A
Accumulation - A stock or any financial instrument that shows higher volume while price is rising. Generally, this is considered price moving to equilibrium after a decline in price. Demand for the stock becomes dominant, and the trend of the stock turns up.
Ask Price- The price at which a seller is willing to sell.
Assign - To designate an option writer for fulfillment of his obligation to sell stock or buy stock . The writer receives an assignment notice from his broker which act on behalf of the Options Clearing Corporation.
At the Money - When an option's strike price is the same or close to the prevailing stock price.
B
Backspread - see Reverse Strategy.
Bearish - A Market condition where prices are expected to go down or are already in decline.
Bear Spread - An option strategy that profits when the underlying stock declines. The strategy can be implemented with either puts or calls and has limited risk. 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.
Bear Trap - A subjective term to describe a usually swift price decline that encourages short sellers to enter the market. It is considered a trap because the move snaps back an results in losses for those caught in the trap.
Beta - A measure of how stock prices to moves with the stock market as a whole. The lowest theoretical Beta is zero indicating no movement while a the highest Beta is 2 indicating extreme price action for small movements in the market.
Bid Price - The price at which a buyer is willing to pay.
Break Even Point- The stock price at which a strategy doesn't make or lose money. It generally is calculated the expiration date of the options involved in the strategy.
Breadth - The net number of stocks advancing versus those declining. When advances exceed declines the breadth of the market is considered strong. When the declines exceed advances the market is considered weak.
Breakout - Ocurs when price moves above or below resistance or support. Most breakouts fail, but successful breakouts can have strong directional moves.
Bullish - A subjective view that the market is strong and should rise or currently rising.
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.
Bull Trap - A move to the upside that encourages investors to take long positions which is quickly reversed and results in fast losses for participants on the long side.
Butterfly Spread - An option strategy that has both limited risk and limited profit potential. It's constructed by combining a bull spread and a bear spread. Three strike prices are used with the lower two being used in the bull spread and the higher two in the bear spread. The strategy can be done with either puts or calls.
C
Calendar Spread - An option strategy in which a short-term option is sold and a longer-term option is bought, both having the same strike price.
Calendar Straddle - A calendar straddle would consist of selling a near-term straddle and buying a longer-term straddle, both with the same striking price.
Calendar Combination- A calendar combination is a strategy that consists of a call calendar spread and a put calendar spread at the same time. The striking price of the calls would be higher than the striking price of the puts.
Call Option - An option which gives the holder the right to buy the underlying security at a specified price for a certain, fixed period of time.
Capitalization - The total amount of securities issued by a corporation. This may include: bonds, debentures, preferred stock, common stock and surplus.
CBOE - The Chicago Board Options Exchange; the first national exchange to trade listed stock options. Delivers free education at their site.
Chaos Theory - The study of nonlinear and dynamic systems. Chaos Theory states tht there is an order to everything, but appears like random events in the short term.
Common Stock - A form of corporation equity ownership represented in securities (stock) . It is a stock whose dividends are based on market fluctuations. It is riskier in comparison to preferred shares, in that in the event of bankruptcy , common stock investors receive their funds after preferred stock holders, bondholders, creditors, etc. Common shares on average perform better than preferred shares or bonds over time because they are purely a function of the stock market which has an upward bias. Holders of common stock are able to influence the corporation through votes on establishing corporate objectives and policy, stock splits, and electing the company's board of directors. Some holders of common stock also receive preemptive rights, which enable them to retain their proportional ownership in a company should it issue another stock offering. Additional benefits from common stock include earning dividends and capital appreciation .
Complex Systems - Complex systems are dynamic, contain critical levels and have a certain amount of noise or negative feedback.
Contingent Order - An order to buy stock and sell a covered call option that is given as one order to the trading desk of a brokerage firm. Also called a "net order." This is a "not held" order.
Contrary Opinion - The opposite belief that of the general public and Wall Street. An overall consensus of opinion, whether bullish or bearish, usually marks an overbought or oversold condition. An investor taking a contrary view will usually benefit in time. In Humphrey Neil's The Art of Contrary Thinking he concludes that "mass movements and public psychology are usually wrong, at least in the timing of events".
Cover - To buy back as a closing transaction an option that was initially sold or written.
Covered Call Write - A strategy in which one writes call options while owning an equal number of shares of the underlying stock. This strategy is often done when additional returns are desired in an underlying stock.
Covered Put Write - A strategy in which one sells put options and is short an equal number of shares of the underlying security. The mirror trade of the cover call wite.
Covered Straddle Write - A strategy in which an investor owns the underlying security and also writes a straddle on that security.
