The Glossary Handbook organizes the key concepts from the Handbook alphabetically so you can easily identify and define important terms presented throughout the Handbook.
10-K - The 10-K is an annual form required by the SEC in which companies provide a comprehensive report of the year’s financial activities.
10-Q - The 10-Q is a quarterly form required by the SEC in which companies provide a comprehensive report of the previous quarter’s financial activities.
Active Portfolio Management - Active portfolio management involves buying and selling assets with the aim of outperforming the broad market indices. The goal is to gain an edge over the long-term buy and hold strategy through active market participation.
Adjustment - Options positions may be adjusted by rolling strike prices up or down and/or extending the time duration by rolling out a contract to a later expiration date. Adjustments may reduce the maximum loss on a trade.
Advance-Decline - The advance-decline line is also referred to as the breadth line and is a cumulative measure of advancing versus declining stocks each day. The number of advancing stocks minus the number of declining stocks are added to the previous day’s value to create a cumulative value.
After-Hours Trading - After-hours trading occurs after regular market hours end, from 4:00 p.m. EST to 8:00 p.m.
Agricultural Futures - Agricultural futures contracts provide exposure to dairy, lumber, grains, soybeans, corn, wheat, and more.
All or None (AON) - Execute the entire order simultaneously or none of the order.
American Stock Exchange (AMEX) - Now known as NYSE American, the exchange focuses on small-cap companies in the United States and is fully electronic.
American Style Options - American-style options contracts can be exercised any day on or before the expiration date. US equity options are American-style options.
Anchoring - Anchoring is an information processing behavioral bias where investors anchor an investment’s value to the price they originally paid for the security, as opposed to its current value. Any subsequent information received after the purchase is weighed in relation to the anchored price.
Annualizing Returns - An annualized return is the amount of money earned by an investment or portfolio over a year. Annualized returns are calculated to represent what a portfolio would earn if the returns were compounded.
Arbitrage - The process in which traders simultaneously buy and sell the same or equivalent securities for a riskless profit.
Arithmetic Average - Arithmetic average is the total sum of returns divided by the number of holding periods.
Arms Index - The Arms index is a volume indicator of market breadth that measures the relative volume of advancing stocks compared to declining stocks.
Ascending Triangle - An ascending triangle is a bullish continuation pattern that typically appears during an uptrend. An ascending triangle has a flat upper trendline and an ascending lower line.
Ask Price - The price at which a seller offers to sell a security.
Asset Allocation - Asset allocation is the percentage of a portfolio invested in various asset classes. Asset allocation creates diversified market exposure and seeks to distribute funds to various investment types.
Asset Utilization Ratios - Asset utilization ratios measure the efficiency with which a company deploys its assets, such as accounts receivable, inventory, or long-term assets.
Assignment - The receipt of an exercise notice that obligates an options seller to sell (in the case of a call) or purchase (in the case of a put) the underlying security at the specified strike price.
At-The-Money - At-the-money options contracts are contracts where the option’s strike price is equal to the underlying’s current price.
Automatic Exercise - Action taken by the Options Clearing Corporation (OCC) to protect the holder of an expiring in-the-money option by automatically exercising the option on behalf of the holder.
Availability Bias - Availability bias is an information processing bias where easily accessible information is overemphasized compared to information that is harder to attain. Rules of thumb, mental shortcuts, or other heuristics that easily come to mind more heavily influence investment decisions than information that is difficult to source.
Average Collection Period - The average collection period describes how long it takes, on average, for a company to collect its accounts receivables.
Average Down - Purchasing more shares or contracts of a security at a lower price to reduce the average cost. Also referred to as "dollar cost averaging."
Average Return - The average return is the average of a sequence of returns realized over a defined time period. There are two types used in investing: arithmetic and geometric.
Average True Range (ATR) - The average true range (ATR) is a technical indicator of volatility based on the average of a particular set of trading ranges over a set number of periods.
Balance of Trade - Balance of trade refers to the net difference over a period of time between a country’s imports and exports of goods.
Balance Sheet - The balance sheet displays a company’s assets, liabilities, and equity. The balance sheet shows what a company owns, who the company owes, and who owns the company.
Bar Chart - Bar charts illustrate the entire range for a period by indicating the opening, closing, high, and low prices on one bar.
Bear Call Spread - A bear call spread is a multi-leg, risk-defined, bearish strategy with limited profit potential. Bear call spreads are credit spreads consisting of two options, one short call option and one long call option, and profit when the underlying asset declines in price.
Bear Put Spread - A bear put spread is a multi-leg, risk-defined, bearish strategy with limited profit potential. Bear put spreads are debit spreads consisting of two options, one long put option and one short put option, and profit when the underlying asset declines in price.
Bearish - A directional bias attributed to the belief that a security’s price will decline.
Bearish Abandoned Baby - A bearish abandoned baby is a bearish three candle reversal pattern.
Bearish Engulfing - A bearish engulfing is a bearish two candle reversal pattern.
Bearish Harami - A bearish harami is a bearish two candle reversal pattern.
Bearish Kicker - A bearish kicker is a bearish two candle reversal pattern.
Bearish Spinning Top - A bearish spinning top is a bearish single candle reversal or continuation pattern.
Behavioral Finance - Behavioral finance seeks to understand and explain how reasoning errors influence investor decision-making and market prices. Behavioral finance links the fields of psychology and finance together to investigate what psychological influences and biases affect financial decisions.
Beta - A measure of how a security's price moves in relation to a benchmark, such as an index or overall market.
Beta-Weighting - Beta-weighting evaluates a portfolio against a specific stock or index to determine how assets will respond to volatility relative to the benchmark.
Bias - A bias is a preconceived inclination or prejudice in favor of a particular viewpoint.
Bid Price - The price at which a buyer is willing to buy a security.
Bid-Ask Spread - The bid-ask spread refers to the price difference between the bid price and the ask price for a security. The bid price is the price a buyer is willing to pay for a security while the ask is the price a seller is willing to sell.
Binomial Distribution - Binomial distribution defines the probability of success for the outcome of a trial that is repeated multiple times.
Binomial Pricing Model - The binomial option pricing model uses an iterative, decision-tree approach to determine an options contract’s value.
Bjerksund‐Stensland Model - The Bjerksund‐Stensland Model is a closed-form options pricing model used to value American-style options contracts.
Black-Scholes Option Pricing Model - The Black-Scholes Option Pricing Model is a mathematical model for pricing options contracts.
Black Monday, October 1987 - October 19, 1987, known as “Black Monday,” stock markets around the world collapsed. The U.S. stock market fell more than 22% for the largest percentage drop in a single day.
Black Swans - A black swan event is an unpredictable and unavoidable incident with significant financial impact.
Blast All - Multiple orders are submitted simultaneously, each independent of the other orders.
Bollinger Bands - Bollinger bands are a volatility indicator, chart overlay that shows the upper and lower bands of normal price movement based on standard deviation.
Bonds - A bond is a fixed-income security that acts as a loan between an investor and a borrower, typically issued by governments or corporations to raise capital in exchange for agreeing to pay back the loan in a specific time period at a predetermined or variable interest rate.
Bottom-Up Analysis - Bottom-up analysis describes investment selection that is independent of broader economic analysis or industry-specific factors.
Break-even point - The price an underlying security must reach for a position to experience a flat return.
Breakout - A breakout is a price movement through a level of significance on a price chart or indicator. A breakout is a move above a resistance level or a drop below a level of support.
Brokerage Firm - Brokerage firms are financial intermediaries that provide brokerage or trading accounts. Brokerage firms execute trades for customers, serve as custodian of customer assets, provide financial research and advice, present live stock quotes, and provide a number of additional portfolio and investment services.
Broker-Dealers - A broker-dealer is an individual or firm acting as an agent or principal in a securities transaction. Broker-dealer firms assist investors with executing trades and/or making financial decisions.
Bull Call Spread - A bull call spread is a multi-leg, risk-defined, bullish strategy with limited profit potential. Bull call spreads are debit spreads consisting of two options, one long call option and one short call option, and profit when the underlying asset increases in price.
Bull Put Spread - A bull put spread is a multi-leg, risk-defined, bullish strategy with limited profit potential. Bull put spreads are credit spreads consisting of two options, one short put option and one long put option, and profit when the underlying asset increases in price.
Bullish - A directional bias attributed to the belief that a security’s price will increase.
Bullish Abandoned Baby - A bullish abandoned baby is a bullish three candle reversal pattern.
Bullish Engulfing - A bullish engulfing is a bullish two candle reversal pattern.
Bullish Harami - A bullish harami is a bullish two candle reversal pattern.
Bullish Kicker - A bullish kick is a bullish two candle reversal pattern.
Bullish Spinning Top - A bullish spinning top is a bullish single candle, reversal or continuation pattern.
Business Cycle - The business cycle refers to the cyclical rise and fall of economic activity in a country. The business cycle has four stages: peak, contraction, trough, and expansion.
