Adjustments
An adjustment is a change to the terms of an options contract due to a corporate action such as a merger, stock split, dividend, acquisition, spin-off, or similar event. These changes can affect critical elements like the strike price, deliverable, expiration date, and multiplier. When a stock split, for instance, occurs (say, a 3-for-2 split), an adjusted option would represent 150 shares instead of the usual 100. Consequently, the premium needs adjusting too; purchasing one call (now covering 150 shares) at $4 would cost $600 due to the altered share quantity.
All Or None Order:
An All Or None Order (AON) is a directive in stock and options trading that mandates the complete fulfillment of the order, or none at all. Its crucial for transactions where partial execution could adversely affect the investment strategy, aiming for full order execution at the desired price and time.
American-style option
American-style options provide the holder the right to exercise the option at any time before its expiration date. This flexibility permits the holder to execute the option between purchase and expiration, allowing strategic decisions based on market movements.
Arbitrage
Arbitrage involves taking advantage of price variations for the same asset or similar assets in different markets at the same time. It essentially entails purchasing an asset at a lower price in one market and selling it at a higher price in another market, potentially generating a risk-free profit.
Ask / Ask price
The ask or ask price represents the value at which a seller is willing to sell their stock or option in the market. It is the minimum amount that the seller is willing to accept in exchange for their asset. The ask is a crucial factor for traders as it influences their buying decisions and overall market dynamics.
Asset
An asset is any resource owned by an individual or entity that is expected to provide future economic benefits. It has value that can be converted as cash or used to generate income. Examples include cash, accounts receivable, inventory, real estate properties, and securities (such as stocks and bonds).
Assigned (an exercise)
When youre assigned in options trading, it refers to being notified by the Options Clearing Corporation (OCC) informing you that your option has been exercised and you are obligated to fulfill the terms of the contract. This means you must either buy or sell the underlying asset at the predetermined price agreed upon in the option contract.
Assignment
An assignment is a notification issued by the OCC to a clearing member informing that an options contract holder has exercised their rights. When this happens, the option writer (the party who sold the option) is obligated to fulfill the terms of the contract by delivering the underlying asset and receiving the exercise price.
Assignment Notice
Assignment Notice is a formal notification sent to the seller of an option contract that the buyer has chosen to exercise their right to buy or sell the underlying asset at the agreed-upon strike price.
At-the-market order (also “market order”)
An at-the-market order (also known as a market order) is an order to buy or sell a security at the best available price in the market. This means the order will be executed immediately, regardless of the specific price, unlike limit orders that specify a desired price.
At-the-money / At-the-money option
An at-the-money (ATM) option is an option contract where the strike price (the predetermined price at which the underlying asset can be bought or sold) is equal to the current market price of the underlying asset. This means that the option has no intrinsic value, as the holder can neither buy nor sell the underlying asset at a profit immediately. Its a crucial point for options traders as the price movement from this position determines whether the option will gain or lose value.
Automatic exercise
Automatic exercise is a protection procedure implemented by the Options Clearing Corporation (OCC) to safeguard an options contract holder, particularly when the option is about to expire in-the-money. This process automatically exercises the option on the expiration date if the holder did not take any action.
Autotrading
Autotrading with Schaeffers Investment Research allows you to automate the execution of options trades provided by their research team. This means that your broker will swiftly execute these trades based on Schaeffers recommendations as soon as they are released, maximizing the potential to capitalize on recommended opportunities, even without your manual intervention.
Averaging down
Averaging down is an investment strategy where an investor buys additional shares of a stock or an option at a lower price than the average price they previously paid. This strategy aims to lower their overall average cost per share and potentially maximize profits when the price of the asset recovers.
Back Month
Back month refers to the expiration month that is furthest away in time within the spread. Basically, its the option contract with the longer runway before it expires.
Backspread
A backspread is an options trading strategy involving buying more long options than short options on the same underlying asset, with the same expiration date but different strike prices. This creates a position with reduced sensitivity to minor fluctuations in the underlying assets price (known as delta neutrality). However, different types of backspreads (e.g., call backspread, put backspread) can be used to limit potential gains in one direction while limiting potential losses in the other, depending on the market expectations and desired outcome.
Barrier Option
A barrier option is a type of derivative contract whose existence and terms are contingent upon the price movement of the underlying asset. It includes specific predefined conditions, known as barriers, that determine whether the option becomes active (knock-in) or nullified (knock-out).
Basket Option
Basket options are a type of option that doesnt put all its eggs in one basket (pun intended!). Instead of focusing on a single underlying asset like a stock or currency, it ties its fate to a basket, a group of different securities like stocks, bonds, or even commodities.
BATS
BATS, also known as Cboe BZX Options Exchange, is a fully electronic options exchange operated by Cboe Global Markets, Inc. It is a leading exchange in the United States, offering a wide range of options contracts on stocks, ETFs, and other underlying assets.
Bear Market
A bear market is a period of sustained decline in the overall stock market, typically defined as a drop of 20% or more from recent highs. Its like a chilly season for investors, where optimism wanes and fear takes root.
Bear Put Ladder Spread
The bear put ladder spread is an intricate options trading strategy employed by investors who hold a bearish view on an underlying security. Its considered an advanced strategy due to its complexity and involves multiple options contracts with varying strike prices and expirations.
Bear spread (call)
A bear call spread involves a two-legged options strategy that combines writing (selling) one call option with a lower strike price and simultaneously purchasing another call option with a higher strike price. Selling 1 XYZ June 60 call and acquiring 1 XYZ June 65 call would be an example of a bear call spread.
Bear spread (put)
A bear put spread involves buying a put option with a higher strike price and simultaneously selling a put option with a lower strike price, all on the same underlying asset and with the same expiration date. Purchasing 1 XYZ June 60 put and selling 1 XYZ June 55 put would be an example of a bear put spread.
Bear Trap
A bear trap is a market scenario that initially signals or appears to confirm a bearish trend or market downturn, luring traders or investors into believing that the market will continue moving downwards. However, contrary to expectations, the market reverses course and moves upward instead, catching those who entered bearish positions off guard.
Bearish
A bearish outlook reflects an anticipation of declining or lower prices for a particular security, market, or overall economy. It indicates a negative sentiment where investors or traders expect the value of a security to decrease.
Bearish debit spread
A bearish debit spread is an options strategy designed to profit from a decline in the price of the underlying asset. It involves selling a lower-strike put option (short put) and buying a higher-strike put option (long put). This strategy results in a net debit (cost) to the investors account, meaning they pay money upfront to initiate the trade.
Beta
Beta is a numerical value (between -1 and +1) that measures the volatility of a stocks price compared to the movement of a broader market index, typically the S&P 500. A beta of more than 1 indicates the stock tends to amplify market movements, both up and down, meaning its more volatile than the market; : Beta of 1 suggests the stocks price fluctuations generally move in line with the market and Beta less than 1 implies the stock tends to be less volatile than the market, meaning it experiences smaller price swings.
Bid price
The bid price refers to the highest price at which a buyer in the market is currently willing to purchase a particular security, such as a stock, bond, or option.
Bid/Ask quote
The bid/ask quote refers to the two most recent prices displayed for an option contract. It provides a vital information about the markets current sentiment and the potential cost of buying or selling an option.
Bid/Ask spread:
Thes Bid/Ask spread is the difference between the highest price a buyer is willing to pay for an option contract (bid price) and the lowest price a seller is willing to accept (ask price). This spread highlights the discrepancy or gap between the buying and selling prices in the market.
Binomial Options Pricing Model
The Binomial Options Pricing Model (BOPM), also known as the Cox-Ross-Rubinstein model, is a well-established and widely used numerical method for pricing options. This model offers a discrete-time framework for valuing options, particularly American-style options, by breaking down the time to expiration into smaller intervals.
Black-Scholes formula
The Black-Scholes formula is a mathematical model used to calculate the theoretical fair price of an option contract. It considers the current stock price, strike price, time until option expiration, prevailing interest rates, dividends (if any), and the volatility of the underlying security of the account. This formula was a groundbreaking contribution, pioneering a new method for valuing options and derivatives. In recognition of its innovation, two of its creators, Fischer Black and Myron Scholes, were awarded the Nobel Prize in Economic Sciences in 1997.
Blackout Period
A blackout period is a specific timeframe during which employees holding stock options are prohibited from buying, selling, or exercising those options.
Bollinger Bands:
Developed by John Bollinger in the 1980s, Bollinger Bands are a technical analysis tool used to assess an assets volatility and identify potential trading opportunities. It consist of bands plotted above and below a stocks 21-day moving average. These bands represent the upper and lower boundaries derived from two standard deviations, encompassing approximately 95 percent of the price action observed over the preceding 21 days.
BOX
The BOX Options Exchange (BOX) is an equity options trading platform in the United States. It is an electronic trading platform that facilitates the trading of various options contracts.