Credit Spreads - A trading strategy the involves the sale of one option and the purchase of another option in the same class and expiration but different strike prices. This investor collects option premium or credit for the trade.D
Delta - Measures how much the theoretical value of an option will change if the underlying stock moves up or down $1.00. Positive delta means that the option position will rise in value if the stock goes up. The closer a stock is to 1.00 or -1.00 the option position will respond like the actual long or short stock when the stock moves. Delta can fluctuate greatly due to extreme moves in the underlying.
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.
Diagonal Spread - Spreads 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.
Discount - An option trading at less than its intrinsic value. A futures contract is trading at a discount if trading price is less than the cash price of its underlying index or commodity. .
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 . it may be expressed in terms of price the stock could fall before a loss or it can be expressed as percentage of the current stock price.
E
Early Exercise Aassignment - The exercise or assignment of an option contract before its expiration date.
Equity Option - An option that has common stock as its underlying security.
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.
Exercise - To invoke the right granted under the terms of a listed options contract. The holder is the one who exercises. Call holders exercise to buy the underlying security, while put holders exercise to sell the underlying security.
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.
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.
Expiration Date - The day on which an option contract becomes void. The expiration date for listed stock options is the Saturday after the third Friday of the expiration month. All holders of options must indicate their desire to exercise, if they wish to do so, by this date.
Expiration Time - The time of day by which all exercise notices must be received on the expiration date. Technically, the expiration time is currently 5:00 PM on the expiration date, but public holders of option contracts must indicate their desire to exercise no later than 5:30 PM on the business day preceding the expiration date. The times are Eastern Time.
Ex-dividend Date - The date when buying a stock does not allow the buyer to receive the declared dividend. I you buy one day before the ex-dividend date, you will get the dividend payment. The price on or after the ex-dividend date is reflected in the stock priice to account for the transfer of equity out of the stock in the form of dividend payments.F
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.
Fundamental Analysis - A method of analyzing the prospects of a security by observing accepted accounting measures such as earnings, sales, assets, and so on.
G
Good Until Canceled (GTC) - A designation applied to some types of orders, meaning that the order remains in effect until it is either filled or canceled.
H
Hedge - A transaction consisting of two or more separate transactions with the objective of providing a greater chance of making a profit, although perhaps a smaller one than with a single transaction.
Hedge Ratio - The mathematical quantity that is equal to the delta of an option. It is useful in facilitation in that a theoretically riskless hedge can be established by taking offsetting positions in the underlying stock and its call options.
Horizontal Spread - An option strategy in which the options have the same striking price, but different expiration dates.
I
Implied Volatility - A measure of the volatility of the underlying stock, it is determined by using prices currently existing in the market at the time, rather than using historical data on the price changes of the underlying stock.
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 is targeted to sell-possibly at substantially higher prices.
Index - A compilation of the prices of several common entities into a single number.
Index Option - An option whose underlying entity is an index. Most index options are cash-based.
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.
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.
L
Last Trading Day - The third Friday of the expiration month. Options cease trading at 3:00 PM Eastern Time on the last trading day.
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.
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.
Limit - See Trading Limit.
Limit Order - An order to buy or sell securities at a specified price (the limit).
Listed Option - A put or call option that is traded on a national option exchange. Listed options have fixed striking prices and expiration dates.
Long - To be long is to own something.
M
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.
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 and the board brokers.
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.
Married Put and Stock-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.
N
Naked Option - see Uncovered Option.
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. Narrow-based indices are NOT subject to favorable treatment for naked option writers.
Neutral - Describing an opinion that is neither bearish or 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.
Non-Equity Option - An option whose underlying entity is not common stock; typically refers to options on physical commodities, but may also be extended to include index options.
O
Open Interest - The net total of outstanding open contracts in a particular option series. An opening transaction increases the open interest, while any closing transaction reduces the open interest.
Option - The right to buy or sell specific securities at a specified price within a specified time. A put gives the holder the right to sell the stock, a call the right to buy the stock. In recent years options on specific stocks have been listed in several exchanges so that it is now possible to trade these instruments in the same way that the underlying stocks can be bought and sold.
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.
Options Clearing Corporation (OCC) - The issuer of all listed option contracts that are trading on the national option exchanges.
Out of the Money - Describing an option that has no intrinsic value. A call option is out-of-the-money if the stock is below the striking price of the call, while a put option is out-of-the-money if the stock is higher than the striking price of the put.
Over-the-Counter Option (OTC) - An option traded over-the-counter, 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.
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.
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, for example. An option trading under parity is a discount option.
Physical Option - An option whose underlying security is a physical commodity that is not stock or futures. The physical commodity itself typically a currency or Treasury debt issue-underlies that option contract.
Position - 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. It also refers to facilitate; buy or sell a block of securities, thereby establishing a position.
