Trading GlossaryGlossary of Terms

Options Trading Glossary

Learning how to trade options first starts with understanding common and frequently used trading terms. Though the entire finance business might seem complicated and full of high-level jargon, you’ll find that it’s actually very straightforward once you get some of the basics under control. And because your education is our top priority here at Option Alpha, we’ve compiled this in-depth trading glossary for you covering all the most important terms and definitions you might run across. While other resources might simply give you the definition and wish you the best, we’ve gone the extra mile to help link up related video training courses, podcasts, and blog articles that dig further into these topic areas.

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 Z

Adjustments

A change to contract terms due to a corporate action (e.g., a merger or stock split). Depending on the corporate action, different contract terms (including strike price, deliverable, expiration date, multiplier etc.) could be adjusted. An adjusted option may cover more or less than the usual 100 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.

  1. Trade Adjustments FAQ
  2. Earnings Adjustments
  3. Calendar Adjustments

All-or-none order (AON)

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-cancelled) order.

American-style Exercise

An option contract that may be exercised at any time between the date of purchase and the expiration date. Most exchange-traded options are American-style.

  1. American vs. European Style Options
  2. Options Expiration & Assignment
  3. OAP 077: Scared Of Being Assigned During Options Expiration Week? Here’s The #1 Reason To Stop Worrying

American-style option

An option that can be exercised at any time prior to its expiration date. See also European-style option.

  1. American vs. European Style Options
  2. 4 Must Know Options Expiration Day Traps To Avoid
  3. Options Expiration & Assignment

Arbitrage

The process in which professional traders simultaneously buy and sell the same or equivalent securities for a riskless profit. See also Risk Arbitrage.

OAP 062: Dividend Stocks – Can You Buy Stock Just For The Dividend?

Ask Price

The price at which a seller is offering to sell an option or stock.

  1. Option Strike Price
  2. Bid-Ask Spread Defined

Assigned (an exercise)

Received notification of an assignment by OCC.

  1. Will My Short Option Contract Be Exercised Or Assigned At Expiration?
  2. How to Deal With Assigned Put Options
  3. Options Expiration & Assignment

Assignment

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.

  1. Will My Short Option Contract Be Exercised Or Assigned At Expiration?
  2. How to Deal With Assigned Put Options
  3. Options Expiration & Assignment

At-the-money

An option is at-the-money if the strike price of the option is equal to the market price of the underlying security.

  1. 6 Quick Examples To Mastering Option Moneyness (ITM, OTM & ATM)
  2. ATM, ITM, and OTM Options
  3. Option Moneyness (ITM, OTM & ATM)

Automatic Exercise

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.

  1. Creating Automatic Alerts
  2. Options Exercise Process

Average Down

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.)

  1. How To Use The 200-Day Moving Average For Trend Trading
  2. How To Analyze Trend Changes Using Ribbon Studies And Multiple Moving Averages

Backspread

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.

  1. Bear Put Backspread
  2. Bull Call Backspread

Bats

Bats Options Exchange

Bear (or bearish) spread

One of a variety of strategies involving two or more options (or options combined with a position in the underlying stock) that can potentially profit from a fall in the price of the underlying stock.

  1. Bear Put Backspread
  2. Bear Put Spread
  3. Bear Call Spread

Bearish

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 Bullish.

  1. Bearish
  2. Earnings, Iron Condors And Bearish Trades
  3. Bearish Options Strategies

Bear Spread

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. See also Bull Spread.

  1. Bear Put Spread
  2. Bear Call Spread

Beta

A measure of how a stock's movement correlates to the movement of the entire stock market. The Beta is not the same as volatility. See also Standard Deviation and Volatility.

  1. Beta Weighting Your Portfolio
  2. Portfolio Beta
  3. How To Correctly Use Beta When Building And Managing Your Portfolio

Bid Price

The price at which a buyer is willing to buy an option or stock.

Bid-Ask Spread Defined

Black-Scholes formula

The first widely used model for option pricing. This formula is 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 often used in the valuation and trading of options.

BOX

BOX Options Exchange

Box Spread

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--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.

Break-even point(s)

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.

Broad-Based

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. See also Narrow-Based.

Bull (or bullish) spread

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.

  1. Bull Put Spread
  2. Bull Call Backspread
  3. Bullish Options Strategies

Bullish

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 Bearish.