Buy-to-Open - "Buy-to-open" (BTO) orders are used to purchase a call or a put.
Buy-to-Close - "Buy-to-close" (BTC) orders are used to close positions that originated from "sell to open" orders.
CAC 40 Index - The CAC 40 Index is a French stock market index that tracks the performance of the 40 largest companies in France.
Call Backspread - A call backspread is a multi-leg, risk-defined, bullish strategy with unlimited profit potential. Call backspreads consist of three options, two long call options and one short call option, and profit when the underlying asset increases in price.
Call Butterfly - A call butterfly is a multi-leg, risk-defined, neutral strategy with limited profit potential. Call butterflies pay a debit and consist of four options, two long call options and two short call options, and profit when the underlying asset experiences little or no movement.
Call Calendar Spread - A call calendar spread is a multi-leg, risk-defined strategy with unlimited profit potential. Call calendar spreads are debit spreads consisting of two options, one short call option and one long call option.
Call Diagonal Spread - A call diagonal spread is a multi-leg, risk-defined, bearish strategy, with limited profit potential. Call diagonal spreads consist of two options, one short call option and one long call option, and profit when the underlying asset declines in price.
Call Option - A call option gives the buyer the right, but not the obligation, to buy an underlying asset at a specific price on or before a specific date.
Call Ratio Spread - A call ratio spread is a multi-leg, neutral strategy with undefined risk and limited profit potential. Call ratio spreads consist of three options, two short call options and one long call option, and profit when the underlying asset experiences little or no movement.
Calmar Ratio - The Calmar ratio uses a portfolio’s maximum drawdown as a measure of its risk and compares it to the compounded annual rate of return during a three year lookback period.
Candlestick Chart - Candlestick charts illustrate the entire range for a period by indicating the opening, closing, high, and low prices of a period. The space between the opening and closing prices of the period forms the candlestick’s body while prices above and below the opening and closing range form the candle’s wick.
Capital Asset Pricing Model (CAPM) - The capital asset pricing model is used to determine if an asset is fairly valued relative to its expected rate of return based on the time value, the market risk premium, and the asset’s beta.
Capital Growth - Capital growth is created by owning assets that appreciate over a long time frame and is measured by the current value of an investment relative to its price when purchased.
Capital Gain - A capital gain is an increase in the value of an asset that gives it a higher worth than the purchase price. For options, a capital gain may be a profit between purchase and sale (regardless of whether the purchase or sale came first) of an asset, and capital gains are not realized until the asset is sold.
Capitalization-Weighted Index - A stock index whose price is calculated by adding the capitalization of each individual stock in the index and dividing by the total number of stocks included. The stocks with the largest market values have the heaviest weighting in the index.
Capital Loss - A capital loss is a loss that occurs when an asset is sold for less than its purchase price. For options, a capital loss may be a loss between purchase and sale (regardless of whether the purchase or sale came first) of an asset, and capital losses are not realized until the asset is sold.
Carrying Cost - The expense of holding a position as represented by the capital allocation of a portfolio or the interest expense to maintain the position.
Cash Account - Cash accounts are brokerage accounts where the investor pays the full amount for securities purchased. Cash accounts are the most basic form of standard accounts and do not utilize leverage through margin.
Cash Flow Statement - The cash flow statement displays the changes that affect a company’s cash account during a specified period of time.
Cash Reserves - Cash reserves are funds or highly liquid assets immediately available to an investor.
Cash-Secured Put - A cash-secured put is a put option that is sold with a sufficient amount of cash or margin to pay for the stock purchase if the short option is assigned.
Cash Settlement - Cash settlement occurs when cash exchanges hands instead of an underlying security or physical commodity at settlement. Cash settlement is primarily used in index options because an index is not deliverable.
Chaikin Money Flow - The Chaikin money flow (CMF) is a technical indicator that uses price and volume to show the flow of funds into or out of a security by combining an accumulation and distribution indicator with an oscillator calculation.
Channel - A channel formation is a continuation pattern where price consolidates in a range of congestion before continuing in the direction of the previous trend. Channels have a series of lower highs and lower lows to form two parallel trendlines in the shape of a channel or a series of higher highs and higher lows.
Chart Patterns - Chart patterns, or more specifically bar chart patterns, combine support and resistance levels and trendlines to signal trading decisions.
Chicago Board Options Exchange (CBOE) - The Chicago Board Options Exchange is the world’s largest options exchange and also provides trading for many other securities.
China A50 Index - The China A50 Index consists of the 50 largest A-share companies listed on the Shanghai Stock Exchange and Shenzhen Stock Exchange.
Chi-Square Distribution - Chi-square distribution is a normal distribution squared, with the degrees of freedom of the distribution equal to the number of standard deviations being summed.
Circuit Breakers - Circuit breakers help rapidly moving markets remain orderly by halting trading activity when securities or markets exceed a defined range.
Clearing Transactions - Clearing is the process of settling financial transactions in the stock market. Clearing transactions assures that buyers and sellers receive delivery and payment in a timely manner.
Closing Transaction - A trade that reverses an investor's position. Buy-to-close transactions close short positions and sell-to-close transactions close long positions.
Clustering Illusion - Clustering illusion occurs when a group of random outcomes leads to the belief that the results are not, in fact, random.
Collar Strategy - A collar strategy is a multi-leg, risk-defined strategy with limited profit potential. Collars combine a long stock position with two options, one short call and one long put.
Collateral - Cash or assets used to securitize a loan.
Combination - Any position involving both put and call options that is not a straddle.
Commission - A commission is a cash payment made to a brokerage firm for executing a transaction.
Contract Adjustments - A change to contract terms due to a corporate action such as a merger or stock split. An adjusted option may cover more or less than the usual 100 shares and create different contract terms including the strike price and expiration date.
COT Reports - COT reports are the Commitment of Traders reports published each week that breakdown positions in various futures and futures options markets. The commitment of traders weekly report shows the breakdown of open interest for markets where 20 or more traders hold positions equal to or above the required reporting levels of the Commodities Futures Trading Commission (CFTC).
Commodities - Commodities are naturally produced goods that are traded through an exchange, such as energy, metals, lumber, meat, and agriculture.
Common Stock - Common stock represents an ownership stake in a corporation. Corporations issue shares of common stock to raise capital, and shareholders own a portion of the company.
Compounded Annual Growth Rate (CAGR) - Compounded annual growth rate measures the rate an investment would grow if it increased at the same rate every year and the profits were reinvested at the end of each year.
Confirmation Bias - Confirmation bias is a belief perseverance bias where investors overemphasize information that confirms their beliefs and ignore, avoid, or underweight views that conflict with previously held beliefs. Confirmation bias occurs when investors tend to agree with, or actively seek out, information and viewpoints that support their perspective and ignore or avoid new information that refutes or contradicts their beliefs.
Conservatism Bias - Conservatism bias is a belief perseverance bias where investors maintain previously held views at the expense of new information received. Investors overemphasize their initial beliefs and discount new information.
Consumer Price Index (CPI) - The consumer price index (CPI) is a standard measure of consumer goods price inflation. CPI measures the average monthly change for a basket of goods and services bought by consumers. Components of CPI include food, transportation, shelter, utilities, clothing, medical care, and entertainment.
Contingent Order - An order which can be executed only if another event occurs.
Contract Multiplier - The number of shares an option contract represents is also called the contract multiplier. Index option contracts and futures options contracts have different multipliers depending on the underlying asset.
Contract size - The amount of the underlying asset covered by the option contract.
Convertible Security - A security that is convertible into another security, such as a bond that is convertible into the same corporation’s underlying stock. The rate at which the security is convertible into the other security is called the conversion ratio.
Correlation - Correlation is the measurement of how two different securities move in relation to one another and the strength of the relationship between the two assets.
Correlation Coefficient - The correlation coefficient is a formula that assigns a value between -1 and 1 to assess the degree to which two securities move together.
Cover - To buy back as a closing transaction an option that was initially sold or reverse a trade after an assignment, such as a short stock position.
Covered Call - A covered call is an options strategy that combines a long stock position with a short call option. Covered calls receive a credit and are used to generate income, but do not define risk for the stock position.
Covered Positions - Covered positions are when options contracts are backed by shares underlying the option.
Covered Put - A covered put is an options strategy that combines a short stock position with a short put option. Covered puts receive a credit and are used to generate income, but do not define risk for the stock position.
Credit - Funds received for the sale of an asset. A credit transaction is one in which the net proceeds are larger than the net cost, thereby bringing funds into the account.
Credit Spread - A transaction involving two or more options that results in collecting funds.
Cup with Handle - A cup with handle pattern is a continuation pattern that gets its name from the visual pattern it makes on the chart. The cup is a curved u-shape or rounded bottom, while the handle slopes slightly downwards.
Currency Futures - Currency futures contracts define the price to exchange one currency for another currency at a predetermined future date. Currency futures prices are derived from the spot price of currency pairs.
