the option contract. The difference between the premium paid for an option and the intrinsic value (whatever value the option has in addition to its intrinsic value ). As an option approaches expiration, the time value erodes, eventually to zero.
The amount by which an option's total premium exceeds its intrinsic value.
See Also: Premium
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.
See Also: Return
The amount of difference between the performance of a specific portfolio of stocks and a broad-based index with which they are being compared.
(1) Any investor who makes frequent purchases and sales. (2) A member of an exchange who conducts his or her buying and selling on the trading floor of the exchange.
An account opened with a brokerage firm from which to place trades.
The exchange-imposed maximum daily price change that a futures contract or futures option contract can undergo.
A specific location on the trading floor of an exchange designated for the trading of a specific option class or stock.
All of the charges associated with executing a trade and maintaining a position. These include brokerage commissions, fees for exercise and/or assignment, exchange fees, SEC fees, and margin interest. In academic studies, the spread between bid and ask is taken into account as a transaction cost.
These are short-term government securities with maturities of no more than one year.
(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.
A fixed-interest U.S. government debt security with a maturity of 10 years or more..
See Also: Bond
A fixed-interest U.S. government debt security with a maturity of between one and ten years.
See Also: Note
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.
The classification of an option contract as either a put or a call.
The classification of an option contract as either a put or a call.
A short call option position in which the writer does not own an equivalent position in the underlying security represented by his option contracts.
See Also: Call, Cover, Covered, Option
A short call option position in which the writer does not own an equivalent position in the underlying security represented by his option contracts.
See Also: Call, Cover, Covered
Uncovered Option is also known as a naked option - a written option is considered to be uncovered if the investor does not have an offsetting position in the underlying security. This is a much riskier strategy than a covered option.
See Also: Cover, Covered, Option
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.
See Also: Cover, Covered, Option, Put
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.
A trading instrument subject to purchase upon exercise.
The security subject to being purchased or sold upon exercise of the option contract.
Describing a security that is trading at a lower price than it logically should. Usually determined by the use of a mathematical model.
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).
The potential for prices to move up. Upside break-even The upper price at which a trade breaks-even.
A delta that can change due to the change of an underlying asset or a change in time expiration of an option.
See Also: Delta
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.
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.
(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.
See Also: Spread
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.
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.
See Also: Volatility
The amount of shares bought and sold on a stock exchange.
A term depicting how an option's value decreases over time.
Losing money on both sides of a price swing.
Refers to an unusually large spread between the bid and asked prices.
See Also: Opening
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.
A day on which two or more classes of options and futures expire.
To sell an option that is not owned through an opening sale transaction. While this position remains open, the writer is subject to fulfilling the obligations of that option contract; i.e., to sell stock (in the case of a call) or buy stock (in the case of a put) if that option is assigned.
An investor who so sells an option is called the writer, regardless of whether the option is covered or uncovered.
A fictitious company used as the underlying stock throughout The Options Toolbox.
A daily publication of the National Quotation Bureau detailing bid and asked prices.
The rate of return on an investment.
The percentage change in an options price per 1% change in implied volatility.
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