  1. Bullish Strategies
  2. Bullish Options Strategies

Bull Spread

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. See also Bear Spread.

  1. Bull Put Spread
  2. Bull Call Backspread

Butterfly Spread

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.

  1. How To Set Up A Broken Wing Butterfly Option Strategy?
  2. Iron Butterfly
  3. How To Setup An Iron Butterfly Option Strategy

Buy-write

See also Covered Call.

Calendar Spread

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.

  1. Put Calendar Spread
  2. Call Calendar Spread
  3. OAP 079: How To Trade Calendar Spreads – The Complete Guide

Calendar Straddle or Combination

See Calendar Spread.

Call

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. See also Put.

  1. Covered Call
  2. Long Call
  3. Short Call

Call option

An option contract that gives the owner the right but not the obligation to buy the underlying security at a specified price (its strike price) for a certain, fixed period (until its expiration). For the writer of a call option, the contract represents an obligation to sell the underlying product if the option is assigned.

  1. How To Buy A Call Option
  2. Long Call Option Explained
  3. Short Call Option Explained

Capitalization-Weighted Index

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 Float, Divisor.

Capped-Style Option

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.

Carrying Cost

The interest expense on a debit balance created by establishing a position.

Cash-Based

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.

Cash Settlement

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.

Physical vs Cash Settlement Options

Cash settlement amount

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 Exercise settlement amount.

Physical vs Cash Settlement Options

CBOE

The Chicago Board Options Exchange; the first national exchange to trade listed stock options.

Class (of Options)

Option contracts of the same type (call or put) and Style (American, European or Capped) that cover the same underlying security.

Closing price

The final price of a security at which a transaction was made. See also Settlement price.

Closing Purchase

A transaction in which the purchaser's intention is to reduce or eliminate a short position in a given series of options.

Closing Sale

A transaction in which the seller's intention is to reduce or eliminate a long position in a given series of options

Closing Transaction

A trade that reduced an investor's position. Closing buy transactions reduce short positions and closing sell transactions reduce long positions. See also Opening Transaction.

Collar

A protective strategy in which a written call and a long put are taken against a previously owned long stock position. The options typically have different strike prices (put strike lower than call strike). 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, the investor could establish a collar involving the purchase of a May 60 put and the writing of a May 65 call to protect some of the unrealized profit in the XYZ Corporation stock position. The investor may also use the reverse (a long call combined with a written put) if he has previously established a short stock position in XYZ Corporation. See also Fence.

Collateral

The loan value of marginable securities; generally used to finance the writing of uncovered options.

Combination

Any position involving both put and call options that is not a straddle.

Commodities

See Futures Contract.

Condor spread

A strategy involving four strike prices with both limited risk and limited profit potential. Establish a long call condor spread 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.

Contingency order

An order to execute a transaction in one security that depends on the price of another security. An example might be to sell the XYZ May 60 call at $2.00, contingent upon XYZ stock being at or below $59.

  1. How to Use Advanced & Contingent Orders
  2. 5 Types of Contingent Orders
  3. Advanced Contingent Orders

Contingent Order

An order which can be executed only if another event occurs; i.e. "sell Oct 45 call 7.25 with stock 52 or lower".

  1. How to Use Advanced & Contingent Orders
  2. 5 Types of Contingent Orders
  3. Advanced Contingent Orders

Contract size

The amount of the underlying asset covered by the option contract. This is 100 shares for 1 equity option unless adjusted for a special event.  See also Adjustments.

Conversion

An investment strategy in which a long put and a short call with the same strike price and expiration combine with long stock to lock in a nearly riskless profit. For example, buying 100 shares of XYZ stock, writing 1 XYZ May 60 call and buying 1 XYZ May 60 put at desirable prices. The process of executing these three-sided trades is sometimes called conversion arbitrage. See also Reversal / Reverse conversion.

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 Reversal Arbitrage.

OAP 062: Dividend Stocks – Can You Buy Stock Just For The Dividend?

Conversion Ratio

See Convertible Security.

Converted Put

See Synthetic Put.

Convertible Security

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.

Cover

To buy back as a closing transaction an option that was initially written.

Covered

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.

  1. Covered Put
  2. Covered Call

Covered Call

An option strategy in which a call option is written against long stock on a share-for-share basis.

  1. F Covered Call
  2. Writing Covered Calls In Bear Markets – 4 Rules For Generating Profits During Market Declines

Covered Call Option Writing

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.