Box spread
A box spread is an options strategy involving four contracts (two calls and two puts with the same expiration date) designed to benefit from minimal price movement in the underlying asset. By buying and selling calls and puts at different strike prices, the strategy aims to achieve a high probability of profit within a narrow price range. However, its not entirely riskless due to factors like transaction costs, early exercise risk, and assignment risk. Ideal conditions for profit include no time decay, no transaction costs, no dividends, and perfectly flat price movement within the strike price range. An example of a box spread would be purchasing 1 XYZ June 60 call and selling 1 XYZ June 65 call, while simultaneously purchasing 1 XYZ June 65 put and selling 1 XYZ June 60 put.
Breakeven point:
The breakeven point for an options strategy is the stock price at which the strategy will neither generate a profit nor incur a loss.
Breakout
In the world of financial markets, breakout refers to a significant price movement where a security breaks through a previously established resistance level or support level. This movement is often accompanied by increased trading volume and signifies a potential shift in the prevailing market sentiment.
Broker
A broker is an individual or firm that acts as an intermediary or agent who facilitates securities transactions on behalf of the clients or customers.
Broker Commissions
Broker commissions are the fees charged by a broker for their services in executing buy and sell orders on behalf of their clients. These fees represent a form of compensation for the brokers role in facilitating trades within the financial market.
Bull (or bullish) spread
A bull spread is an options trading strategy that seeks to profit from a rise in the price of the underlying asset. It involves using two or more options contracts with the same expiration date but different strike prices.
Bull Condor Spread
A complex options trading strategy utilized by traders with a bullish outlook on an underlying security but anticipate moderate price movement within a specific range.
Bull Market
A bull market is a period of sustained upward movement in the overall market, characterized by rising asset prices, increased investor confidence, and an optimistic outlook.
Bull spread (call)
A bull call spread is an options strategy that involves simultaneously buying a call option with a lower strike price (the long leg) and writing a call option with a higher strike price (the short leg), both on the same underlying asset and with the same expiration date. Acquiring 1 XYZ June 60 call and selling 1 XYZ June 65 call would be an example of a bull call spread.
Bull spread (put)
A bull put spread is an options strategy that involves simultaneously writing (selling) a put option with a higher strike price (the short leg) and buying a put option with a lower strike price (the long leg), both on the same underlying asset and with the same expiration date. Selling 1 XYZ June 60 put and purchasing 1 XYZ June 55 put would be an example of a bull put spread.
Bull Trap
A bull trap is a deceptive market scenario that lures investors to confirm the beginning of a bull market or a significant upward trend. However, its a false signal, as the market reverses its direction shortly after, moving downward instead of continuing the expected upward trend.
Bullish
Bullish is a term used in the financial world to describe a positive outlook or expectation that the price of a security, such as a stock, bond, or commodity, will increase in the future.
Bullish credit spread
A bullish credit spread is an options strategy that involves selling a higher-strike put option and simultaneously purchasing a lower-strike put option on the same underlying asset with the same expiration date. This results in a net credit to the investors account, meaning they receive money upfront when entering the trade.
Bullish debit spread
A bullish debit spread is implemented by purchasing a lower-strike call and simultaneously selling a higher-strike call option on the same underlying asset with the same expiration date. This results in a net debit from the investors account, meaning they pay upfront to enter the trade.
Butterfly spread
A butterfly spread is an options trading strategy that involves multiple legs and is used when a trader anticipates minimal volatility in the underlying assets price. A long butterfly spread established by buying an in-the-money option, selling two at-the-money options, and buying an out-of-the-money option. The goal of this strategy is to establish it for a net credit, meaning the premium received from the at-the-money options sold is higher than the cost of the other options bought.
Buy to close
Buy to close is another way to say closing purchase in options trading. It refers to the act of buying back an options contract that you previously sold, thereby closing out your short position.
Buy to open
Buy to open is another way to say opening purchase in the context of options trading. It refers to the act of buying a new options contract and establishing a new long position.
Buy-write
A buy-write is an options trading strategy combining a long stock position with the simultaneous writing of call options on the same underlying asset and with the same expiration date. It is essentially a covered call position, offering investors a way to generate income from their holdings while limiting downside risk. An example of a buy-write strategy is purchasing 500 shares of XYZ stock and selling 5 XYZ June 60 calls simultaneously.
C2
C2 is one of the options exchanges operated by the Chicago Board Options Exchange (Cboe). It was designed to complement the offerings of its parent exchange, providing a platform for trading various options products.
Calendar spread
A calendar spread is an options strategy involving simultaneously buying and selling options of the same type (call or put) and strike price, but with different expiration dates. Typically, you buy a longer-term (far-term) option, giving you the right to exercise at a later date and sell a shorter-term (near-term) option, granting the buyer the right (or obligation) to exercise sooner.
Calendar Straddle
A Calendar Straddle is an advanced options strategy designed to potentially profit from an underlying security maintaining a neutral stance while benefiting from potential changes in volatility or movement in the future.
Call
A call option is a type of financial contract that provides the holder (buyer) the right, but not the obligation, to purchase a specific underlying asset at a predetermined price (known as the strike price) within a specified timeframe.
Call option
A call option is a financial contract that grants the holder (buyer) the right, but not the obligation, to purchase a specified quantity of an underlying asset at a predetermined price (known as the strike price) within a set period. This period extends until the options expiration date.
Call ratio backspread
A call ratio backspread is an options trading strategy that combines a directional trade with a hedging component, offering limited risk and potentially unlimited reward.
Called away
Called away and assignment are closely related terms in options trading, both referencing the process where a call option writer is obligated to sell the underlying asset to the option buyer. This term specifically refers to the perspective of the call option writer. It emphasizes the involuntary nature of the transaction, highlighting that the writer is forced to sell their shares due to the option holder exercising their right to purchase them.
Capital
Capital refers to the financial assets or resources possessed by an individual, company, or entity that hold value and contribute to their wealth or economic well-being. It represents the wealth used to generate income or for investment purposes.
Capital Gains
Profits earned from selling an investment (such as stocks, bonds, or real estate) at a higher price than the original purchase price. Capital gains are a key source of return for investors and come in two main types: short-term (held for less than a year) and long-term (held for a year or more), often taxed differently. Some mutual funds specifically aim to achieve long-term capital gains for their investors through focused investment strategies.
Capital Gains Tax
Capital gains tax is a type of tax levied on the profits earned from the sale or disposal of certain assets, such as stocks, bonds, real estate, precious metals, or other investments that have appreciated in value.
Carry / Carrying cost
Refers to the expenses associated with holding or carrying a financial asset or investment position over a certain period.
Cash Settled Option
A cash-settled option is a type of derivative contract where, upon exercise or expiration, the profit or loss is settled in cash rather than through the exchange of the underlying asset.
Cash settlement amount
This refers to the net amount received or paid when an index option is exercised and settled in cash instead of physical delivery of the underlying index. It is the difference between exercise price and exercise settlement value.
Chain
A formatted table displaying comprehensive information about specific options contracts for an underlying asset. It typically includes details like strike price, expiration date, bid/ask prices, open interest, and implied volatility. Options chains are valuable tools for traders to analyze potential profits and losses, compare different options, and make informed trading decisions.
Charm
Charm represents the rate of change of an options delta () with respect to time. In simpler terms, charm tells you how fast the delta of an option is changing as time passes.
Chicago Board of Trade (CBOT)
The CBOT, founded in 1848, boasts a rich history and holds the coveted title of the oldest derivatives exchange globally. The CBOT specializes in trading standardized contracts known as futures and futures-options, offering an avenue for managing risk and speculation across various asset classes.
Chicago Board Options Exchange (CBOE)
The CBOEs role in creating listed options in 1973 was a game-changer for the options market. These standardized contracts, traded on an auction-style platform similar to stock exchanges, brought transparency and ease of access to options trading, paving the way for its widespread adoption. CBOE holds a prominent position within the U.S. options exchanges. Its historical achievements and ongoing operations have solidified its status as a significant player in the options trading realm.
Chicago Mercantile Exchange (CME)
The CME, or Chicago Mercantile Exchange, is a financial heavyweight in the world of futures and options trading. Think of it as a giant marketplace where people can buy and sell contracts that agree on a future price for various assets.
Chooser Option
Also known as a compound option, is a specialized type of option that grants the holder the right to choose, at a predetermined point within the contracts duration, whether the option will become a call or a put option.
Class of options
A class of options encompasses all options contracts related to the same underlying security and of the same type, either calls or puts.
Clearinghouse
A clearinghouse is an entity, often associated with an exchange, that ensures the smooth execution of trades by guaranteeing the fulfillment of contracts. It acts as an intermediary between buyers and sellers, essentially becoming the buyer for every seller and the seller for every buyer. This setup ensures the completion of transactions and minimizes the risk of default. For instance, in the world of listed equity options, the OCC serves as the clearinghouse. It steps in to guarantee the performance of options contracts, maintaining stability and trust within the market by managing the obligations of both parties involved in a trade.
Close
The specific time at the end of a trading day when a market officially ceases trading and final prices for all assets are calculated. Closing prices are crucial for determining valuations, settling open positions, and influencing market sentiment for the next trading session. While closing times may vary depending on the market and asset class, they mark a key point in the trading cycle for investors and traders to assess their daily gains or losses.