Current Income - Current income is cash flow that is generated by consistent, anticipatory revenue streams.
Current Ratio - The current ratio describes a company’s ability to pay off its current liabilities with current assets.
Custodial Accounts - Custodial Accounts are accounts established under the Uniform Gifts to Minors Act (UGMA) or Uniform Transfers to Minors Act (UTMA) by an adult for the benefit of a minor. Custodial accounts deposits are immediate and irrevocable, and the custodian manages the assets within the account for the benefit of the minor until a specified age.
Dark Cloud Cover - A dark cloud cover is a bearish two candle reversal pattern.
DAX Index - The DAX tracks the 30 largest stocks on the Frankfurt Exchange.
Day Order - The order remains open until the end of regular trading hours.
Day Trade - Any position that is opened and closed on the same day.
Debit - Funds paid for the purchase of an asset. A debit transaction is when the net cost is larger than the net proceeds, thereby removing funds from the account.
Debit Spread - A transaction involving two or more options that results in paying money.
Debt to Total Assets - The debt to total assets ratio describes the level of debt relative to the company’s total assets.
Debt Utilization Ratios - Debt utilization ratios measure a company’s indebtedness relative to its assets and earnings ability.
Declaration Date - The declaration date is the day a corporation announces an upcoming dividend payment to stockholders.
Deep-In-The-Money - Deep-in-the-money options contracts have a strike price significantly in-the-money.
Deep-out-of-the-money (DOTM) - Deep-out-of-the-money options contracts have a strike price significantly out-of-the-money.
Delivery - The process of satisfying the terms of a contract by transferring securities from one party to another party. Delivery can be physical or cash-settled.
Delta - Delta is the amount an option price should change based on a $1 move up in the stock. Calls have a positive Delta between 0 and 1, while puts have a negative Delta between 0 and -1.
Delta Neutral - Delta neutral is a term used to describe a directionally balanced portfolio. The strategy uses the collective positions in a portfolio to neutralize one another to achieve a net-zero delta value.
Depository Trust Corporation (DTC) - A corporation that holds securities for member institutions. The DTC facilitates and guarantees delivery of underlying securities if an assignment is made against securities held in DTC.
Derivative - A financial security whose value is determined in part from the value and performance of another underlying security.
Descending Triangle - The descending triangle is a bearish continuation pattern that typically appears during a downtrend. The descending triangle has a downward sloping upper trendline and a flat lower line.
Direct Stock Purchase Plans - Direct stock purchase plans allow individual investors to purchase a company’s stock from the company directly.
Discount Brokers - Discount brokers execute trades for clients.
Distributions - Distributions demonstrate the probability of specific outcomes for a set of variables and are typically displayed as curves on a graph.
Diversification - Diversification is a portfolio strategy that combines multiple low or uncorrelated assets to reduce overall risk exposure and minimize the unsystematic risk associated with allocating capital to a single stock or sector.
Dividends - Dividends are payments from a corporation to stockholders.
Dividend Assignment - Dividend assignment is the process of being assigned the obligation to pay a dividend on a short call position.
Dividend Income - Distributions of money, stock, or other property paid to a shareholder by a corporation, ETF, or mutual fund. Dividends are reported on Form 1099-DIV for taxable accounts and are primarily separated by ordinary dividends and qualified dividends.
Dividend Reinvestment Program (DRIP) - Dividend reinvestment programs allow investors to reinvest cash dividends into additional shares of the company’s stock as opposed to receiving cash dividends.
Doji - A doji is a single candle neutral pattern.
Dollar Returns - Total dollar return calculates the profit or loss from investments over a defined time period. Dollar return is the aggregate return realized in an account and can be calculated on individual positions or an entire portfolio.
Dollar Weighted Returns - The dollar weighted return helps measure the overall performance of an investment. Dollar weighted returns include cash inflows and outflows such as deposits and withdraws, realized gains or losses, and dividends.
Double Bottom - The double bottom is a bullish reversal pattern with two troughs, or lows, at approximately the same price level. The double bottom typically follows a long downward trend, and its "W" shape is easily recognizable.
Double Top - The double top is a bearish reversal pattern with two peaks, or highs, at approximately the same price level. The double top typically follows a long uptrend, and its "M" shape is easily recognizable.
Dow Jones Industrial Average - The Dow Jones Industrial Average (DJIA) consists of the 30 largest and most successful corporations in America.
Dragonfly Doji - A dragonfly doji is a bullish single candle reversal pattern.
Duration - Duration measures the sensitivity to changes in interest rates for fixed-income investments. Duration is represented in percentage terms or years.
Early Exercise or Assignment - The exercise or assignment of an option contract before its expiration date. Early exercise or assignment is possible with American-style options contracts.
Earned Income (Ordinary Income) - Includes wages, salaries, tips, and net earnings from self-employment. This is often the type of income for which a W-2 or a Form 1099 for self-employment income is received.
Earnings Calendar - The earnings calendar provides details regarding the release of earnings reports.
Earnings Reports - Earnings reports are the public release of a company’s financial records.
Economic Indicators - Economic indicators are key measurements showing the direction of an economy. Economic indicators can be leading, coincident, or lagging.
Education Savings - Education savings accounts are tax-deferred trusts created by the United States government to assist families in funding the education of minors.
Efficient Market Hypothesis - The efficient market hypothesis assumes that stock prices reflect all information available in the market and the current price of an asset is an expression of its true value.
Endowment Effect - The endowment effect is an emotional bias where investors attribute more value to an investment currently owned than if they did not own it. Investors may become overly optimistic about an investment’s future returns and ignore contradictory information that may suggest otherwise.
Energy Futures - Energy futures contracts provide exposure to fossil fuel related products such as oil, natural gas, energy, electricity, and more.
Equity - In a margin account, equity is the difference between the securities owned and the margin loans owed.
Equity Option - A call or put option where the underlying security is common stock or an ETF.
Equity Risked - Equity risked is the amount of capital an investor is willing to risk on an investment.
Estate Accounts - Estate accounts are accounts where an estate’s executor consolidates an estate’s assets to manage and distribute the estate’s assets and pay taxes and cover expenses. Estate accounts are cash accounts.
Euro STOXX 50 Index - The EURO Stoxx 50 Index includes 50 of the largest companies from the 11 countries that use the Euro as their currency.
European Style Options - European-style option contracts can only be exercised on the expiration date. Many index options are European-style options; European-style options cannot be assigned early to the option seller.
Evening Doji Star - An evening doji star is a bearish two candle reversal pattern.
Evening Star - An evening star is a bearish three candle reversal pattern.
Exchange - An exchange is a centralized financial marketplace where a variety of securities can be traded by investors.
Exchange-Traded Funds (ETFs) - ETFs are a basket of securities like stocks, bonds, and commodities packaged together and traded on an exchange. ETFs are created by bundling together multiple securities into one tradable asset.
Ex-Dividend Date - The ex-dividend date is the day a security begins trading without the value of the next dividend.
Exercise - Options exercise is the process by which the buyer of an option submits a request to his or her broker to exercise the rights of an options contract.
Expected Return - The return an investor might expect to make on an investment if the investment was made many times throughout history.
Expiration - The expiration date is the last trading day that an option can be exercised.
Expiration Cycle - The expiration dates applicable to various classes of options. There are three cycles: January/April/July/October, February/May/August/November, and March/June/September/ December.
Exponential Moving Average (EMA) - An exponential moving average is the weighted average of a set of data points where new data points receive greater weight in the average calculation.
Extended-Hours - Outside of regular trading hours, either before the market opens (pre-market) or after the market closes (after-hours).
Extrinsic Value - Extrinsic value is the value of an options contract beyond the intrinsic value. The extrinsic value of an options contract is also called the time value of the contract because its value is dependent on external factors such as the time time remaining on the contract, the volatility of the underlying security, the current risk-free interest rate, and the dividend rate of the underlying security.
Falling Wedge - A falling wedge is a bullish continuation or reversal pattern, depending on where the falling wedge appears. Wedges are similar to triangles, but slope counter to the previous trend.
Fear-of-missing-out (FOMO) - Fear-of-missing-out, or FOMO, is a cognitive bias similar to herding behavior. The fear of missing out on investments that could potentially make money causes investors to make suboptimal decisions.
Federal Reserve - The Federal Reserve is the central bank for the United States. The function of the Fed is to regulate the United States financial system and national banks.
Fill or Kill - Immediately execute an entire order or cancel the full order.
Financial Crisis, 2007-08 - Also known as the Global Financial Crisis, the stock market experienced a steady decline for many months as a result of the collapse of the housing market.
Financial Goals - Financial goals are the objectives investors prioritize when developing a plan for investing, saving, and spending their money.
FIRNA - The Financial Industry Regulatory Authority (FINRA) is an independent organization that enforces the rules that govern brokers and broker-dealer firms in the United States.