Writing Covered Calls In Bear Markets – 4 Rules For Generating Profits During Market Declines

Covered combination

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 requires purchase of additional stock.

Covered option

An open short option position completely offset by a corresponding stock or option position. 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 Uncovered call option writing and Uncovered put option writing.

Covered put / Covered cash-secured put

The cash-secured put is an option strategy in which a put option is written against a sufficient amount of cash (or Treasury bills) to pay for the stock purchase if the short option is assigned.

Covered Put Write

A strategy in which one sells put options and simultaneously is short an equal number of shares of the underlying security.

Covered Straddle

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.

Covered Straddle Write

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.

Credit

Money received in an account. 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. See also Debit.

Credit spread

A spread strategy that increases the account's cash balance when established. A bull spread with puts and a bear spread with calls are examples of credit spreads.

  1. Debit Spread or Credit Spread
  2. Adjusting Credit Spreads, Iron Condors & Calendars
  3. IYR Call Credit Spread (LIVE Adjusting Trade)

Curvature

A measure of the rate of change in an option's Delta for a one-unit change in the price of the underlying stock. See also Delta.

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.

Day order

A type of option order that instructs the broker to cancel any unfilled portion of the order at the close of trading on the day the order was first entered.

Day trade

A position (stock or option) that is opened and closed on the same day.

OAP 045: Pattern Day Trading Rules – What Are They & What Can Go Wrong?

Debit

An expense, or money paid out from an account. A debit transaction is one in which the net cost is greater than the net sale proceeds. See also Credit.

Debit spread

A spread strategy that decreases the account's cash balance when established. A bull spread with calls and a bear spread with puts are examples of debit spreads.

  1. Getting Paid To Roll A Debit Spread
  2. Debit Spread Adjustments

Decay

A term used to describe how the theoretical value of an option erodes or declines with the passage of time. Time decay is specifically quantified by Theta.

  1. Trading Calendar Option Spreads – Using Time Decay To Your Advantage
  2. OAP 080: The 3 Big Reasons Why Your Option Strategy Payoff Diagram Is Different Today Than At Expiration

Deliver

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.

Delivery

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).

Delta

The amount by which an option's price will change for a one-point change in price by the underlying entity. 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. See also Hedge Ratio.

  1. Using Delta For Probabilities
  2. Delta Hedging
  3. Balancing Our Deltas In Oil With OIH Call Spread

Delta Spread

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. See also Ratio Spread and Delta.

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.

Derivative security

A financial security whose value is determined in part from the value and characteristics of another security, the underlying security.

Diagonal Spread

Any spread in which the purchased options have a longer maturity than do the written options as well as having different striking prices. Typical types of diagonal spreads are diagonal bull spreads, diagonal bear spreads, and diagonal butterfly spreads.

  1. Call Diagonal Spread
  2. Put Diagonal Spread
  3. Using Diagonal Spreads For Long Term Investing Plus Monthly Cash Flow

Discount

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. See also Intrinsic Value and Parity.

Discount Arbitrage

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). See also Discount.

Discretion

Freedom given to the floor broker by an investor to use his 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. See Limit Order and Market Not Held Order.

Divisor

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).

Downside Protection

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 Covered Call Write.

Dynamic

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.

Early Exercise (assignment)

The exercise or assignment of an option contract before its expiration date.

  1. Options Exercise Process
  2. OAP 071: The 2 Major Misconceptions About Exiting Option Trades Early
  3. Will My Short Option Contract Be Exercised Or Assigned At Expiration?

Equity

In a margin account, equity is the difference between the securities owned and the margin loans owed. The investor keeps this amount after all positions are closed and all margin loans paid off.

Equivalent strategy

A strategy that 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 Synthetic position.

  1. How to Choose the BEST Options Strategy?
  2. Strategy Selection Process
  3. Ultimate Strategy Guide

Escrow Receipt

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.

Equity Options

Options on shares of an individual common stock. See also Non-Equity Option.

European Exercise

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.

  1. American vs. European Style Options
  2. 4 Must Know Options Expiration Day Traps To Avoid

European-Style Options

An option contract that may be exercised only during a specified period of time just prior to its expiration.

American vs. European Style Options

Ex-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.