Preferred Stock - A class of ownership in a corporation that has a higher claim on the assets and earnings than common stock . Preferred stock generally has a dividend that must be paid out before dividends to common stockholders and the shares usually do not have voting rights. The precise details as to the structure of preferred stock is specific to each corporation. However, the best way to think of preferred stock is as a financial instrument that has characteristics of both debt (fixed dividends) and equity (potential appreciation). Also known as "preferred shares ". Should preferred stock be converted to common stock, there may be dilution to existing holders of common stock and possible affect on management as common share will allow voting rights potentially affecting how the company is managed.
Premium - For options, the total price of an option contract. The sum of the intrinsic value and the time value premium. For futures, the difference between the futures price and the cash price of the underlying index or commodity.
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 breakeven. The price range between the two break-even points would be the profit range.
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.
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). The Ride The Flow System is an example of a protected strategy.
Public Book (of orders) - The orders to buy or sell, entered by the public, that are away from the current market. The board broker 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).
Put - An option granting the holder the right to sell the underlying security at a certain price for a specified period of time. See also Call.
R
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 out-of-the-money options.
Ratio Strategy - A strategy in which one has an unequal number of long securities and short securities. Normally, it implies a preponderance of short options over either long options or long stock.
Ratio Write - Buying stock and selling a preponderance of calls 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.
Return (on investment) - The percentage profit that one makes, or might make, on his investment.
Return If Exercised - The return that a covered call writer would make if the underlying stock were called away.
Return If Unchanged - 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.
Reverse Hedge - A strategy in which one sells the underlying stock short and buys calls on more shares than he has sold short. This is also called a synthetic straddle and is an outmoded strategy for stocks that have listed puts trading.
Reverse Strategy - A general name that is given to strategies which are the opposite of better known strategies. For example, a ratio spread consists of buying calls at a lower strike and selling more calls at a higher strike. A reverse ratio spread also known as a backspread consists of selling the calls at the lower strike and buying more calls at the higher strike. The results are obviously directly opposite to each other.
Roll Down - Close out options at one strike and simultaneously open other options at a lower strike.
Roll Forward - 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.
Roll Up - Close out options at a lower strike and open options at a higher strike.
Rotation - A trading procedure on the option exchanges whereby bids and offers, but not necessarily trades, are made sequentially for each series of options on an underlying stock.
S
Selling Climax - Exceptionally heavy volume created when panic-stricken investors dump stocks.Often this marks the end of a bear market and is a spot to buy.
Series - An option contracts on the same underlying stock having the same striking price, expiration date, and unit of trading.
Short (to be short) - Short Selling is normally a speculative operation undertaken in the belief that the prices of the shares will fall. It is accomplished by selling shares one does not own by borrowing stock from a broker. Most stock exchanges prohibit the short sales of a security below the price at which the last board lot was traded.
Short Covering - The process of buying back stock that has already been sold short.
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. The spread order may be either a debit or credit.
Spread Strategy - Any option position having both long options and short options of the same type on the same underlying security.
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.
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.
Strategy - With respect to option investments, a preconceived, logical plan of position selection and follow-up action.
Strike Price - The price at which the buyer of a call can purchase the stock during the life of the option or the price at which the buyer of a put can sell the stock during the life of the option.
Subindex - see narrow-based index.
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.
Synthetic Put - A security which some brokerage firms offer to their customers. The broker sells stock short and buys a call, while the customer receives the synthetic put. This is not a listed security, but a secondary market is available as long as there is a secondary market in the calls.
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.
Swing Trading -
Technical Analysis - The method of predicting future stock price movements based on observation of historical stock price movements.
Theoretical Value - The price of an option, or a spread, as computed by a mathematical model.
Time Spread - see Calendar Spread.
Time Value Premium - The amount by which an option’s total premium exceeds its intrinsic value.
Topping Out - A peak point where the sellers begin to outnumber the buyers.
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.
Trading Limit - The exchange imposed maximum daily price change that a futures contract or futures option contract can undergo.
Trend - The direction of a price movement. A trend in motion is assumed to remain intact until there is a clear change.
Triple Witching - The final hour of the stock market trading session on the third Friday of March, June, September, and December, when option contracts and futures contracts expire on market indexes used by program traders. The simultaneous expirations often set off heavy trading of options, futures and the underlying stocks, which can cause large fluctuations in the value of their underlying stocks.
Type - The designation to distinguish between a put or call option.
U
Uncovered Option - A written option is considered to be uncovered if the investor does not have a corresponding position in the underlying security.
Underlying Security - The security which one has the right to buy or sell via the terms of a listed 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.
V
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.
Vertical Spread - Any option spread strategy in which the options have different striking prices, but the same expiration dates.
Volatility - A measure of the amount by which an underlying security is expected to fluctuate in a given period of time. Generally measured by the annual standard deviation of the daily price changes in the security, volatility is not equal to the Beta of the stock.
W
Write - To sell an option. The investor who sells is called the writer.