Fixed Asset Turnover - Fixed asset turnover describes the amount of sales relative to the company’s fixed assets.
Fixed Charge Coverage - The fixed charge coverage ratio describes a company’s ability to pay its fixed obligations with income from operations.
Fixed Income - Fixed income investments produce regular, predetermined payments through interest or dividends.
Flag - A flag is a continuation pattern created after a significant movement in a security, followed by a period of consolidation. The flag is similar to a pennant but has a more rectangular shape instead of converging lines.
Flash Crash, May 2010 - May 6, 2010, the United States stock market fell 9% in just a few minutes, and bounced back almost immediately. The “Flash Crash” exposed the dangers of high-frequency electronic trading.
Float - The number of shares outstanding for a stock.
Fractional Stock - A fractional share of stock is less than one full share of a company’s common stock.
Frame Dependence- Frame dependence is a belief perseverance cognitive bias where a question is answered differently based on how the question is framed. Frame dependence may result in investors focusing on changes in wealth as opposed to levels of wealth, causing them to make inconsistent decisions.
Frequency Distribution - Frequency distributions display the frequency of outcomes for a specified sample and time period.
FTSE 100 Index - The FTSE 100 index is a portfolio of stocks comprised of 100 blue-chip companies listed on the London Stock Exchange.
Full-Service Brokers - Full-service brokers provide multiple services to clients, including financial advice, retirement planning, strategies, and more.
Fundamental Analysis - Fundamental analysis is the analysis of a company’s financial statements to forecast the company’s future stock price. Fundamental analysis uses a combination of quantitative and qualitative methods to determine a fair value for a company’s stock price by examining the company’s operations, management, and profitability to assess its investment prospects.
Futures - Futures contracts are derivative investments traded on specialized exchanges and are an agreement to buy or sell a specific quantity of a security at a specific price on a specific date in the future.
Futures Option - Options on futures contracts with underlying assets available across a spectrum of asset classes which includes currencies, interest rates, equity indexes, and physical commodities.
Gambler’s Fallacy - The gambler’s fallacy occurs when an investor assumes that a deviation from a historical average will be immediately corrected.
Gamma - Gamma is the rate of change in Delta for every $1 change in the underlying stock price. Gamma represents the acceleration at which an option's price increases or decreases.
Geometric Return - Geometric return uses compound growth to calculate the average of a sequence of returns realized over a defined time period.
Good-til-Canceled Orders (GTC) - The order remains in effect until canceled. GTC orders are typically active for 90 days or less, depending on the broker.
Gravestone Doji - A gravestone doji is a bearish single candle reversal pattern.
Gross Domestic Product (GDP) - Gross domestic product (GDP) measures the market value of goods and services produced over a period of time. GDP measures the economic output of a country.
Hammer - A hammer is a bullish single candle reversal pattern.
Hang Seng Index - The Hang Seng Index, or HSI, includes the largest companies traded on the Hong Kong Exchange.
Hanging Man - A hanging man is a bearish single candle reversal pattern.
Head and Shoulders - The head and shoulders pattern is a bearish reversal pattern signaling an uptrend’s reversal. The head and shoulders pattern is also called the “head and shoulders top” and is perhaps the most well-known chart pattern.
Hedging- Hedging stock is the process of protecting positions by entering an offsetting position to reduce overall risk. The purpose of hedging is to minimize downside risk and protect against losses.
Herd Mentality - Herd mentality is the behavior exhibited by individuals who are influenced by the collective group into thinking and behaving similarly to the group.
Hindsight Bias - Hindsight bias is a belief perseverance bias where investors believe past events were predictable or reasonable to expect.
Historical Volatility - Historical volatility, or statistical volatility, is backward-looking and describes the price movement of an underlying security in the past.
Holder - The purchaser of an option.
Holding Period - The holding period is the amount of time an investment is held by an investor and begins when a security is purchased and ends the day it is sold.
Hot-Hand Fallacy - Hot-hand fallacy is a bias where a streak of winning trades skews the perceived odds of an investor’s success.
Ichimoku Cloud - The Ichimoku cloud is a technical indicator that depicts support, resistance, momentum, and trend in one chart overlay. Ichimoku clouds provide a number of indicators at a glance by using a variety of moving averages and other calculations to indicate areas of support and resistance on a price chart.
Illusion of Knowledge - Illusion of knowledge is a behavioral bias that results from overconfidence where the belief that information held by the investor is superior to the information of others.
Implied Volatility - Implied volatility is forward-looking and represents the amount of volatility expected in the future.
Implied Volatility Percentile - Implied volatility percentile represents the current implied volatility relative to past values of implied volatility.
Implied Volatility Rank - Implied volatility rank describes where implied volatility is currently compared to implied volatility over the past year.
Income Statement - The income statement measures profitability over a period of time.
Income Taxes - Taxes on income earned (salaries, wages, tips, commissions) and unearned (interest, dividends). Income taxes can be levied on both individuals (personal income taxes) and businesses (business and corporate income taxes).
Index - An index uses a standardized unit of measurement to track the performance of a group of securities or financial markets.
Index Futures - Index futures are futures contracts that allow investors to buy or sell equity indices.
Index Option - A stock index option is an option on a stock market index. An equity index option’s underlying asset is the stock index, such as the S&P 500 or NASDAQ.
Information Ratio (IR) - The information ratio measures a portfolio’s return that exceeds the returns of a benchmark index, relative to the volatility of each investment.
Initial Margin - Initial margin is the percentage of a security’s price that an investor is required to have in cash and/or collateral in their account as margin to purchase a security.
Institution - An organization engaged in professional investing in securities. Normally a bank, insurance company, or mutual fund.
Interest Income - The income received from certain bank accounts ,such as savings or money market accounts, or from investments such as corporate bonds, municipal bonds, Treasury securities, and other investments. Form 1099-INT from brokerage firms, mutual funds, and other financial institutions is distributed for accounts with interest income of more than $10 during the year.
Interest Rate Futures - Interest rate futures provide exposure to securities that are impacted by changes in interest rates because the underlying derivative pays interest.
In-The-Money (ITM) - In-the-money options contracts are contracts with positive intrinsic value. A call option is in-the-money if the underlying security’s price is higher than the option contract’s strike price.
Intrinsic Value (Options) - The value of an option if it were to expire immediately with the underlying stock at its current price; the amount by which an option is in-the-money.
Intrinsic Value - The amount of value estimated through financial analysis that exceeds the current market value of an investment.
Inventory Turnover - Inventory turnover describes how many times over the course of a year a company’s inventory turns over.
Inverse Hammer - An inverse hammer is a bullish single candle reversal pattern.
Inverse Head and Shoulders - The inverse head and shoulders pattern is a bullish reversal pattern signaling a downward trend’s reversal. The pattern is also called the "head and shoulders bottom" or even a "reverse head and shoulders."
Iron Butterfly - An iron butterfly is a multi-leg, risk-defined, neutral strategy with limited profit potential. Iron butterflies collect a credit and consist of four options, one long call option, one short call option, one short put option, and one long put option, and profit when the underlying asset experiences little or no movement.
Iron Condor - An iron condor is a multi-leg, risk-defined, neutral strategy with limited profit potential. Iron condors collect a credit and consist of four options, one long call option, one short call option, one short put option, and one long put option, and profit when the underlying asset experiences little or no movement.
Jensen’s Alpha - Jensen’s alpha measures the excess returns earned by a portfolio compared to projected returns relative to the broad market by taking into account the risk-free rate of return for a specified time period.
Jobless Claims - Jobless claims represent the number of people filing claims to receive unemployment insurance benefits. Initial jobless claims measure the number of individuals filing for unemployment insurance for the first time in the past week.
Joint Tenants with Rights of Survivorship - Joint Tenants with Rights of Survivorship, or more commonly referred to as joint accounts, have two or more account owners where each owner has an undivided interest in the account. If one account owner dies, the ownership interest is retained by the other account owner.
Keltner Channels - Keltner channels are a volatility indicator, chart overlay that shows the upper and lower channels, or range, of price movement based on an exponential moving average and the average true range for the channel’s width.
Law of Small Numbers - Law of small numbers is a cognitive error where investors believe that the probability exhibited over a small sample size will resemble a larger number of samples. Law of small numbers is related to recency bias and gambler’s fallacy and overemphasizes recent outcomes.
LEAPs (Long-Term Equity Anticipation Securities) - LEAPs are publicly traded options contracts with an expiration date longer than one year.
Leverage - Leverage uses debt or margin to acquire larger exposure to a position, leading to greater profit and risk potential.
Limit Down - A circuit breaker that triggers if a futures contract price exceeds a maximum percentage to the downside.
Limit Order - Execute the order at a specific price or better.
Limit Up - A circuit breaker that triggers if a futures contract price exceeds a maximum percentage to the upside.
Line Chart - Line charts plot the closing price of a security and connect each point with a line. Line charts are a visual representation of a security’s price.