  1. OAP 062: Dividend Stocks – Can You Buy Stock Just For The Dividend?
  2. XLU Stock and Dividend Assignment

Exchange traded funds (ETFs)

Exchange traded funds (ETFs) are index funds or trusts listed on an exchange and 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— 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 investors to enjoy some of the more favorable features of stock trading, such as liquidity and ease of equity style, in an environment of more traditional index investing.

  1. Stocks, Indexes & ETFs
  2. Inverse ETFs
  3. Show 027 : How Inverse And Leveraged ETFs Actually Work
  4. 101 Inverse ETFs To Short Any Market – But Do They Really Work?
  5. $1,200+ Trading GLD, GDX & SLV Recently
  6. How To Diversify Your Portfolio With A Single ETF Purchase

Exercise

To implement the right under which the holder of an option is entitled to buy (in the case of a call) or sell (in the case of a put) the underlying security.

  1. Options Exercise Process
  2. Will My Short Option Contract Be Exercised Or Assigned At Expiration?
  3. WFC Exercised Call

Exercise by exception processing

A procedure used by OCC as an operational convenience for clearing members. Under these proceedings, OCC assumes a clearing member 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 held in customer accounts are exercised if they are in-the-money by a specified amount.

Exercise Limit

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.

Exercise price

The price at which the option holder may buy or sell the underlying security, as defined in the terms of his option contract. 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. See also Exercise.

Exercise settlement amount

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.

Expected Return

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.

Calculating Expected Portfolio Return

Expiration cycle

An expiration cycle relates to the dates on which options on a particular underlying security expire. A given option, other than LEAPS®, will be assigned to one of three cycles, the January cycle, the February cycle or the March cycle.

Expiration date

The day on which an option contract becomes void. For stock options expiring prior to February 15, 2015, this date is the Saturday immediately following the third Friday of the expiration month. For stock options expiring on or after February 15, 2015, this date is the third Friday of the expiration month. Brokerage firms, however, may set an earlier deadline for notification of an option buyer's intention to exercise. If Friday is a holiday, the last trading day will be the preceding Thursday. See also Expiration Time and Automatic Exercise.

  1. Expiration Calendar Video
  2. Option Expiration

Expiration Friday

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. If the third Friday of the month is an exchange holiday, the last trading day is the Thursday immediately preceding the third Friday.

Expiration month

The month that the expiration date occurs.

Expiration time

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 Date.

Facilitation

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. See also Hedge Ratio.

Fair Value

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. See also Intrinsic Value and Model.

Fence

A protective strategy in which a written call and a long put are added to a previously owned long stock position, also referred to as a collar. The options may have the same strike price or different strike prices. 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, an investor could establish a collar involving the purchase of a May 60 put and the writing of a May 65 call as a way of protecting some of the unrealized profit in the XYZ Corporation stock position. An investor might also use the reverse (a long call combined with a written put) if he has previously established a short stock position in XYZ Corporation.

Fill-or-kill order (FOK)

A type of option order that 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 killed (cancelled) immediately. Unlike an AON order, an FOK order cannot be used as part of a good-‘til-cancelled order.

FINRA (Financial Industry Regulatory Authority)

The largest independent regulator for all securities firms doing business in the United States.

FLEX Options

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.

Float

The number of shares outstanding of a particular common stock.

Floor Broker

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.

Floor trader

An exchange member on the trading floor who buys and sells for their own account.

Fundamental Analysis

A method of analyzing the prospects of a security by observing accepted accounting measures such as earnings, sales, assets, and so on. See also Technical Analysis.

Is Fundamental Analysis Dead?

Fungibility

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.

Futures Contract

A standardized contract calling for the delivery of a specified quantity of a commodity at a specified date in the future.

Gamma

The rate of change in an option's delta for a one-unit change in the price of the underlying security. See also Delta.

The "Greeks"

GEM

ISE Gemini

Good Until Canceled (GTC)

A designation applied to some types of orders, meaning the order remains in effect until it is either filled or canceled. See also Stop Limited and, Trading Limit.

Hedge

A conservative strategy used to limit investment loss by effecting a transaction which offsets an existing position.

  1. Here’s A Quick Way To Hedge Credit Spread Option Strategies
  2. Hedging and Adjusting Oil Option Positions Correctly
  3. Importance of Adjusting & Hedging Trades

Hedge Ratio

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 Facilitation and Delta.

Historic volatility

A measure of actual stock price changes over a specific period. See also Standard deviation.

Historical vs. Implied Options Volatility

Holder

The purchaser of an option.