Close / Closing transaction
Refers to the act of offsetting an existing open position in an option contract in the market by executing an offsetting purchase or sale of the same option contract. This essentially means undoing your previous action in that option. To close a long option position, you sell the same option contract you previously bought. Conversely, to close a short option position, you buy the same option contract you previously sold.
Closeout date
Refers to the specific date set by an options trader to exit a position if it hasnt reached the desired level of profit. This predefined date acts as a time stop in the traders strategy, ensuring that if the position hasnt met the targeted profit by this date, the trader will close the position.
Closing Order
An order used to exit an existing position in an asset (like stocks or options) by buying to close (for short positions) or selling to close (for long positions). This can be done to take profits, limit losses, or adjust ones trading strategy.
Closing price
Refers to the last price at which a trade occurred for that security during a particular trading day.
Closing sale (sell to close)
A closing sale, also known as sell to close, occurs when an investor, who initially acquired an option, decides to exit or close their position by selling an option contract that matches the terms of the one they originally purchased. This action effectively offsets or cancels out the existing position, resulting in the reduction of the open interest for that particular option.
Closing Transaction
A closing transaction is an action taken by a trader to eliminate or reduce an existing open position in an option contract, whether its a long position (by selling to close) or a short position (by buying to close).
Collateral
Collateral refers to assets pledged by a borrower to secure a loan. These assets serve as a guarantee to the lender that the loan will be repaid, even if the borrower defaults.
Combination Order
A combination order, in trading, refers to a single order that combines or groups together multiple individual orders for different securities or contracts. This type of order allows traders to execute multiple transactions simultaneously with specific conditions or criteria.
Commodity Option
A type of option where the underlying asset is either a physical commodity (like oil, gold, or wheat) or a futures contract for that commodity. Commodity options are commonly used for hedging existing positions or speculating on future price movements. For example, a farmer might buy a call option on corn futures to secure a minimum selling price for their upcoming harvest.
Compound
A type of option where the underlying asset is not a traditional asset like a stock or commodity, but another contract like another option, a futures contract, or certain swaps.
Confirmation statement
A confirmation statement is a document issued by a brokerage firm to a customer following the initiation or closure of an options position. This statement provides detailed information about the transaction, including the number of contracts bought or sold and the specific prices at which these transactions were executed. It serves as a proof of trading activity and ensures transparency.
Consensus estimate
The consensus estimate in the context of stock earnings refers to the average of all the individual forecasts made by analysts who closely monitor a particular stock. Prior to a company announcing its quarterly results, these analysts predict what they expect the companys earnings to be for that period. The consensus estimate is derived from averaging all these individual forecasts.
Contingency order
An instruction placed by an investor to execute a transaction in one security based on specific conditions related to the price movement of another security. For example, writing a call option (e.g., XYZ June 60 call) at a specified price (e.g., $2.00) based on a condition related to the price of the underlying stock (e.g., XYZ stock being at or below $59).
Contingent Order
A type of order that allows a trader to define specific conditions under which their existing position will be automatically closed. These conditions, often linked to price movements or market events, act as triggers that activate the order and execute the exit once met. Common examples include stop-loss, take-profit, and trailing stop-loss orders.
Contract
Contract refers to a specific agreement or instrument created by the Options Clearing Corporation (OCC). This contract represents the right, but not the obligation, to either buy (in the case of a call option) or sell (in the case of a put option) a particular underlying asset at a predetermined price within a specified period.
Contract Neutral Hedging
Contract neutral hedging is a strategy used by traders to hedge their existing positions in an underlying security by purchasing options in quantities that correspond to the number of units of the security they hold.
Contract Range
The span of prices, from highest to lowest, at which an option contract has traded throughout its lifetime. This range reflects market activity and can signal sentiment, volatility, and potential trading opportunities. Its distinct from the fixed strike price range offered for each expiration date.
Contract size
The contract size in options trading refers to the standardized quantity of the underlying asset that is covered by a single options contract. For equity options, the standard contract size typically represents 100 shares of the underlying stock which applies to both puts and calls.
Contrarian theory
The Contrarian Theory, particularly in Schaeffers philosophy, goes against the idea of following the crowd or consensus. Instead, it suggests that when the majority of investors support a current price trend, it might indicate a situation where the market is already pricing in the consensus expectation. Contrarians believe that such moments might lead to situations where the market could be overbought or oversold.
Contrarians focus on buying assets or securities when they perceive that the general sentiment or expectations toward those assets are particularly low. This doesnt necessarily mean investing in cheap or undervalued stocks (which aligns more with value investing); rather, it involves identifying situations where the market sentiment is pessimistic, often resulting in low expectations.
Control or Restricted Loan
A specialized margin loan where the borrower uses control or restricted securities as collateral to borrow from a broker.
Control Persons, Insiders or Affiliates
Individuals or entities with significant influence over a companys management or access to non-public information. This typically includes officers, directors, policy-making executives, major shareholders (often owning 10% or more of outstanding shares), and entities linked to them through ownership ties or business relationships. Spouses, family members sharing the same household, and entities controlled by a control person may also be considered affiliates under Rule 144. To prevent insider trading and ensure market fairness, securities trading by control persons is subject to stricter regulations and reporting requirements. This includes complying with Rule 144 documentation and limitations when selling control securities, even if theyre not technically restricted. Remember, definitions and regulations regarding control persons and insider trading vary across different countries.
Convexity
Convexity in options is a significant advantage that stems from the dynamic nature of an options delta concerning changes in the underlying stocks price. When the stock price moves, the delta of an option changes as well, leading to whats known as positive curvature.
For instance, when a stock drops, a call options delta decreases. This means that for each subsequent drop in the stock price, the option will lose proportionally less value compared to the initial drop. Conversely, as the stock price increases, a call options delta rises, allowing the option holder to gain more value for each successive increase in the stock price.
Convexity can also refer to a strategy in trading or investing where a trader allocates more capital in successive trades during a winning streak and reduces capital allocation during a losing streak. This approach aims to safeguard capital during losses and capitalize more during profitable periods, helping to manage risk and maximize gains over time.
Cost-to-Carry
Cost-to-carry represents the ongoing expenses associated with holding an options or stock position, including interest on margin loans, dividends paid on shorted stocks, storage costs for physical commodities, and other related fees. Its essential to factor in these costs when assessing the overall profitability of a trade.
Cover
Signifies the offsetting transaction you take to close out a short position you previously established.
Covered
Thats a comprehensive definition! When an option writer holds or has an opposing position that corresponds directly to the written (sold) options, those written options are considered covered. Having covered positions reduces the risk for the option writer, as they have a corresponding position that can fulfill the obligations of the written options if they are exercised. These covered positions also affect margin requirements because having a covered position generally requires less margin than an uncovered (naked) position due to the reduced risk exposure.
Covered put / Covered cash-secured put
A covered put or covered cash-secured put is an options trading strategy where a put option is written (sold) while having enough cash set aside in the trading account to cover the potential purchase of the underlying stock if the put option is exercised.
Covered straddle
A covered straddle is an options strategy where a call and a put with the same strike price and expiration date are written (sold) against each 100 shares of the underlying stock. However, its essential to note that despite its name, the covered straddle isnt fully covered as the short put, if assigned, may require the purchase of additional stock.
Credit
Refers to any transaction that increases the accounts cash balance. Its essentially the opposite of a debit, which decreases the balance.
Credit spread
Credit spreads are option strategies designed to increase your accounts cash balance when established. They achieve this by selling options contracts that generate premium income while simultaneously buying other options contracts with the same underlying asset but different strike prices and/or expiration dates.
Currency Option
A type of option contract that gives the holder the right (but not the obligation) to buy or sell a specific currency at a predetermined price by a certain date. Currency options are used for various purposes, including speculating on exchange rate movements, hedging existing currency positions, and generating income through option premiums. Common currency pairs traded with options include EUR/USD and USD/JPY.
Curvature
Curvature, also known as Gamma, measures the rate of change of an options delta for a one-unit change in the price of the underlying stock. While delta tells you how much an options price changes with a small change in the stock price, curvature tells you how quickly that delta itself is changing.
Cycle
Cycle refers to the expiration dates associated with various series of options. Options contracts within a cycle typically have expiration months falling into one of three cycles: January Cycle includes expiration months of JAJO (January, April, July, & October), February Cycle includes expiration months of FMAN (February, May, August, & November), and March Cycle includes expiration months of MJSD (March, June, September, & December).
Day order
A type of option order that instructs the broker to cancel any remaining portion of the buy or sell request that hasnt been filled by the close of trading on the day it was placed. Day orders offer risk management benefits by limiting exposure to potential overnight market movements, but may cause missed opportunities if prices change favorably outside trading hours. They are commonly used for managing short-term options positions or controlling overnight risk exposure.
Day trade
A day trade refers to the opening and closing of a position in a financial assetsuch as stocks, options, or other securitieswithin the same trading day. In essence, it involves buying and selling (or selling short and covering) the same asset within a single trading session.