Liquidity - A trading environment characterized by high trading volume, a narrow spread between the bid and ask prices, and the ability to trade large sized orders without significant price changes.
Liquidity Ratios - Liquidity ratios measure a company’s ability to pay off its short-term liabilities.
Listed Option - A put or call option that is traded on a national options exchange. Listed options have fixed strike prices and expiration dates.
Long - To be long an option or security is to purchase shares or contracts, and will result in paying a debit.
Long Box Spread - A long box spread is a multi-leg, risk-defined, neutral options strategy with limited profit potential. Long box spreads consist of four options, one long call option, one short call option, one short put option, and one long put option, and look to take advantage of underpriced options to create a risk-free arbitrage trade.
Long Call - A long call is a single-leg, risk-defined, bullish options strategy, where the expectation for the underlying asset is a rise in price before expiration.
Long Put - A long put is a single-leg, risk-defined, bearish options strategy, where the expectation for the underlying asset is a decline in price before expiration.
Long Straddle - A long straddle is a multi-leg, risk-defined, neutral strategy. Long straddles cost a debit and consist of two options, a long call option and a long put option, and profit from a large move in the underlying security.
Long Strangle - A long strangle is a multi-leg, risk-defined, neutral strategy. Long strangles cost a debit and consist of two options, a long call option and a long put option, and profit from a large move in the underlying security.
Long-Term - Describes a holding period of more than one year.
Loss Aversion - Loss aversion is an emotional bias originating from prospect theory. With loss aversion, investors avoid risk to the point where they will not exit a losing position and realize a loss, because doing so will make the loss an actualized reality with a subsequent financial impact.
Maintenance Margin - Maintenance margin is the amount of capital that must be available in the account to hold positions purchased on margin.
Margin - Margin is capital an investor deposits as collateral to borrow from a brokerage to buy securities beyond their purchasing power.
Margin Account - Margin accounts are brokerage accounts where investors may borrow money from their broker to purchase securities. Margin accounts provide increased purchasing power beyond the funds deposited in the account.
Margin Call - A margin call occurs when there is not enough margin in an account to cover the broker’s margin requirements.
Margin Expansion - Margin expansion occurs when the underlying security experiences high volatility. Increased volatility results in higher margin requirements.
Mark Price - The mark price is the midpoint price between the bid price and the ask price. The mark price is not necessarily the price a security may be bought or sold, but is an indication of the price of a security based on the current bid price and ask price.
Market Breadth - Market breadth measures the broadness of participation in a market trend.
Market Capitalization - Market capitalization is determined by multiplying a stock’s price by the number of shares outstanding.
Market Holidays - Federal holidays observed by the exchanges where trading is closed for the day. Some days before and after holidays have limited trading hours.
Market Hours - The time period when markets are open for trading. The United States stock market has regular trading hours Monday through Friday from 9:30 a.m. to EST 4:00 p.m. EST.
Market Indicators - Market indicators are broad measures of market indexes or groups of related securities. Market indicators provide context to recent market trends, measure the strength or weakness of an index’s price, assess investor’s participation in a recent price trend, or signal extreme levels in market sentiment.
Market Makers - Market makers provide bids and offers to ensure the marketplace has the proper liquidity to conduct transactions. Market makers are responsible for quoting two-sided markets for a security.
Market on Close - Execute a market order as close as possible to the market closing price.
Market Order - Execute the order at the best possible price immediately. Market orders are executed in the order received and may be partially executed at different prices.
Markowitz Efficient Frontier - The Efficient Portfolio Frontier is a theory that ranks investments in terms of return versus risk and is the basis for modern portfolio theory.
Mark-To-Market - An accounting process by which the price of a security is updated each day to reflect the last sale price. The equity in an account is updated daily to properly reflect current security prices.
Married Put - The simultaneous purchase of stock and put options that results in a limited risk position.
Marubozu - A marubozu is a neutral single candle pattern.
McClellan Oscillator - The McClellan oscillator is a breadth indicator of the NYSE index calculated by taking the difference between two exponential moving averages of advances minus declines.
Meats Futures - Metals futures contracts provide exposure to livestock such as cattle and hogs.
Mental Accounting - Mental accounting is an information processing cognitive bias where investors separate money into different mental categories depending on the source of the funds.
Mental Models - Mental models shape how individuals understand the world, explain how something works, and represent how the mind interprets different situations.
Metals Futures - Metals futures contracts provide exposure to the metals market without owning physical assets such as gold and silver.
Momentum - Momentum is the rate of acceleration of price or volume movement. In technical analysis, momentum is an indicator of strength or weakness in a security’s price.
Moneyness - Moneyness is used to describe the amount of intrinsic value for an options contract.
Monte Carlo Simulation - Monte Carlo simulations estimate solutions or expected outcomes for relatively complex problems by running multiple iterations, or simulations, of variables across expected ranges.
Morning Doji Star - A morning doji star is a bullish two candle reversal pattern.
Morning Star - A morning star is a bullish three candle reversal pattern.
Moving Average Convergence/Divergence (MACD) - The moving average convergence/divergence (MACD) is a technical indicator of momentum that uses moving averages to determine a trend’s strength. The MACD uses three exponential moving averages (a short term, a long term, and the average difference between the short and long term) to show price momentum.
Mutual Funds - Mutual funds collect money from multiple investors and combine them together to purchase securities. Investors can buy shares of a mutual fund and its value is equivalent to the performance of the underlying assets.
Naked Option - A short option position with no ownership of the underlying asset and, therefore, undefined risk.
NASDAQ - The NASDAQ exchange is an electronic marketplace that primarily focuses on the technology sector.
NASDAQ Composite - The Nasdaq composite is a market capitalization weighted index that includes more than 2,500 companies. The Nasdaq encompasses a broad range of companies, including international corporations, American depository receipts, REITs, and more.
Negative Correlation - Negative correlation implies that the price of two securities will move in opposite directions.
Net New 52-Week Highs - Net new 52-week highs is a high-low market indicator of breadth where the number of new 52-week lows is subtracted from the number of new 52-week highs.
Neutral - Directional bias attributed to little or no expected movement in the price of the underlying security.
New York Stock Exchange (NYSE) - The New York Stock Exchange is the largest stock exchange in the world based on market capitalization of publicly listed companies.
Nifty 50 Index - The Nifty 50 is an index on the National Stock Exchange of India and includes some of the largest companies in India.
Nikkei 225 Index - The Nikkei 225 Index tracks the largest companies traded on the Tokyo Stock Exchange in Japan.
Normal Distribution - Normal distribution is a symmetrical, bell-shaped curve, where the majority of the data is centered at the mean.
NYSE Arca - The NYSE Arca is an electronic exchange that trades securities in the United States and specializes in Exchange Traded Products (ETPs).
OCC - The Options Clearing Corporation (OCC) is the world's largest equity derivatives clearing organization. The OCC is responsible for listing all options and oversees the contract exercise and assignment process.
On Balance Volume - On balance volume (OBV) is a technical indicator that uses price and volume to show the flow of funds into or out of a security.
One Cancels Other (OCO) - Two orders are entered simultaneously. If one order is executed, the other order is automatically canceled. OCO orders are conditional orders.
One Triggers Other (OTO) - The execution of one order triggers a second order’s entry. For example, a buy stop order is executed and a trailing-stop loss order automatically triggers based on the execution of the buy stop order. If the initial order is never triggered, the conditional order remains queued.
Open Interest - Open interest is the number of active contracts outstanding. Open interest represents the number of options contracts for a particular class, strike price, and expiration date that are open and have not been closed or exercised.
Open outcry - Trading method where market makers and brokers make bids and offers on the trading floor of an exchange.
Options Approval Level - Options approval levels are options trading restrictions placed on a brokerage account. An investor’s option approval outlines what strategies may be utilized in a specific type of account.
Options Assignment - Options assignment is the fulfillment of the contractual obligation of an options contract seller. An option seller has an obligation to complete the requirements of the options contract--whether that is to sell shares of stock at a certain price (call option seller) or purchase shares of stock at a certain price (put option seller).
Options Chains - Options chains provide an organized, visual display of available options for an underlying security. Options price quotes are displayed in options chains where contracts are listed in order of expiration and then strike price.
Options Class - Options class refers to all call options or put options for a particular underlying security. Options of the same type (calls or puts), underlying security, style (American or European), and contract size are of the same options class.
Options Contract - An agreement between two parties (a buyer and a seller) to purchase or sell an underlying asset at a specific price on or before a specific date. One equity contract is equal to one hundred shares of stock.
Options Greeks - Greeks are a group of terms used to represent the variables that determine an option’s constantly changing price. The most commonly used Greeks are delta, gamma, theta, vega, and rho.
Options Price - An option’s price, or value, is determined by the price of the underlying security, the strike price of the option, the time remaining until expiration of the contract, the volatility of the underlying security, the current risk-free interest rate, and the dividend rate of the underlying security. The price of an options contract is also called the option premium.