Horizontal Spread

An option strategy in which the options have the same striking price, but different expiration dates.

Implied Volatility

A measure of the volatility of the underlying stock, it is determined by using option prices currently existing in the market at the time rather than using historical data on the price changes of the underlying stock. See also Volatility.

  1. Historical vs. Implied Options Volatility
  2. Show 007: Why Implied Volatility Is The Key To Your “Edge” Trading Options
  3. When IV Drops, Options Lose Their Value

Incremental Return Concept

A strategy of covered call writing in which the investor is striving to earn an additional return from option writing against a stock position which he (she) has targeted to sell -- possibly at substantially higher prices.

Index

A compilation of the prices of several common entities into a single number. See also Price-Weighted Index, Capitalization-Weighted Index.

  1. Stocks, Indexes & ETFs
  2. OAP 068: VIX Index – How To Trade Volatility w/ Mark Sebastian from OptionPit.com
  3. How Large Index Options Can Help Reduce Your Commission Costs

Index Option

An option whose underlying entity is an index. Most index options are cash-based.

Individual volatility

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

Institution

An organization, probably very large, engaged in professional investing in securities. Normally a bank, insurance company, or mutual fund.

In-the-money

A term describing any option that has intrinsic value. A call option is in-the-money if the underlying security is higher than the striking price of the call. A put option is in-the-money if the security is below the striking price. See also Out-of-the-Money and Intrinsic Value.

  1. Option Moneyness (ITM, OTM & ATM)
  2. ATM, ITM, and OTM Options
  3. 6 Quick Examples To Mastering Option Moneyness (ITM, OTM & ATM)
  4. Options Trading Strategy For Deep-In-The-Money ETF Options

Intrinsic value

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. 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. See also In-the-Money, Time Value Premium and Parity.

Iron butterfly

An option strategy with limited risk and limited profit potential that involves both a long (or short) straddle, and a short (or long) strangle. An iron butterfly contains four options. It is equivalent to a regular butterfly spread that contains only three options. For example, a short iron butterfly might include buying 1 XYZ May 60 call and 1 May 60 put, and writing 1 XYZ May 65 call and writing 1 XYZ May 55 put.

  1. TLT Iron Butterfly Option Trade Adjustment
  2. Options Trading Case Study – FXE Iron Butterfly
  3. IWM Iron Butterfly (LIVE Closing Trade)
  4. EWZ Iron Butterfly (LIVE Closing Trade)
  5. OAP 084: Why We Ladder Or Stack Option Trades Over Time & Price

ISE

International Securities Exchange

ISE Gemini

International Securities Exchange Gemini

Kappa

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

Lambda

A measure of leverage. The expected percentage change in the value of an option for a 1% change in the value of the underlying product.

Last Trading Day

The very last full day of open trading before an options expiration day, usually the third Friday of the expiration month.

Day Trading

LEAPS®

Long-term Equity Anticipation Securities, or LEAPS®, are long-term stock or index options. LEAPS®, like all options, are available in two types, calls and puts, with expiration dates up to three years in the future.

Leg

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.

  1. Single-Leg vs Multi-Leg
  2. Single vs. Multi-Leg Options Strategies
  3. Concept Of Legging

Letter of Guarantee

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).

Leverage

In investments, the attainment of greater percentage profit and risk potential. 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.

  1. Smart Use Of Leverage
  2. Leveraging the “Analyze” Tab

Limit

See Trading Limit.

Limit Order

An order to buy or sell securities at a specified price (the limit). 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.

Limit Orders

Liquidity / Liquid market

Trading environments 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.

  1. Liquidity & Pricing Requirements
  2. The Importance of Liquidity
  3. Strong Liquidity Examples

Listed Option

A put or call option that is traded on a national options exchange. Listed options have fixed striking prices and expiration dates. See also Over-the-Counter Option.

Local

A trader on a futures exchange who buys and sells for his own account and may sometimes also fill public orders.

Lognormal Distribution

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.

Long 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).

Long option position

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 (strike price) at or before some date in the future (the expiration date). This position results from an opening purchase transaction (long call or long put).

Long stock position

A position in which an investor has purchased and owns stock.

Margin

To buy a security by borrowing funds from a brokerage house. The margin requirement - the maximum percentage of the investment that can be loaned by the brokerage firm -- is set by the Federal Reserve Board.

  1. Cash vs. Margin Basics
  2. Margin & Trading Accounts
  3. Understanding Options Trading Margin Requirements For Naked Options

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.