Day trader
A stock or options trader who actively buys and sells securities within the same trading day. Day traders often look for short-term profit opportunities by exploiting market movements or implementing specific trading strategies.
Day Trading
An active trading style characterized by initiating and exiting positions within a single trading session, primarily focusing on stocks, options, or other short-term instruments. Driven by motivations like capitalizing on intraday inefficiencies or executing specific trading strategies, day traders face high-frequency trading, volatility, and psychological pressure, requiring rigorous risk management and discipline.
Debit
Money paid out from an account, resulting in a decrease in the available balance. This can happen through withdrawals, purchases, automatic payments, or fees. Debits are the opposite of credits, which add money to your account. Think of it like paying for something every debit you make reduces the overall amount of money you have available.
Decay
Decay, in the context of options trading, refers to the reduction in the value of an option over time as it approaches its expiration date. Quantified by theta, it plays a crucial role in determining an options value and influences the profitability of various options trading strategies. Visualizing decay curves with different strike prices and expiration dates can be helpful for making informed trading decisions.
Deep discount broker
A type of broker who charges very low fees for trading stocks and other securities. Their primary focus is to offer minimalistic services, often stripped-down from additional features, research tools, or advisory services, in exchange for very low commission fees.
Deep in the money
An informal term used to describe an option thats significantly in the money, meaning its strike price is far below the current price of the underlying asset. Think of it like being way ahead in a game its unlikely for the option to lose its value before expiration. Deep in the money options offer lower potential profit than other options but also involve less risk of losing money.
Deep out of the money
An options contract where the current market price of the underlying asset is significantly distant from the options strike price. This condition indicates that the option has very little to no intrinsic value and a low likelihood of moving into a profitable position (in the money) before its expiration.
Delivery
Refers to fulfilling the terms of an options contract after receiving notification of assignment. It pertains to the obligations that arise when an option is exercised, resulting in the transfer of the underlying asset or its cash equivalent based on the type of option and the position held.
Delta
A quantitative measure of the theoretical value change in an option due to a one-unit shift in the underlying assets price. Understanding Delta plays a crucial role in options pricing, strategy development, and risk management, allowing traders to assess potential price movements and make informed decisions about buying, selling, or hedging their positions.
Delta hedging
An options trading strategy employed by traders to manage their exposure to price movements in the underlying asset. It involves adjusting the quantity of the underlying asset, typically stocks, to offset the changes in the value of an options portfolio concerning price movements in the underlying asset.
Delta Neutral Hedging
Delta neutral hedging is a risk management strategy employed by traders to minimize the impact of small price movements in the underlying asset. It involves adjusting positions to maintain a delta-neutral position, where the overall delta of the combined positions is balanced or hedged.
Delta Neutral Trading
Delta neutral trading is a strategy used by traders to construct positions that are relatively immune to small price movements in the underlying asset while profiting from substantial price swings in either direction.
Delta Value
A key Greek letter quantifying the first derivative of an options price with respect to the underlying asset price.
Depository Trust & Clearing Corporation
A prominent financial services company that primarily focuses on providing clearing and settlement services within the financial markets. DTCC plays a crucial role in maintaining the integrity and stability of financial markets by providing clearing, settlement, and other related services, fostering transparency, efficiency, and risk mitigation in securities transactions.
Derivative / Derivative security
A derivative or derivative security is a financial instrument whose value is derived from, or dependent on, the value of an underlying asset or group of assets. This underlying asset could be a stock, bond, commodity, currency, market index, or even another derivative.
Diagonal spread
A trading strategy involving buying a call or put option (longer expiration) while simultaneously selling a similar option of the same type with a higher strike price and a shorter expiration. For example, buying one call option with a strike price of $60 expiring in May and simultaneously writing one call option with a strike price of $65 expiring in March.
Diagonal spread
A type of options strategy that involves both buying and selling calls or puts with different strike prices and expiration dates.
Directional Outlook
An investors expectation regarding the future price movement (upward, downward, or sideways) of a security, informed by analysis of economic trends, company fundamentals, technical indicators, and market sentiment.
Directional Risk
Directional risk is the potential for losing money if the price moves in the opposite direction you expected. For example, selling calls exposes you to the risk of the stock price going up, which means you might have to buy it back at a higher price, incurring a loss. Remember, this risk can affect your entire portfolio, so managing it wisely is crucial.
Discount
When an option is trading at a price lower than its intrinsic value, its referred to as trading at a discount or being discounted.
Discount broker
A discount broker is a brokerage firm that offers trading services at lower commission rates compared to traditional or full-service brokers. While discount brokers provide fewer additional services, such as investment research or personalized advice, they focus on executing trades at reduced costs.
Discount Option
An option contract trading below its intrinsic value, calculated as the difference between the underlying assets price and the strike price for call options (underlying > strike) or vice versa for put options (underlying
Discretion
Discretion in trading refers to the authority granted by an investor to a broker or account executive to use their judgment and make decisions regarding the execution of an order. It can vary in terms of limitations and the level of freedom given to the broker.
Diversification
A strategy of holding various investments like stocks, bonds, or even options in different companies and industries. This strategy may help mitigate risk because if one investment falls, the other investment that may be doing better may help balance it out and potentially mitigate losses. Diversification may also reduce overall profits.
Dividend
Dividends are a portion of a companys profits distributed to its shareholders as a form of reward or return on their investment. They are typically paid out regularly, often on a quarterly basis, and can take various forms:
Double top
A double top is a bearish technical chart pattern observed in the financial markets, particularly in stock trading. It occurs when the price of an asset reaches a peak, declines, rallies back to a similar level to form a second peak (resembling the letter M), and then experiences a subsequent decline.
Downside Protection
Downside protection refers to strategies or mechanisms utilized by investors and traders to mitigate potential losses resulting from a decline in the value or price of an underlying asset. This protection is often sought after to limit the downside risk in an investment or trading position.
Downtrend
A stock price that keeps going lower over time. Its not just a single dip, but a series of downward movements, which can be gradual, steep, or even jerky depending on the situation.
Dynamic Position
An actively managed investment position that undergoes frequent adjustments through buying, selling, or rebalancing of holdings to optimize its alignment with a specific investment objective, such as income generation, risk mitigation, or exploiting market inefficiencies.
Early Assignment
Early assignment refers to a situation in options trading where the holder (buyer) of an option exercises their right to buy or sell the underlying asset before the contracts expiration date. This action obligates the writer (seller) of the option to fulfill their contractual obligations ahead of the agreed-upon expiration date.
EDGX
Cboe EDGX Options Exchange is part of the Cboe Options Exchange family operated by Cboe Global Markets. EDGX Options is a platform specifically focused on providing options trading services. EDGX Options, alongside other Cboe exchanges, contributes to the overall liquidity and functionality of the options market, offering a platform for traders and investors to execute options trades efficiently and transparently.
Efficient Market Hypothesis (EMH):
The Efficient Market Hypothesis (EMH) posits that asset prices efficiently reflect all publicly available information, leading to random future price movements. It proposes three levels of efficiency: the weak form suggests technical analysis is ineffective due to rapid price adjustments; the semi-strong form implies that even fundamental analysis cannot consistently outperform the market; and the strong form postulates that even insider information is already incorporated into prices, preventing above-average profits. While highly influential, EMH faces numerous criticisms for potential market inefficiencies, behavioral biases, and information asymmetries. Understanding the various facets of EMH and its limitations is crucial for informed investment decisions and strategic portfolio management.
Employee Stock Options
Employee stock options are a type of compensation granted to employees, offering the right to purchase company shares at a pre-determined price by a specific date. These options incentivize employee commitment and align their interests with company performance. Different types of options exist, such as ISOs with tax benefits, NSOs subject to income tax, and RSUs vesting over time, each with its own characteristics and tax implications.
Equity
In the context of a margin account, equity represents the portion of the accounts total value that the account owner truly owns outright, considering the borrowed funds (margin loans) used for trading. Equity serves as a measure of the account owners actual ownership stake in the securities held in the account.
Equity option
An equity option is a type of financial derivative that gives the holder the right, but not the obligation, to buy or sell a specified number of shares of an individual stock or an exchange-traded fund (ETF) at a predetermined price (strike price) within a specified period (until expiration).
Equivalent strategy
An equivalent strategy, in options trading, refers to a combination of options or positions that offer an identical risk-reward profile to another strategy. For example, a long call spread and a short put spread on the same stock at the same price can both achieve similar potential gains and losses. Knowing this flexibility gives you more options to manage your investments!
Estimated Exercise Cost
The estimated exercise cost represents the anticipated total cost associated with exercising a stock option, calculated by multiplying the grant price by the number of options exercised. While this provides an initial guideline, the actual exercise cost at execution may differ due to market fluctuations, potential commissions and fees, and relevant tax implications.
Estimated Gross Sale Proceeds
The estimated exercise cost is a calculated projection of the total expenses associated with exercising stock options. Its computed by multiplying the grant price (the predetermined price at which the options were initially granted) by the number of options being exercised.