Options Pricing Curve - A graphical representation of an option’s projected price at a fixed point in time generated by a mathematical model. The pricing curve reflects the amount of time value premium in the option for various stock prices.
Options Series - Options series refers to all of the call options or put options with the same strike price and expiration date.
Options Symbols - Options symbols are uniform, follow standards set by the Options Clearing Corporation, and consist of four parts: the root symbol, the expiration date, the option type, and the strike price.
Out-Of-The-Money (OTM) - Out-of-the-money options contracts have no intrinsic value because the contracts are “out-of-the-money” to be exercised based on the current underlying security’s price and the contract’s strike price.
Overconfidence - Overconfidence is a behavioral bias where investors attribute higher levels of knowledge or skill to themselves than they actually possess and likely overtrade or underestimate risk as a result.
Pandemic Crash, 2020 - February and March, 2020, the United States and global stock markets entered a sudden and dramatic decline brought on by the unexpected arrival of COVID-19.
Partial Fills - Some portion of an order is filled, but not the entire order. The remaining unfilled portion of the order will remain open until it is filled or canceled.
Partnership Accounts - Partnership Accounts are accounts where a partnership with an established partnership agreement conducts business in the account for profit. Partnership accounts are not subject to taxation because the tax liability is each partner’s based on the ownership interest in the account.
Passive Portfolio Management - Passive portfolio management seeks to match the broader market indices’ returns by purchasing stocks or ETFs that comprise an index fund. A passive portfolio will perform similarly to the overall market and requires minimal attention from the investor.
Pattern Day Trader - A trader who executes four or more day trades in a five day period using a margin account.
Payment Date - The payment date is the day on which stockholders of record will receive the dividend payment.
Payoff Diagram - Payoff diagrams visually identify where options strategies will win or lose money at expiration based on different price points of the underlying asset.
Pennant - A pennant is a continuation pattern created when there is a significant movement in a security, followed by a period of consolidation. This creates the pennant shape due to the converging trendlines.
Percentage Returns - Percentage returns measures the percentage gain or loss on an asset or portfolio relative to its starting value.
Per-Contract Commission - Per-contract commissions may be tiered or fixed depending on the volume of contracts traded during a month and are charged based on the number of contracts traded in a transaction.
Performance Metrics - Performance metrics track the results of individual trades or entire portfolios to quantify the overall quality of investments.
Per-Share Commission - Per-share commissions are volume-based, and the commission decreases as the volume of shares traded increases.
Per-Ticket Commission - Per-ticket commissions are transaction-based commissions where a flat fee is charged per ticket regardless of the number of shares or contracts traded on the ticket.
Physical Settlement - Physical settlement of options contracts is the most common form of settlement and involves the physical or actual delivery of the underlying security at settlement.
Piercing Line - A piercing line is a bullish two candle reversal pattern.
Pivot Points - Pivot points are calculated values based on the prior period’s range to show potential support and resistance levels. Pivot points take the prior day’s high, low, and close to calculate the pivot point, two levels of support, and two levels of resistance.
Poisson Distribution - Poisson distribution quantifies how many times an action is likely to occur within a defined period of time.
Poor Man’s Covered Call - A poor man’s covered call, also known as a synthetic covered call, is a multi-leg, risk-defined options strategy that simulates owning shares of a security through the use of LEAPs option contracts while short calls are sold against the position to reduce cost.
Portfolio Management - Portfolio management is the process of creating and maintaining a selection of investments to create the highest possible return relative to an acceptable amount of risk. Portfolio management can be active or passive.
Portfolio Margin - Portfolio margin utilizes margin requirements that incorporate the portfolio’s net risk, not just the risk of a specific position. Margin requirements for portfolio margin are set based on a range of outcomes, such as a one standard deviation move up or down, or unrealized gains and losses of 10-15%.
Position Sizing - Position sizing is the amount of shares or contracts purchased in a security. The number of shares or contracts and the price of the security determines the amount of capital invested to hold the position.
Positive Correlation - Positive correlation implies that the price of two securities will move in the same direction.
Post-Market Earnings Release - A corporation releases earnings and conducts an earnings call after the market closes.
Preferred Stock - Preferred stock is a form of equity ownership in a corporation with a higher priority in dividend payments. Preferred stock is viewed as a common-stock-and-debt hybrid.
Pre-Market Earnings Release - A corporation releases earnings and conducts an earnings call before the market opens.
Pre-Market Trading - Pre-market trading occurs before regular market hours begin, from 4:00 a.m. EST to 9:30 a.m. EST.
Premium - The option premium is the debit paid or credit received when buying or selling an options contract.
Preservation of Capital - Capital preservation strategically protects funds and aims to limit losses.
Price Chart - Price charts display a series of prices over a defined period of time.
Price Quote - Options price quotes are standardized and quoted in dollars and cents. For example, a call option may have a bid price of $1.00 and an ask price of $1.10. Options prices are quoted on a per share basis.
Price-Weighted Index - A stock index that is calculated by adding the price of each individual stock in the index and dividing by the total number of stocks included.
Profit Factor - Divides the total amount of money gained by the total amount of money lost to quantify the success of a series of investments.
Profit Margin - The profit margin describes the percentage of sales that becomes net income for a company.
Profit Range - The range within the break-even points where a position realizes a profit.
Profitability Ratios - Profitability ratios measure a company’s ability to earn money based on sales, assets, or invested capital.
Prospect Theory - Prospect theory models how investors choose between alternatives involving risk and uncertainty and demonstrates the concept of loss-aversion. Prospect theory suggests that investors are more concerned with potential losses than they are happy with potential gains.
Protective Put - A protective put is an options strategy that combines a long stock position with a long put option. Protective puts cost a debit and define the downside risk for the long stock position.
Put/Call Ratio - The put/call ratio is a volume-based market indicator of sentiment where the total volume of put option contracts traded on the CBOE is divided by the total volume of call option contracts traded.
Put Backspread - A put backspread is a multi-leg, risk-defined, bearish strategy with unlimited profit potential. Put backspreads consist of three options, two long put options and one short put option, and profit when the underlying asset decreases in price.
Put Butterfly - A put butterfly is a multi-leg, risk-defined, neutral strategy with limited profit potential. Put butterflies cost a debit and consist of four options, two long put options and two short put options, and profit when the underlying asset experiences little or no movement.
Put Calendar Spread - A put calendar spread is a multi-leg, risk-defined strategy with unlimited profit potential. Put calendar spreads are debit spreads consisting of two options, one short put option and one long put option.
Put Diagonal Spread - A put diagonal spread is a multi-leg, risk-defined, bullish strategy with limited profit potential. Put diagonal spreads consist of two options, one short put option and one long put option, and profit when the underlying asset increases in price.
Put Option - A put option gives the buyer the right, but not the obligation, to sell an underlying asset at a specific price on or before a specific date.
Put Ratio Spread - A put ratio spread is a multi-leg, neutral strategy with undefined risk and limited profit potential. Put ratio spreads consist of three options, two short put options and one long put option, and profit when the underlying asset experiences little or no movement.
Qualified Retirement Plans - Individual Retirement Arrangements (IRAs), Roth IRAs, 401(k) Plans, 403(b) Plans, SIMPLE IRA Plans, SEP Plans, and other tax-advantaged retirement plans created to encourage saving for retirement. By deferring taxation on income or allowing earnings to grow tax-free, qualified retirement plans provide an advantage over individual accounts for saving money on taxes.
Qualitative Analysis - Qualitative analysis uses factors that cannot be precisely measured to make investment decisions. Qualitative analysis considers many factors, including the experience of a company’s management team, employee morale, brand recognition, competitive advantage, and other subjective measures to evaluate a company’s investment prospects.
Quantitative Analysis - Quantitative analysis uses measurable factors to value assets, evaluate financial trends, or examine a company’s financial prospects. Quantitative analysis uses historical data, including price data and financial statements, to develop statistical models for investment analysis.
Quick Ratio - The quick ratio describes a company’s ability to pay off its current liabilities with its most liquid assets (cash, marketable securities, and accounts receivable).
R-Squared - R-squared measures the amount that a portfolio’s performance can be explained by the movement of a benchmark and is measured on a scale of 1-100 percent.
Random Walk Hypothesis - The random walk hypothesis assumes that markets are random and future price action is impossible to predict.
Rate of Change - Rate of change is a technical indicator of momentum that measures the percentage change in price from period to period. Rate of change is also referred to as “momentum” and is often used to confirm trends.
Ratio Analysis - Ratio analysis is a fundamental analysis method that uses relationships between financial statement amounts to determine value, assess risk, analyze trends, and evaluate efficiency.
Receivables Turnover - Receivables turnover describes how many times a company’s accounts receivables turn over throughout a year.
Recency Bias - Recency bias is a cognitive error where investors overemphasize recent outcomes. Recency bias results in investors giving more importance to recent events than historical events.