  1. Reducing Margin Requirements
  2. Understanding Options Trading Margin Requirements For Naked Options
  3. OAP 073: We Examined 8 Short Strangles For Returns & Margin Requirements

Mark-To-Market

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 Basket

A portfolio of common stocks whose performance is intended to simulate the performance of a specific index. See Index.

Market-Maker

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 Order Book Official and Specialist.

Market Not Held Order

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.

Market Order

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.

  1. Market Orders
  2. Market, Limit, Stop Loss Orders

Market quote

Quotations of the current best bid/ask prices for an option or stock in the marketplace (an exchange trading floor). The investor usually obtains this information from a brokerage firm. However, for listed options and stocks, these quotes are widely disseminated and available through various commercial quotation services.

21 Top Places To Get Real-Time Stock Market Quotes And News

Market maker

An exchange member on the trading floor who buys and sells options for their own account and who has the responsibility of making bids and offers and maintaining a fair and orderly market. See also Specialist / specialist group / specialist system.

Market maker system (competing)

A method of supplying liquidity in options markets by having market makers in competition with one another. As an alternative to a specialist system, they are also responsible for making fair and orderly markets in a given class of options.

Market-not-held order

A type of market order that allows the investor to give discretion to the floor broker regarding the price and/or time of trade execution.

Market-on-close order (MOC)

A type of option order that requires that an order be executed at or near the close of trading on the day the order is entered.

Market On Close Orders

Married Put and Stock

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.

Married Put Strategy

A put and stock are considered to be married if they are bought on the same day, and the position is designated at that time as a hedge.

Model

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.

Multiple-listed / multiple-traded option

Any option contract listed and traded on more than one national options exchange. See also Fungibility.

Naked or uncovered option

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 deeper-in-the-money long call position. A short put position is uncovered if the writer is not short stock or long another deeper-in-the-money put.

  1. Custom Naked Call
  2. Custom Naked Put
  3. Time To Dispel The Stupid Myth Of ‘Unlimited Losses’ In Naked Option Selling

Naked Option

See Uncovered Option.

  1. Custom Naked Call
  2. Custom Naked Put
  3. Time To Dispel The Stupid Myth Of ‘Unlimited Losses’ In Naked Option Selling

Naked writer

See Uncovered call writing and Uncovered put writing.

Narrow-Based

Generally referring to an index, it indicates that the index is composed of only a few stocks, generally in a specific industry group. See also broad-based.

NASDAQ

A national securities exchange (Operated by NASDAQ OMX).

21 Top Places To Get Real-Time Stock Market Quotes And News

Net credit

Money received in an account either from a deposit or a transaction that results in increasing the account's cash balance.

Net debit

Money paid from an account either from a withdrawal or a transaction that results in decreasing the cash balance.

Neutral

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. See also Bearish and Bullish.

Neutral Strategies

Neutral strategy

An option strategy (Or stock and option position) expected to benefit from a neutral market outcome.

Neutral Strategies

Ninety-ten (90/10) strategy

A conservative option strategy in which an investor buys Treasury bills (or other liquid assets) with 90% of their 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.

Non-Equity Option

An option whose underlying entity is not common stock; typically refers to options on physical commodities and index options.

Not-held order

A type of order that 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 broker 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 Discretion and Market-not-held order.

Notice Period

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.

NYSE

A national securities exchange (Operated by NYSE Euronext).

Offer / Offer price

The price at which a seller is offering to sell an option or a stock. Also known as ask or ask price.

One-cancels-other order (OCO)

A type of option order that 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 they 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 a day order or a good-‘til-cancel order.

Open outcry

The trading method by which competing market makers and floor brokers representing public orders make bids and offers on the trading floor.

Opening Purchase

A transaction in which the purchaser's intention is to create or increase a long position in a given series of options.

Opening Sale

A transaction in which the seller's intention is to create or increase a short position in a given series of options.

Opening Transaction

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. See also Closing Transaction.

Open Interest

The number of outstanding option contracts in the exchange market or in a particular class or series.

  1. No Options Open Interest? Here’s Why It Happens
  2. The Beginner’s Guide To Option Open Interest

Option period

The time from when a buyer or writer of an option creates an option contract to the expiration date; sometimes referred to as an option's lifetime.