The formula for estimated exercise cost is:
Estimated Exercise Cost=Grant PriceNumber of Options ExercisedEstimated Exercise Cost=Grant PriceNumber of Options Exercised
Estimated New Cash Proceeds
Estimated New Cash Proceeds represent the projected final cash received after executing an exercise and sell order for stock options. This post-deduction estimate accounts for costs like commissions, fees, and relevant tax liabilities, particularly for non-qualified options.
Estimated Share Proceeds
Estimated Share Proceeds represent the projected value of the underlying asset acquired through an exercise and hold order for stock options. While this provides an initial forecast, the actual share proceeds may differ at execution due to market fluctuations, potential deductions for exercise costs (commissions, fees), and relevant tax liabilities, particularly for non-qualified options.
Estimated Taxable Income
The estimated taxable income represents an approximation of the income subject to ordinary income tax resulting from an exercise and sell or an exercise and hold order for non-qualified stock options. This estimate provides an overview of the projected taxable income after executing such orders.
Estimated Total Cost
Estimated Total Cost represents the projected total deduction from proceeds incurred upon executing an exercise and hold order for non-qualified stock options. This typically comprises the sum of the estimated exercise cost and the estimated tax liability, calculated based on the difference between the exercise price and the fair market value of the underlying asset at exercise.
Estimated Total Options Outstanding Value
The estimated total options outstanding value represents an approximation of the aggregate value attributed to the entirety of stock options that have not been exercised. This estimation includes vested and unvested stock options.
Estimated Total Tax Withholding
Estimated Total Tax Withholding represents the projected upfront deduction from proceeds in the form of income tax withheld upon executing an exercise and sell/hold order for non-qualified stock options. This typically entails calculations based on the difference between the exercise price and the fair market value at exercise, in conjunction with applicable tax rates and withholding regulations.
Estimated Value of Options Outstanding
Estimated Value of Options Outstanding represents the projected market value of all unexercised stock options, encompassing both vested (immediately exercisable) and unvested (not yet exercisable) options. This estimate, typically calculated by multiplying the previous days closing price of the underlying stock by the total number of options outstanding, provides a preliminary gauge of the potential claims on the companys stock. However, its essential to recognize that this is distinct from the intrinsic value of the options and may differ from the actual value due to factors like time decay, volatility, interest rates, and potential changes in the underlying asset price.
Estimated Value of Vested Options/Exercisable
Estimated Value of Vested Options/Exercisable represents the projected total value of all vested and immediately exercisable stock options across all your grants. This calculation typically involves multiplying the total number of such options by the spread, defined as the difference between the current market price of the underlying asset and the respective strike prices of the options.
Estimated Vested Options/Exercisable
The estimated vested options or exercisable options refer to an estimation of the number of stock options from the original grant that have vested and are available for exercise based on the specified vesting schedule or conditions.
European-style option
European-style options offer the right to exercise (buy or sell the underlying asset) only during a pre-defined early exercise period, typically starting several weeks before the expiration date. Understanding the timing constraints and potential strategic implications of this window compared to American-style options is crucial for options valuation, timing decisions, and overall portfolio management strategies.
Even Money
An even money transaction occurs when the total amount received from the position is equal to the total amount paid. This term is often used to describe situations where the net cost or proceeds of a multi-leg options strategy is close to zero.
Ex-date / Ex-dividend date
The ex-date, or ex-dividend date, determines the eligibility for dividend payments. Shareholders on the record date (one day before the ex-date) are entitled to the dividend, which reduces the stock price by the dividend amount on the ex-date. Similar adjustments occur for splits and distributions, with the ex-date marking the effective date of the split ratio or distribution adjustment. Understanding ex-dates is crucial for accurate valuation, strategic investment timing, and managing dividend capture strategies.
Exchange
An exchange serves as a pivotal marketplace where financial instruments, such as stocks, bonds, commodities, options, and other securities, are bought and sold.
Exchange traded funds (ETFs)
While individual stocks can be exciting, they also carry higher risk. ETFs offer a smart alternative: access to a diversified portfolio through a single, tradable security. From tracking broad indexes like the S&P 500 to specific sectors or themes like technology or clean energy, ETFs provide flexible exposure with the liquidity and ease of trading youre familiar with from single stocks. Plus, their lower fees compared to actively managed funds make them a potentially cost-effective way to achieve your investment goals.
Execution
Execution refers to the successful completion of a buy or sell order on an exchange. While traditionally associated with the bustling activity of exchange floors, modern execution occurs electronically through sophisticated matching algorithms.
Exercise
Exercising an option contract involves invoking the right to buy (call) or sell (put) the underlying asset at a predetermined price before expiration. While offering potential profit opportunities, early exercise involves surrendering the options remaining time value and comes with an opportunity cost. Understanding the strategic considerations and alternative strategies like assignment, closing, or rolling can help optimize option utilization and manage risk effectively.
Exercise and Hold
Exercising and holding stock options involves acquiring the underlying shares at the predetermined strike price and retaining ownership instead of immediate sale. Remember to have sufficient funds available to cover the exercise cost and required tax withholdings, which may include income tax and state taxes, with potential adjustments upon filing tax returns. When considering this strategy, factor in potential benefits like long-term capital appreciation, dividend income, and the expiration date for unexercised options compared to alternative approaches like exercise and sell.
Exercise and Sell
Exercise and Sell is a stock option exercise method where an individual exercises their stock options to acquire shares of their companys stock and immediately sells these acquired shares on the open market. The cash generated from the sale is then used to cover various expenses associated with the exercise and any resulting taxes.
Exercise by exception processing
Its a method utilized by the Options Clearing Corporation (OCC) to streamline the exercise process for clearing members dealing with expiring options that are in-the-money by a certain threshold. Exercise by exception processing simplifies the exercise procedure for clearing members, providing a default mechanism to safeguard options holders interests by ensuring that valuable options are not inadvertently allowed to expire without being exercised when they meet certain in-the-money criteria.
Exercise Cost
Exercise cost represents the total upfront payment required to acquire the underlying shares upon exercising stock options. Its typically calculated by multiplying the grant price (specific to each option type and grant date) by the number of options exercised. While this provides a preliminary estimate, the actual cost at execution may differ slightly due to potential platform fees or other applicable charges.
Exercise Date
Exercise Date refers to the specific date chosen by the option holder to execute a stock option and acquire the underlying shares at the predetermined strike price. While flexibility exists within the allowable timeframe (e.g., vesting schedules, expiration dates), selecting the optimal exercise date requires careful consideration of market conditions, potential tax implications, and alignment with individual financial goals.
Exercise Limit
Exercise limits, imposed by exchanges, regulators, or the option issuer, restrict the number of option contracts a holder can exercise within a specific timeframe. This differs from position limits, which restrict the total number of contracts held.
Exercise Order Date
Exercise Order Date refers to the specific date on which an order to exercise stock options is placed with a broker or platform. While this triggers the initiation of the exercise process, its crucial to recognize that execution and subsequent settlement may occur on different dates depending on platform specificities, processing times, and potential requirements for additional approvals.
Exercise price
The exercise price, also known as the strike or strike price, is the pre-determined price at which the holder of an option contract can buy (call) or sell (put) the underlying asset. This fixed price significantly impacts the options intrinsic value (in-the-money vs. out-of-the-money) and extrinsic value (time value and volatility). Understanding the interplay between exercise price and other pricing factors is crucial for strategic option utilization, valuation analysis, and potential pricing strategies.
Exercise settlement amount
The exercise settlement amount refers to the financial result or difference between the exercise price stipulated in the option contract and the exercise settlement value of the underlying index at the time the index option is exercised.
Expectational Analysis
Pioneered by Bernie Schaeffer, Expectational Analysis takes a multi-faceted approach to predicting stock price movements. It goes beyond traditional technical and fundamental analysis by incorporating investor sentiment and expectations, measured through tools like options data, surveys, and news sentiment analysis. This can offer valuable insights, like identifying contrarian opportunities or managing emotional biases, but it also comes with limitations like subjectivity and potential market inefficiencies.
Expiration calendar
An expiration calendar provides a comprehensive overview of upcoming expiry dates for various option classes across different asset classes.
Expiration date
The expiration date of an option marks the point at which the option contract becomes invalid and ceases to exist. After this date, the option holder loses the right to buy or sell the underlying asset as per the terms of the contract.
Expiration Friday
Expiration Friday marks the closing window for most equity options to be traded or exercised. While typically falling on the third Friday of the month, holidays can shift this date to the preceding Thursday. Its a time when traders need to make decisions about whether to close, exercise, or roll their positions to manage their options exposure effectively.
Expiration month
The expiration month refers to the specific month during which the expiration date of an options contract falls. Its a crucial aspect of options trading as it denotes the timeframe within which the options contract is valid before it expires.
Expire Worthless
Options that expire worthless have no intrinsic value remaining at the expiration date, meaning the holder loses the initial premium paid. This typically occurs when contracts are ATM or OTM at expiration, as they lack sufficient intrinsic value to incentivize exercise compared to the cost of purchasing the underlying asset directly.