Record Date - The record date is the day set by a corporation to determine who is entitled to receive the declared dividend payment.
Rectangle - A rectangle formation is a continuation pattern where price consolidates in a range of consolidation before continuing in the direction of the previous trend. Rectangles have a series of approximately equal highs and roughly equal lows to form two parallel trendlines.
Reg T - Regulation T by the Federal Reserve governs the use of margin in investor accounts and outlines the requirements for minimum initial margin and maintenance margin for positions in a margin account. The minimum initial margin set by the Federal Reserve is 50%, and the minimum maintenance margin is 25%, although individual brokerage firms may require higher levels of both.
Regulatory - Markets are regulated by agencies to establish compliance and ensure that all individuals and institutions operate within the laws.
Relative Strength Index (RSI) - The relative strength index (RSI) is a technical indicator of momentum that measures the speed and change of price on a scale of 0 to 100, typically over the past 14 periods. Readings over 70 are considered overbought, while readings below 30 are considered oversold. RSI is also used to confirm price action for a security.
Resistance - Resistance levels on a price chart are areas where buying subsides and selling pressure overwhelms investor demand. Resistance is associated with supply and previous highs on a price chart.
Return Calculations - Return calculations quantify the profits and losses from investments and measure the performance of individual assets or portfolios.
Return on Assets - Return on assets describes the percentage return (net income) for a company’s investment in assets.
Return on Equity - Return on equity describes the percentage return (net income) for the company’s equity.
Return on Investment (ROI) - Return on investment is the net gain or loss of an investment relative to the initial cost of the trade and is calculated by dividing the realized return by the initial cost of entry.
Return on Margin - Return on margin is the net gain or loss of an investment relative to the required margin to initiate the trade and is calculated by dividing the realized return by the initial margin.
Reversal - A reversal is a multi-leg options strategy with defined risk and limited profit potential that combines a stock position with options and looks to take advantage of skewed options pricing. Reversals can also be a bullish strategy using a long call option and a short put option.
Reverse Iron Butterfly - A reverse iron butterfly is a multi-leg, risk-defined, neutral strategy with limited profit potential. Reverse iron butterflies cost a debit and consist of four options, one short call option, one long call option, one long put option, and one short put option, and profit when the underlying asset experiences a large move in either direction.
Reverse Iron Condor - A reverse iron condor is a multi-leg, risk-defined, neutral strategy with limited profit potential. Reverse iron condors cost a debit and consist of four options, one short call option, one long call option, one long put option, and one short put option, and profit when the underlying asset experiences a large move in either direction.
Reverse Stock Split - A reverse stock split decreases the number of shares outstanding without any change in shareholder’s equity or market value.
Rho - Rho measures the sensitivity of an option’s price related to changes in interest rates. Rho represents the expected change of a contract’s value for a 1% change in interest rates.
Rights & Warrants - Stock rights and warrants are two alternatives corporations use to raise capital. Holders of rights or warrants may purchase shares of a company's stock before the shares are sold to the public.
Risk-Averse Behavior - Risk-averse behavior is the propensity for investors to seek ceratin positive outcomes over uncertain outcomes with higher expected returns.
Risk Defined Strategies - Risk defined strategies are strategies where the maximum loss is defined at trade entry.
Risk-Free Rate of Return - Used in various models and metrics to represent a return without risk. Though unrealistic, because some level of risk is unavoidable, the risk-free rate of return is typically represented by Treasury bills.
Rolling - An adjustment strategy that involves closing a position and moving the option strike price up, down, or out to a future expiration date.
Rounding Bottom - The rounding bottom is a bullish reversal pattern representing a period of consolidation before reversing higher. This pattern is sometimes called a "saucer bottom" and demonstrates a long-term reversal showing the stock move from a downward trend to an upward trend.
RTS Index - The RTS Index is the Russian Trading System for the top 50 stocks traded on the Moscow Exchange.
Russell 2000 Index - The Russell 2000 index consists of approximately 2,000 small-cap companies taken from the bottom two-thirds of the Russell 3000 index.
S&P 500 Index - The S&P 500, or Standard and Poor’s 500 index, comprises the 500 largest companies in the United States based on weighted market capitalization and represents multiple major sectors within the U.S. economy.
S&P ASX Index - The S&P ASX tracks the 200 largest companies in Australia.
SEC - The Securities and Exchange Commission (SEC) is an agency of the United States government that regulates markets and investors.
Security Market Line - The security market line describes the relationship between systematic risk and a security’s expected returns as represented by its beta.
Self-Attribution Bias - Self-attribution bias is a cognitive error where investors attribute wins to investment skill and losses to poor luck. Self-attribution bias may also be called self-serving attribution bias, which causes investors to blame others for their failures while personally taking credit for successes.
Selling Stock - Selling stock is the process of closing a long stock position.
Sell-to-Close - "Sell-to-close" orders are used to close positions that originated from "buy-to-open" orders.
Sell-to-Open - "Sell-to-open" orders are used to sell a call or put.
Semi-Strong Form Efficient Markets - The semi-strong form is part of the efficient market hypothesis and states prices currently reflect all public information available to investors.
Sequencing of Returns - The sequence of returns is the distribution of trade outcomes and cannot be controlled by the investor. Sequencing risk refers to the potential of experiencing multiple losing trades in a row despite a high probability of success.
Settlement - Options settlement is the process of satisfying the terms of an options contract when the contract is exercised.
Shanghai Index - The Shanghai Index, or SSE Composite (Shanghai Stock Exchange), tracks the performance of all the companies listed on the Shanghai exchange.
Sharpe Ratio - The Sharpe ratio measures the return of an investment relative to its risk and is calculated by subtracting the risk-free rate of return from the portfolio’s return, then dividing the value by the portfolio’s standard deviation of returns.
Shooting Star - A shooting star is a bearish single candle reversal pattern.
Short - To be short an option or security is to sell shares or contracts and receive a credit.
Short Box Spread - A short box spread is a multi-leg, risk-defined, neutral options strategy with limited profit potential. Short box spreads consist of four options, one long call option, one short call option, one short put option, and one long put option, and look to take advantage of overpriced options to create a risk-free arbitrage trade.
Short Call - A short call is a single-leg, bearish options strategy with undefined risk and limited profit potential, where the expectation for the underlying asset is a price decline prior to expiration.
Short Put - A short put is a single-leg, bullish options strategy with undefined risk and limited profit potential, where the expectation for the underlying asset is a price rise prior to expiration.
Short Selling - Short selling occurs when an investor sells shares of stock they do not already own. Investors must first borrow the stock through their broker.
Short Straddle - A short straddle is a multi-leg, neutral strategy with undefined-risk and limited profit potential. Short straddles collect a credit and consist of two options, a short call option and a short put option, and profit when the underlying asset experiences little or no movement.
Short Strangle - A short strangle is a multi-leg, neutral strategy with undefined-risk and limited profit potential. Short strangles collect a credit and consist of two options, a short call option and a short put option, and profit when the underlying asset experiences little or no movement.
Short-term - Describes a holding period of one year or less.
Simple Moving Average (SMA) - A simple moving average is an arithmetic average of a set of data points where each data point is added together and then divided by the total number of data points.
SIPC - The Securities Investor Protection Corporation (SIPC) is an independent organization established by Congress to protect investors whose brokerage firm has gone bankrupt.
Skew - Skew occurs when the shape of a distribution differs from the normal distribution because the mean and median are not centered.
Slippage - The difference between the expected price paid or received and the actual price realized at execution. Most prominent with low liquidity and high volatility.
Snakebite Effect - Snakebite effect is a behavioral bias that is the opposite of overconfidence, where a series of losses leads to the belief that the investment process has failed, and an investor cannot do anything right.
Softs Futures - Softs future commodities include products such as coffee, orange juice, sugar, cocoa, and more. Softs typically refers to any commodity that can be grown as opposed to mined, like hard metals, and may include products listed under agricultural futures.
Sortino Ratio - The Sortino ratio focuses on negative volatility in a portfolio to evaluate the return of an investment based solely on its returns relative to the downside risk.
Speculation - Speculation is the practice of allocating capital to investments that typically offer above-average returns but are generally more volatile than safer investments.
Spinning Top - A spinning top is a neutral single candle pattern.
Spread Strategy - A position consisting of long options and short options of the same type on the same underlying security.
Standard Brokerage Accounts - Standard or individual brokerage accounts have one owner and are not tax-advantaged. The account owner is responsible for reporting gains, losses, interest income, and dividends for each tax year.
Standard Deviation - Standard deviation is a measure of the distribution of data points relative to their average value.
Star - A star is a neutral single candle reversal pattern.
Stochastic Oscillator - The stochastic oscillator is a technical indicator of momentum that shows where the closing price for a period fits in the relative high-low range of a lookback period, typically 14 periods.
Stock Funds - Stock funds are funds that pool investments to invest in equity securities. Stock funds allow investors to purchase a basket of securities.