Option Pricing Curve

A graphical representation of the projected price of an option at a fixed point in time. 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 Delta, Hedge Ratio, and Model.

Options Clearing Corporation (OCC)

The issuer of all listed option contracts that are trading on the national option exchanges.

What is the Options Clearing Corporation (OCC)?

Order Book Official

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 Market-Maker and Specialist.

Out-of-the-money

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.

  1. 6 Quick Examples To Mastering Option Moneyness (ITM, OTM & ATM)
  2. ATM, ITM, and OTM Options
  3. Option Moneyness (ITM, OTM & ATM)

Over-the-Counter Option (OTC)

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 Listed Stock Option and Secondary Market.

Overvalued

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. See also Fair Value and Undervalued.

Parity

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. See also Discount and Intrinsic Value.

Options Parity

Physical 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 equity option, index option.

Physical vs Cash Settlement Options

Position

As a noun, specific securities in an account or strategy. (A covered call writing position might be long 1,000 XYZ and short 10 XYZ January 30 calls). As a verb, to facilitate; to buy or sell - generally a block of securities - thereby establishing a position. See also Facilitation and Strategy.

Position Limit

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.

Premium

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.

  1. Option Premiums
  2. Rolling Option Trades for Duration & Premium

Price-Weighted Index

A stock index which is computed by adding the prices of each stock in the index, and then dividing by the divisor. See also Capitalization-weighted index, Divisor.

Payoff Diagram

See Profit Graph.

  1. Option Profit & Loss Diagrams
  2. OAP 080: The 3 Big Reasons Why Your Option Strategy Payoff Diagram Is Different Today Than At Expiration

Profit Graph

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.

Profit Range

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. See also Break-Even Point.

Profit Table

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 Graph.

Protected Strategy

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 Combination and Straddle.

Public Book (of orders)

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 Book Official, Market-Maker, and Specialist.

Put

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. See also Call.

  1. Covered Put
  2. Short Put
  3. Long Put

Ratio Calendar Combination

A strategy consisting of a simultaneous position of a ratio calendar spread using calls and a similar position using puts, where the striking price of the calls is greater than the striking price of the puts.

Ratio Calendar Spread

Selling more near-term options than longer-term ones purchased, all with the same strike; either puts or calls.

Ratio Spread

Constructed with either puts or calls, the strategy consists of buying a certain amount of options and then selling a larger quantity of more out-of-the-money options.

  1. Selling A Ratio Spread In VXX
  2. VXX Ratio Spread
  3. Now You Can Profit From Volatility Skew With Put Ratio Spreads

Ratio Strategy

A strategy in which one has an unequal number of long securities and short securities. Normally, it implies a preponderance of short options over either long options or long stock.

Ratio Write

Selling of call options in a ratio higher than 1 to 1 against the stock that is owned.

Resistance

A term in technical analysis indicating a price area higher than the current stock price where an abundance of supply exists for the stock and therefore the stock may have trouble rising through the price. See also Support.

What The Heck Is Support And Resistance For Stock Traders And How Can I Use It?

Return (on investment)

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

  1. Return on Capital vs. Return of Capital
  2. Targeting Your Portfolio Returns
  3. Calculating Expected Portfolio Return

Return if Exercised

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

Reversal Arbitrage

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

Rho

The expected change in an option's theoretical value for a 1 percent change in interest rates. See also Theoretical Value.

Risk Arbitrage

A form of arbitrage that has some risk associated with it. Commonly refers to potential takeover situations where the arbitrageur buys the stock of the company about to be taken over and sells the stock of the company that is effecting the takeover.

Roll Down

Close out options at one strike and simultaneously open other options at a lower strike.

Roll Forward (Out)

Close-out options at a near-term expiration date and open options at a longer-term expiration date.

Rolling

A follow-up action in which the strategist closes options currently in the position and opens other options with different terms, on the same underlying stock. See also Roll Down, Roll Forward, and Roll Up.

  1. Mechanics of Rolling
  2. Rolling Positions
  3. Rolling Option Trades for Duration & Premium

Roll Up

Close out options at a lower strike and open options at a higher strike.

Secondary Market

A market that provides for the purchase or sale of previously sold or bought options through closing transactions.

Series

All option contracts of the same class that also have the same unit of trade, expiration date and strike price.

Settlement Price

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 Mark-to-market.

Short Position

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).

Specialist

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. Most stock exchanges and some option exchanges utilize the specialist system of trading.