Extrinsic Value
Extrinsic value represents the portion of an options price attributable to factors beyond the intrinsic value associated with the right to exercise. Key determinants of extrinsic value include time to expiration, volatility, strike price, interest rates, and supply and demand dynamics.
Fair Market Value
Fair Market Value (FMV) is a critical metric, especially in the context of stock options. It represents the price at which an asset would change hands between a willing buyer and a willing seller when both have reasonable knowledge of the relevant facts and are not under any compulsion to act.
Fair Market Value at Exercise
The Fair Market Value (FMV) at exercise refers to the price per share used when executing a stock option exercise order. This value is determined according to the guidelines outlined in your companys stock option plan.
Fair Value
Refers to the theoretical or calculated worth of a contract. This value is often determined by mathematical models, considering factors like the current price of the underlying asset, time to expiration, interest rates, dividends, and implied volatility. Sometimes, fair value can also refer specifically to the intrinsic value of an option.
Fiduciary Call
A fiduciary call is an options trading strategy designed to reduce the cost of exercising a call option. It achieves this by combining a long call option with the investment of an equivalent amount in a risk-free asset, such as a fixed-income security or money market instrument.
Fill
It refers to the actual price at which an order to buy or sell a security is executed. In simpler terms, its the price that your trade gets locked in at.
Fill-or-kill order (FOK)
A fill-or-kill order (FOK) is an instruction to execute an entire order immediately or cancel it entirely if it cant be executed right away. In options trading, when a fill-or-kill order is placed, it must be either completely filled immediately or canceled altogether. This order type emphasizes immediate execution and doesnt allow partial fills or the order to stay open.
Financial Instrument
A financial instrument is any asset or contract that holds a monetary value and can be traded or transferred between parties. It encompasses a broad range of items, including stocks, bonds, derivatives (like options and futures), currencies, commodities, and various other securities. These instruments serve as a means for investors and entities to manage risk, invest capital, and generate returns within the financial markets. They often represent ownership interests, debt obligations, or rights to specific monetary values.
FINRA (Financial Industry Regulatory Authority)
FINRA acts as the independent watchdog for the U.S. securities industry. They set the rules for brokers, keep a close eye on their activities through exams, and step in to resolve disputes when needed. By ensuring fair and transparent markets, FINRA plays a crucial role in building trust and stability in the financial system, ultimately benefiting both investors and businesses.
First-Order Option Greeks
First-order option Greeks, comprising Delta, Theta, Vega, and Rho, represent mathematical measures of an options sensitivity to changes in the underlying price, time to expiration, implied volatility, and interest rates respectively.
Flat price risk
Flat price risk simply means being exposed to the overall, absolute change in the price of a single asset. In other words, your profit or loss will depend solely on whether the price of that asset goes up or down, regardless of anything else happening in the market.
Float
The float represents the quantity of outstanding shares of a companys stock available for public trading. It excludes shares held by insiders, controlling stakeholders, or shares restricted from trading for various reasons. The float essentially comprises shares accessible for purchase or sale in the open market, influencing stock price dynamics due to its liquidity and availability for trading.
Floor broker
A floor broker is a professional trader present on the floor of an exchange, responsible for executing buy and sell orders on behalf of clients. They facilitate trading by interacting directly on the trading floor, executing orders at the best available prices in the market. This role involves quick decision-making and fast execution of orders, aiming to achieve the best possible outcomes for their clients within the bustling environment of the exchange floor.
Floor trader
A floor trader is an individual who operates on the trading floor of an exchange and conducts buying and selling activities solely for their personal account or for their firms account, not on behalf of clients or customers. They are also known as locals or registered competitive traders.
Foreign currency option
A foreign currency option provides the holder with the right, but not the obligation, to buy (call option) or sell (put option) a predetermined amount of foreign currency at a fixed price within a specified timeframe.
Forward price
The predetermined price at which a specific asset will be delivered on a future date, as agreed upon in a forward contract. This price is influenced by the current spot price, as well as anticipated fluctuations in interest rates and other factors affecting the assets value.
Free market price
Free market price is the equilibrium price established by buyers and sellers in a market operating without external constraints. Driven by the invisible hand of supply and demand, this price continuously adjusts to reflect the current availability of goods or services and the willingness of buyers to pay. Unlike controlled prices, it dynamically responds to market changes, aiming for efficient allocation of resources.
Front Month
Refers to the closer expiry date. Compared to the back month, the front month is generally more liquid and volatile, impacting pricing and trading dynamics. Spreads utilizing the front month, like calendar or diagonal spreads, can offer specific strategic advantages but require careful consideration of the expiry dates impact on costs and potential profits/losses.
Full fungibility
This refers to the unrestricted ability to buy and sell option contracts on an exchange at any time. This means any specific option contract is perfectly interchangeable with any other of the same series (same underlying asset, strike price, and expiration date).
Full-service broker
A full-service broker offers a wide array of financial services, including investment advice, research reports, market analysis, and various investment products. They provide personalized guidance and tailored investment strategies, along with the execution of buying and selling securities.
Fundamental analysis
Fundamental analysis involves assessing the intrinsic value of a stock by examining various factors related to the companys financial performance, management, industry conditions, and overall economic environment.
Fundamental beta
Fundamental beta typically refers to a statistical measurement that evaluates a securitys inherent risk or volatility based on fundamental factors such as earnings, sales, dividends, and other financial data, rather than solely on price movements. This beta is derived from a model that integrates fundamental metrics and market-related information to estimate the potential risk associated with a specific security. It aims to provide a broader perspective on risk assessment beyond the traditional beta calculated solely from historical price data.
Fungibility
The interchangeability of assets due to standardization, plays a crucial role in options markets. While exchange-listed options generally exhibit a high degree of fungibility due to standardized terms and settlement procedures, factors like exercise settlement dates and potential variations in terms across different exchanges can influence the level of interchangeability. Multiple-listed/multiple-traded options, representing classes of options listed and traded on more than one national exchange, further enhance market liquidity and price discovery through wider market reach and increased competition.
Future Contract
A standardized agreement traded on exchanges to buy or sell a specific quantity and quality of an asset (commodities, currencies, financial instruments) at a defined future date.
Futures Option
A futures option is an agreement that grants the holder the right, but not the obligation, to buy or sell a futures contract at a specified price (strike price) on or before the expiration date. The underlying asset in this case is a futures contract rather than the actual physical asset. Futures options give investors the opportunity to hedge against price fluctuations in the futures market or speculate on potential future price movements.
Gamma
Gamma measures the sensitivity of deltathe change in an options price concerning the change in the underlying stock price. As the stock price fluctuates, gamma gauges how much the options delta will adjust, providing insights into how the options risk exposure to the stocks movement changes. High gamma indicates the potential for larger changes in delta with small movements in the stock price, while low gamma suggests less sensitivity of delta to such movements.
Gamma Neutral Hedging
Gamma neutral hedging involves adjusting a portfolios options positions to maintain a gamma-neutral stance, meaning the overall gamma value remains close to zero. Gamma measures the rate of change of an options delta concerning changes in the underlying assets price. A gamma-neutral position attempts to stabilize the delta, ensuring the portfolios sensitivity to price changes in the underlying security remains constant. This strategy can help hedge against risks associated with significant market movements.
Gamma Value
One of the Greeks used in options analysis, gamma measures the rate of change of an options delta (its sensitivity to the underlying assets price) for a one-unit change in the underlying price. Imagine delta as the slope of a hill representing the options price, and gamma as how steeply that slope changes. Higher gamma means the slope changes more rapidly, leading to potentially larger and faster price swings in the option for small underlying price movements.
Gap
In technical analysis, a gap is a significant discontinuity in a stocks price chart where the opening price is notably higher or lower than the previous days closing price. This often occurs due to major news events impacting the market outside of trading hours. Gaps can come in various types, each potentially signaling strong buying or selling pressure and suggesting future price movement.
GEM
Stands for the Nasdaq Global Market Extension. Its a Nasdaq options trading platform that offers an array of options products and operates as part of the Nasdaq Options Market. GEMX facilitates trading in a variety of options contracts, providing a marketplace for investors and traders to execute their options strategies.
Going Long
Refers specifically to buying a call option, granting the right (but not the obligation) to buy the underlying asset at a set price by a specific date. This offers potential leverage compared to outright ownership while limiting downside risk to the premium paid.
Going Short
Means selling a financial instrument, like stocks or options, with the anticipation that its value will decrease over time. When an investor takes a short position on an option, theyre essentially writing or selling the option contract, aiming to profit if the price of the option decreases, allowing them to buy it back at a lower price.
Good-’til-cancelled (GTC) order
A type of limit order that remains active until it is either filled (executed) at a specified price or cancelled by the investor. Unlike day orders which expire at the end of the trading day, GTC orders can span multiple trading sessions. However, for option GTC orders, automatic cancellation occurs at the options expiration date if not filled.