Stock Market Crash of 1929 - In October of 1929, the Dow Jones dropped more than 23% in two days. The “Great Crash” eventually led to the Great Depression.
Stock Repair - Stock repair is a multi-leg options strategy used to help recoup losses from a long stock position that has moved down in price. Stock repairs have limited profit potential and do not define risk to the downside, but lower the break-even point on a long stock position.
Stock Split - A stock split increases the number of shares outstanding without any change in shareholder’s equity or market value.
Stop Order - Execute a market order once a price reaches a certain amount away from the current price.
Stop-Limit Order - A stop order that becomes a limit order instead of a market order once the stop price is reached. Stop-limit orders set the specific price for the stop order to be filled, but in fast-moving markets, stop-limit orders may result in the limit order not being filled.
Stop-Loss Order - Execute a market order once a security reaches a certain amount above or below the current price.
Strap - A strap is a multi-leg, risk-defined, neutral to bullish strategy. Straps cost a debit and consist of three options, two long calls and one long put, and profits from a large move in the underlying security.
Strategy Backtesting - Strategy backtesting is the process of testing a strategy’s performance on historical data.
Strike Price - The strike price is the specific price at which the underlying security can be bought or sold with an option contract. The strike price is also referred to as the exercise price.
Strike Price Interval - The distance between strike prices as provided on an options chain. Intervals vary based on the price of the underlying security and trading volume.
Strong-Form Efficient Markets - The strong-form is part of the efficient market hypothesis and states that all information related to a security, both public and private, is priced into markets.
Sunk Cost Fallacy - Sunk cost fallacy is a behavioral bias where investors commit more capital to investments that have declined in value to lower the break-even point, regardless of the investment’s prospects going forward. Sunk cost fallacy causes biased decision making due to regret over previously committed funds.
Supply and Demand - Supply and demand refer to the interaction of basic economic principles with security pricing. When demand for a security increases, the price goes up, and as demand decreases, the price goes down.
Support - Support levels on a price chart are areas where investor demand overwhelms selling pressure. Support is associated with demand and previous lows on a price chart.
Symmetrical Triangle - The symmetrical triangle, or coil, is a continuation pattern with the upper and lower trendlines converging in a symmetrical shape to form a triangle. The coil may develop in a downtrend or uptrend and is typically a consolidation that leads to a breakout in the direction of the previous trend.
Synthetic Covered Call - A synthetic covered call, also known as a poor man’s covered call, is a cost-effective way to gain long exposure to an asset while selling covered calls against the long call option position to lower the overall cost basis.
Synthetic Long Calls - A synthetic long call combines long stock with a long put option at the strike price of the original long stock position.
Systematic Risk - Systematic risk is the unavoidable uncertainty inherent in investing in the stock market. All investments in the market are susceptible to systematic risk, and it cannot be completely eliminated.
Technical Analysis - Technical analysis is the study of security prices to identify trends, patterns, and supply and demand levels on charts to formulate assumptions for future price action. Technical analysis assesses supply and demand, trends, sentiment, momentum, patterns, cycles, and other analysis techniques for security selection decisions and directional biases.
Technical Indicators - Technical indicators are tools used to analyze price action.
Theta - Theta represents the effect time decay has on the value of an option.
Three Inside Up - A three inside up is a bullish three candle reversal pattern.
Three Black Crows - Three black crows is a bearish three candle reversal pattern.
Three Line Strike - A three line strike is a four candle continuation pattern that may be bullish or bearish depending on the preceding trend.
Three Outside Up - A three outside up is a bullish three candle reversal pattern.
Three White Soldiers - Three white soldiers is a bullish three candle reversal pattern.
Ticker Symbols - Ticker symbols are the letter combinations assigned to a company’s security that allow for easy identification when trading and are often related to the company’s name.
Time Decay - Describes the effect the passage of time has on the value of an options contract. Time decay causes an options contract to lose value every day and is quantified by the option Greek theta.
Time Series Analysis - Time series analysis describes the process of reviewing a series of data points to identify trends.
Time Value - Time value is the difference between the options contract’s price and the option’s intrinsic value.
Times Interest Earned - The times interest earned ratio describes a company’s ability to pay its interest obligations with income from operations.
Top-Down Analysis - Top-down analysis is an approach where broad, global economic indicators are considered first in the investment selection process before company-specific data.
Total Asset Turnover - Total asset turnover describes the amount of sales relative to the company’s total assets.
Trading Platform - Trading platforms are provided by brokerage firms to customers to execute transactions, analyze portfolios, research investment ideas, track performance, and manage positions and trades.
Trailing Stop-Loss Order - A stop-loss order placed at an initial fixed price difference from the entry and automatically moves up if the security advances but does not move down.
Trend Analysis (Financial) - Trend analysis of financial ratios compares a company’s performance year over year. Trend analysis is used by investors to compare performance over a period of time to determine if a company is improving its operations or experiencing a decline.
Treynor Ratio - The Treynor ratio is a risk to reward measurement that uses a portfolio’s beta to calculate its exposure to systematic risk.
Triple Bottom - The triple bottom is a bullish reversal pattern with three troughs, or lows, at approximately the same price level. The triple bottom and inverse head and shoulders are very similar, with the main difference being the triple bottom pattern's equal bottoms.
Triple Witching - Triple witching is a term that refers to the third Friday of March, June, September, and December when the quarterly expiration of stock options, stock index futures contracts, and stock index options contracts occur on the same day.
Trust Accounts - Trust Accounts are accounts where the account owner transfers assets such as cash or securities to one or more recipients who hold legal title to the assets and manage the assets for the benefit of the owner or other beneficiaries. Trust accounts may be established as taxable living, revocable, irrevocable, or testamentary trusts.
Tweezer Bottom - A tweezer bottom is a bullish two candle reversal pattern.
Tweezer Top - A tweezer top is a bearish two candle reversal pattern.
Underlying - The underlying in an options contract is the security or asset for which the option gets its value.
Unemployment Rate - The unemployment rate is the percentage of a country’s labor force that is unemployed but seeking employment. Each month, the unemployment rate is published by the Bureau of Labor Statistics (BLS) in the nonfarm payrolls report.
Unlimited Risk Strategies - Unlimited risk strategies have an undefined or unlimited risk of loss at trade entry.
Unsystematic Risk - Unsystematic risk is the risk of investing in one specific asset or sector and involves the consequences that may arise from issues related to individual securities.
Value at Risk (VaR) - Value at Risk measures the probability of a significant loss in a portfolio.
Value Investing - Value investing is an investing style that seeks to identify and invest in securities trading below their intrinsic value.
Variability - Variability measures the amount at which data varies from itself and from the average in a statistical study.
Variance - Variance is a measure of dispersion for a set of data and measures the deviation from an average value.
Vega - Vega is the amount options prices change for every 1% change in implied volatility for the underlying security.
VIX Index - The CBOE VIX index is a benchmark index based on options on the S&P 500 index (SPX options) where expected future volatility is calculated based on put and call options pricing. The VIX index is a 30-day representation of volatility expectations for the S&P 500.
Volatility - Volatility in options contracts refers to the fluctuation in the price of the underlying security.
Volatility Clustering - Volatility clustering is the propensity for large movements in security prices to group together and promote similarly volatile movements in the future.
Volatility Index - The Cboe Volatility Index, or the VIX, was designed by the Chicago Board Options Exchange to measure the U.S. stock market’s 30-day expected volatility. The index is calculated using real-time price quotes on S&P 500 Index SPX call and put options.
Volatility Smile - Volatility smile refers to the graphical representation plotting implied volatility and an option’s strike price. Implied volatility increases as the strike price is further out-of-the-money or further in-the-money compared to at-the-money.
Volatility Smirk - Volatility smirk, or volatility skew, refers to the skewness that commonly occurs in option pricing where in-the-money calls and out-of-the-money puts are relatively more expensive compared to out-of-the-money calls and in-the-money puts.
Volume - Volume is the number of options contracts traded on a given day and is shown for each strike price for both call and put options.
Volume-Weighted Average Price (VWAP) - Volume-weighted average price (VWAP) combines price and volume to show where the average trading activity has taken place for a specified period. VWAP is calculated by dividing the total dollar value of all trades by the trading volume for the period referenced.
Wash Sale - A wash sale occurs when a security is sold or traded at a loss and, within 30 days of the sale, substantially identical securities are purchased.
Weak-Form Efficient Markets - The weak-form is part of the efficient market hypothesis and assumes that past price information for a security does not predict, and is unrelated to, future price action.
Win Rate - Calculates the percentage of the total number of winning trades relative to total trades to quantify the success of a series of investments.
Writer - The seller of an option contract.
Yield Curve - The yield curve is a graph depicting the relationship between interest rates and time to maturity. Interest rates are plotted from the shortest maturity to the longest maturity.
Zero Correlation - Zero correlation implies that two securities move completely random from each other with no measurable relationship.