Spread Order

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.

Why You Underestimate The Power Of Order Spreading vs Bundling

Spread Strategy

Any option position having both long options and short options of the same type on the same underlying security.

Standard Deviation

A measure of the volatility of a stock. It is a statistical quantity measuring the magnitude of the daily price changes of that stock.

Pricing & Volatility

"Static" Return

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.

Stop-Limit 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 Stop Order.

Limit Orders

Stop Order

An 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.

Straddle

The purchase or sale of an equal number of puts and calls having the same terms.

  1. Short Straddle
  2. XHB Straddle (LIVE Closing Trade)
  3. How To Place A Short Straddle Option Strategy
  4. Straddle Adjustments

Strategy

With respect to option investments, a preconceived, logical plan of position selection and follow-up action.

  1. Strategy Selection Process
  2. How to Choose the BEST Options Strategy?

Strike 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.

  1. Option Strike Price
  2. Strike Price Anchoring with Probabilities

Striking Price Interval

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.

Sub-Index

See narrow-based index.

Suitability

A requirement that any investing strategy fall within the financial means and investment objectives of an investor.

Suitable

Describing a strategy or trading philosophy in which the investor is operating in accordance with his (her) financial means and investment objectives.

Support

A term in technical analysis indicating a price area 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. See also Resistance.

What The Heck Is Support And Resistance For Stock Traders And How Can I Use It?

Synthetic Put

A strategy equivalent in risk to purchasing a put option where an investor sells stock short and buys a call.

Synthetic Stock

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.

  1. Synthetic Short Stock
  2. Synthetic Long Stock

Technical Analysis

The method of predicting future stock price movements based on observation of historical stock price movements.

  1. Technical Analysis
  2. Technical Analysis Indicators & SIGNALS

Terms

The collective name denoting the expiration date, striking price, and underlying stock of an option contract.

Theoretical Value

The price of an option, or a combination of options, as computed by a mathematical model.

Theta

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. See Time Decay..

Time Decay

A term used to describe how the theoretical value of an option "erodes" or reduces with the passage of time. Time decay is especially quantified by Theta..

Trading Calendar Option Spreads – Using Time Decay To Your Advantage

Time Spread

See Calendar Spread.

Time Value

The portion of the option premium that is attributable to the amount of time remaining until the expiration of the option contract. Time value is whatever value the option has in addition to its intrinsic value.

Time Value Premium

The amount by which an option's total premium exceeds its intrinsic value.

Total Return Concept

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.

Tracking Error

The amount of difference between the performance of a specific portfolio of stocks and a broad-based index with which they are being compared. See also market basket.

Trader

An investor or professional who makes frequent purchases and sales.

  1. A Great Time To Be An Options Trader
  2. Kirk Duplessis, Trader
  3. New Options Trader?

Trading Limit

The exchange-imposed maximum daily price change that a futures contract or futures option contract can undergo.

Treasury Bill/Option Strategy

(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.

Type

The classification of an option contract as either a put or a call.

Uncovered Call Writing

A short call option position in which the writer does not own an equivalent position in the underlying security represented by his option contracts.

Uncovered Option

A written option is considered to be uncovered if the investor does not have an offsetting position in the underlying security. See also Covered.

Uncovered Put Writing

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.

Underlying Security

The security subject to being purchased or sold upon exercise of the option contract.

Undervalued

Describing a security that is trading at a lower price than it logically should. Usually determined by the use of a mathematical model. See also Overvalued and Fair Value.

Unit of Trading

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).

Variable Ratio Write

An option strategy in which the investor owns 100 shares of the underlying security and writes two call options against it, each option having a different striking price.

Vega

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

Vertical Spread

(1)Most commonly used to describe the purchase of one option and sale of another where both are of the same type and same expiration, but have different strike prices. (2)It is also used to describe a delta-neutral spread in which more options are sold than are purchased.

How Can I Exit A Vertical Option Spread Without Getting Creamed?

Volatility

A measure of the fluctuation in the market price of the underlying security. Mathematically, volatility is the annualized standard deviation of returns.

  1. Profiting From A Drop In Volatility With VXX
  2. No Time To Be Timid – Sell Volatility
  3. Pricing & Volatility
  4. Historical vs. Implied Options Volatility

Write

To sell an option. The investor who sells is called the writer.

Writing Covered Calls In Bear Markets – 4 Rules For Generating Profits During Market Declines