Grant
The official transaction by which your employer awards you stock options, giving you the right to purchase a specific number of company shares at a preset price (exercise price) in the future. The terms of your grant, including the number of options, vesting schedule, and exercise window, are outlined in your individual grant agreement and your companys stock option plan. These grants can be either incentive stock options (ISOs) or non-qualified stock options (NSOs) with different tax implications.
Grant Type
In stock options, the grant type determines whether the options qualify for beneficial tax treatment upon exercise and sale. The two main types are Incentive Stock Options (ISOs) and Non-Qualified Stock Options (NSOs).
Greeks
Refer to a set of five key values (delta, gamma, theta, vega, rho) that measure the theoretical sensitivity of an options price to changes in various market conditions. Think of them as dials on a machine, each influencing a specific aspect of how the option responds to factors like the underlying assets price, volatility, and time to expiration.
Immediate-or-cancel order (IOC)
A type of option order that gives the market one chance to fill it at the specified price. If any part of the order remains unfilled after announcement, that portion is immediately cancelled. This type of order can be helpful when seeking immediate execution without committing to potentially unfavorable prices for unfilled portions, but unlike market orders, it wont fill at any available price. Compared to limit orders, which only fill at a specific price or better, IOC offers the potential for faster execution but risks partial cancellation.
Implied volatility
A theoretical percentage representing the markets expectation of future volatility for an underlying asset, like a stock. Its not a single, fixed value, but rather a range of values associated with different options based on their strike prices and expiration dates. IV directly influences option prices, with higher IV resulting in more expensive premiums. As a forward-looking measure, IV doesnt reflect past volatility but attempts to predict future price movements.
In-the-money / In-the-money option
An in-the-money option refers to an option that currently holds intrinsic value. For call options, this means the stock price is above the strike price, allowing the option holder to buy the stock cheaper than its current market price. Conversely, for put options, it indicates the stock price is below the strike price, allowing the option holder to sell the stock for more than its current market price.
Incentive Stock Options (ISO)
Incentive Stock Options (ISOs) are a type of company stock option granted to employees, often as a part of their compensation package. These options offer certain tax advantages compared to other types of stock options, like Non-Qualified Stock Options (NQSOs).
Index
An index is essentially a statistical measure that represents the value of a particular segment of the stock market. Its generally composed of a basket of stocks that represent a particular sector, market, or industry. The S&P 100 Index, for instance, represents the performance of 100 major companies listed on U.S. stock exchanges.
Index fund
An index fund aims to replicate the performance of a specific market index, like the S&P 500 or the Nasdaq Composite, by holding the same stocks in the same proportions as the index. This passive investment strategy often offers lower fees due to minimal active management.
Index option
An index option gives the holder the right to buy or sell an index at a specific price within a certain timeframe. Unlike stock options, which involve buying or selling shares of an individual stock, index options are settled in cash. Theyre based on broader market indexes like the S&P 500 or the NASDAQ-100.
Individual volatility
A theoretical statistical measure of the expected future price fluctuations of an underlying asset, used to price an option based on a specific model. By inputting the current option price along with five other known factors (underlying asset price, time to expiration, strike price, interest rate, and dividends), theoretical pricing models can calculate the individual volatility required to justify that specific option price. This value helps calibrate pricing models to reflect market conditions and analyze option pricing discrepancies compared to real-world prices. However, its important to remember that individual volatility is a theoretical concept and relies on model assumptions, potentially leading to inaccuracies compared to actual market behavior.
Initial public offering (IPO)
An Initial Public Offering (IPO) marks the first time a private company offers its shares to the public, allowing investors to purchase ownership stakes in the company. Its a significant moment for a company as it transitions from being privately owned to publicly traded on the stock exchange.
Institution
Refers to a formal, established entity that plays a role in the financial system. While investment management companies like banks, pension funds, mutual funds, and insurance companies are prominent examples, institutions encompass a broader range of players.
Institutional investors
Organizations that manage large pools of capital on behalf of others, playing a crucial role in the financial system. This includes banks, insurance companies, pension funds, mutual funds, endowments, and various investment companies like hedge funds or venture capital firms. Their primary function is to invest and generate returns for their beneficiaries, which can range from individual policyholders to retirees to charitable causes. However, beyond investing, they also contribute to market stability, liquidity, and responsible corporate governance through their investment practices and engagement with companies.
Internet broker
A financial services provider offering online trading platforms and tools for individual investors. They typically emphasize low commission rates, similar to deep discount brokers, along with convenient access to various assets like stocks, options, ETFs, and mutual funds. Some internet brokers go beyond pure trading, offering educational resources, research tools, and diverse account options.
Intrinsic value
The inherent value of an option determined by its potential to be exercised profitably. It represents the minimum profit an option holder can guarantee by exercising the option immediately and buying or selling the underlying asset at the strike price.
ISE
ISE stands for the International Securities Exchange, a fully electronic options exchange in the United States. It was acquired by Nasdaq and operates as Nasdaq ISE, LLC. The ISE is known for its electronic trading platform, catering to various options traders and providing a marketplace for options contracts.
ISE Gemini
ISE Gemini refers to a U.S. options exchange that was part of the International Securities Exchange (ISE) and operated as ISE Gemini before being acquired by Nasdaq and rebranded as Nasdaq GEMX, LLC. Its among the platforms used for options trading.
Issuer’s Stock
Shares of a company representing ownership rights and providing various benefits like dividends, voting rights (for common stock), and the potential for capital appreciation through price increases. Issuing stock allows companies to raise capital for growth and operations. Owning issuers stock differs from a grant of stock options in that the latter only grants the right to purchase shares at a specific price within a defined period, not immediate ownership.
Lambda
Often known as the leverage ratio or the percentage change in the value of an option for a 1% change in the underlying assets value, indicates the sensitivity of an options price to changes in the underlying assets price. It specifically measures the percentage change in the options value for a 1% change in the underlying assets price.
Last sale price
The price of a security at the most recent transaction, reflecting the latest market interaction between buyers and sellers. It serves as a crucial reference point for market sentiment, supply and demand dynamics, and often triggers various order execution mechanisms.
Last trading day
The final business day before a derivative contracts expiration date when trading (buying and selling) of the contract is allowed. This applies to options, futures, warrants, and certain types of swaps. Generally, for equity options in the US, the last trading day is the third Friday of the expiration month.
LEAPS
LEAPS, or Long Term Equity Anticipation Securities, are options contracts with extended expiration dates, typically extending beyond one year. They function similarly to standard options but offer a longer time frame for investors to capitalize on potential price movements in the underlying asset.
LEAPS® (Long-term Equity AnticiPation Securities) / Long-dated options
LEAPS are a type of call and put option with expiration dates exceeding nine months from listing, offering investors flexible long-term exposure to an underlying asset with potential leverage benefits. They typically have two expiration series at any time, with one expiring in January of the current year and the other in January of the following year.
Leg
A term denoting one side of a position involving two or more components. Legs are commonly used in various multi-leg strategies, including spreads, straddles, and complex structures like butterflies and condors.
Legging
The process of entering or exiting a multi-leg strategy (e.g., spreads, straddles) by executing each individual leg (e.g., buying or selling a specific call or put) separately. Traders might choose to leg in/out for various reasons: timing the market, managing risk, or capitalizing on specific market movements.
Legging In
Refers to the strategy of entering into a multi-leg options position in stages or separately, rather than establishing all parts of the position simultaneously. It involves executing one side of the trade first and adding the other parts later.
Legging Out
Legging out involves exiting a multi-leg options position in stages or separately rather than closing out all parts of the position simultaneously. Its the opposite of legging in when entering a position.
Level II Quotes
Real-time bid-ask spreads offered by market makers on an exchange, providing granular depth of market information beyond just the best available buy and sell prices. Level II displays not only the price at which market makers are willing to buy or sell, but also the quantity of shares they are willing to trade at that price, their identity, and potentially the type of orders they are placing.
Leverage
Leverage refers to the ability to control a greater asset value (e.g., 100 shares of stock) by investing a smaller amount (e.g., the premium of a call option). This amplifies both potential profits and losses. For instance, a 10% stock price increase could double the value of the option, while the same decline could result in a complete loss of the premium. While leverage can be an attractive tool for boosting returns, its crucial to understand its risks and costs. Remember, leverage isnt limited to options; it applies to various financial instruments, each with its own risk profile and cost considerations. Prudent risk management and thorough analysis are essential for effectively utilizing leverage within your investment strategy.
Limit order
A limit order specifies the maximum price (for a sell order) or minimum price (for a buy order) at which a trade should be executed. If the market doesnt reach the specified price, the trade might not be executed. It offers control over the trade price but doesnt guarantee execution if the market doesnt meet the set limit.
Limit Stop Order
A conditional order that combines aspects of both stop orders and limit orders to provide more control over trade execution. It instructs your broker to close a position if the market price reaches a specified stop price, but only if the order can be filled at a specified limit price or better.
Limited risk
Limited risk is a defining feature of options for buyers. When someone purchases an option, their risk is confined to the premium they paid for that option. This means that regardless of how far the underlying assets price moves against their position, the maximum loss they can incur is the initial premium cost.
Liquidity / Liquid market
Liquidity refers to the ease with which an asset or security can be bought or sold in the market without causing a significant movement in its price. Liquid markets typically have a high volume of trading activity, tight bid-ask spreads and can accommodate larger orders without substantially affecting the assets price. This is advantageous for investors as it allows them to enter and exit positions more easily.
Listed option
Listed options are standardized contracts traded on organized exchanges like the CBOE (Chicago Board Options Exchange). They have set specifications regarding the underlying asset, expiration date, strike price, and contract size. In contrast, over-the-counter (OTC) options are customized contracts tailored to specific needs, traded directly between two parties, allowing more flexibility in terms but often lacking the liquidity and standardization of listed options.
Lockup Agreements
Legal contracts restricting company insiders, including employees, friends and family, and venture capitalists, from selling their shares for a predetermined period of time, typically following an IPO or other significant event.
Lognormal distribution
The lognormal distribution is a statistical model often used to describe the distribution of asset prices, particularly in finance, like stock prices over time. Its derived from the normal distribution but characterizes the logarithms of the price changes rather than the actual dollar amounts.
Long
Long
Long Call
An options trading strategy used when an investor anticipates a bullish movement in the price of an underlying asset. It involves buying a call option, which gives the holder the right (but not the obligation) to buy the underlying asset at a predetermined price (strike price) within a specific timeframe (expiration date).
Long Gut
The Long Gut strategy is an options trading strategy designed for volatile market conditions when an investor anticipates significant price movement in an underlying security but isnt certain about the direction of the movement.
Long option position
When you hold a long option position, it means youve bought the option contract, giving you the right but not the obligation to buy (in the case of a call option) or sell (in the case of a put option) the underlying asset at a specified price (strike price) on or before the expiration date. This position is initiated by purchasing an option, giving you control over its exercise depending on market conditions and your investment strategy.
Long Position
Holding a financial instrument in anticipation of it increasing in value. This term applies to various instruments, including stocks, bonds, options contracts, futures contracts, and even certain swaps.
Long Put
An options trading strategy employed when an investor holds a bearish outlook on an underlying security. It involves purchasing a put option, granting the holder the right (but not the obligation) to sell the underlying asset at a predetermined price (strike price) within a specified timeframe (expiration date).
Long stock position
A position in which an investor owns shares of a company, expecting to benefit from potential price appreciation, dividend income (for eligible stocks), or voting rights (for common stock). Long positions are often associated with longer investment horizons and carry risks from market volatility, economic factors, and company performance.
Long Strangle
A long strangle is an options trading strategy used when an investor anticipates significant price movement in an underlying security but is uncertain about the direction of that movement. This strategy involves buying both a call option and a put option on the same underlying asset with the same expiration date but different strike prices.
Look Back Option
A special type of option where the holder exercises the option at the most favorable price (highest for calls, lowest for puts) achieved by the underlying asset during the entire life of the option, not just the ending price.
Margin call
A demand from either the clearinghouse (variation margin call) or the broker (maintenance margin call) to an investor to deposit additional funds into their margin account. This call occurs when adverse price movements in the investors leveraged positions cause their account equity to fall below a minimum threshold, known as the maintenance margin requirement.
Mark-to-market
An accounting practice involving the daily valuation of financial instruments in an account, using market prices or reliable market quotes as benchmarks. This ensures that a portfolios equity accurately reflects current market conditions, even before actual purchase or sale of the securities. MTM impacts both the balance sheet (asset and liability values) and the income statement (unrealized gains/losses), potentially influencing reported earnings per share. While closing prices are commonly used, various valuation methods, such as closing prices or the Black-Scholes model for options, might be applied depending on the security type and market circumstances. MTM applies not only to equities but also to bonds, derivatives, and certain loans.
Market Capitalization
Market capitalization, often referred to as market cap, is a key financial metric used to evaluate a companys size in the financial markets. Its calculated by multiplying the companys last closing share price by the total number of outstanding shares.
Market maker
A market maker is an individual or a firm that facilitates trading in financial securities by providing buy and sell prices for securities. They do so by standing ready to buy or sell a particular security at publicly quoted prices, ensuring liquidity in the market.
Market maker system (competing)
Serves as a mechanism to ensure liquidity, efficiency, and fair trading in options markets. This system involves multiple market makers competing with each other to provide continuous bid and ask prices for specific options. Competition among market makers promotes price discovery, leading to more accurate and efficient pricing.
Market Place
A venue that brings together buyers and sellers of various goods and services to facilitate trading and price discovery.
Market quote
Real-time information displaying the current best buying (ask) and selling (bid) prices for a security in the marketplace. These quotes, typically originating from exchange trading floors or electronic platforms, provide crucial data for informed trading decisions. Market quotes typically include the security symbol, time stamp, bid price, ask price, and potentially volume or other relevant information like implied volatility for options.
Market Recap
Schaeffers Market Recap is a daily report provided by Schaeffers Investment Research, typically published on their website, SchaeffersResearch.com, and available for delivery via email to subscribers. This report offers a comprehensive review of the days trading activity in the financial markets.
Market Stop Order
An order to automatically close a position at the market price when a specific price (stop price) is touched or breached. This can be used to limit losses on existing long or short positions by triggering a market order to sell when the price falls below the stop price (for short positions) or buy when the price rises above the stop price (for long positions).
Market timing
The practice of making investment decisions based on predictive methods in the hope of buying and selling securities at optimal times to achieve better returns than simply buying and holding. This often involves utilizing technical or fundamental analysis, economic forecasts, or sentiment indicators to anticipate significant price movements in the market or individual securities.
Market-not-held order
A type of market order where the investor grants the broker (or electronic platform) discretion over the timing and/or price of execution. This can be beneficial for seeking a better price than the current best bid/ask, minimizing market impact, or accommodating specific timing needs.
Market-on-close order (MOC)
Market-on-Close (MOC) order typically pertains more to equity trading than options. However, the concept of an MOC order can apply to options trading as well, albeit less commonly.
An MOC order is an instruction from an investor to execute a trade at the market price as close to the closing price of the trading day as possible. For equity markets, this means buying or selling a stock at or near the closing price. This type of order aims to ensure that the trade is executed at a price close to the days final market valuation.
MCRY
MCRY, on the Nasdaq exchange, stands for Mercury Systems, Inc. (MRX). Its a leading provider of high-performance embedded processing technology and mission-critical solutions for the aerospace and defense industry.
Mean
The mean is a fundamental statistical measure that represents the average of a set of data. Its calculated by adding up all the values in a dataset and then dividing that sum by the total number of observations.
MIAX
The Miami Options Exchange (MIAX Options) is a fully electronic options trading platform focused on providing efficient and innovative solutions to market participants. It leverages its award-winning technology platform to offer fast execution, low latency, and robust risk management features.
Model
A model in options trading refers to a mathematical formula or framework used to estimate or calculate the theoretical value of an option. These models are designed to help traders and investors determine the fair price of an option based on various factors including the underlying assets price, time until expiration, volatility, interest rates, and other relevant variables.
Money market fund
A money market fund is a type of mutual fund that primarily invests in short-term, low-risk securities. These funds are designed to provide investors with a relatively safe and liquid investment option while aiming to preserve the principal value of their investment.
Moneyness
A critical concept in options trading that defines the relationship between the strike price of an option and the current price of the underlying security. It categorizes options as in the money (ITM): having positive intrinsic value and immediate profit potential, at the money (ATM): having no intrinsic value, and out of the money (OTM): having negative intrinsic value and requiring a significant price movement to become profitable.
Morphing
A sophisticated complex trading technique involving the transformation of one synthetic position into another using a single order. This allows traders to dynamically adjust their strategy based on market movements or new information, without the need to exit and re-enter the market separately. Morphing can offer increased efficiency, cost savings, and improved risk management but requires a good understanding of options and synthetic positions.
Moving average
A technical analysis tool that calculates the average price of a security over a specified timeframe (minutes, days, weeks, etc.). As new price data becomes available, the oldest data point is dropped, and the average is recalculated. This continuous updating process smooths out short-term fluctuations, making it easier to identify underlying trends and potential turning points in the market. While different types of moving averages exist, like simple, exponential, and weighted, all serve the purpose of filtering out noise and providing a clearer picture of the overall price movement. Choosing the appropriate timeframe for the moving average depends on the asset and the intended analysis. However, its important to remember that moving averages are lagging indicators and should be used in conjunction with other technical and fundamental analysis methods for informed investment decisions.
MPRL
MPRL stands for MIAX PEARL, LLC, an options exchange platform within the Miami Options Exchange (MIAX) ecosystem. MPRL focuses on offering competitive fees and innovative pricing structures for specific options contracts.
Multiple-listed / multiple-traded option
A multiple-listed or multiple-traded option refers to an options contract that is available for trading on more than one national options exchange. These exchanges can include major options markets like the Chicago Board Options Exchange (CBOE), NYSE Arca Options, Nasdaq Options Market, among others.
Multiplier
A crucial factor in cash-settled options contracts, determining the cash amount required to be delivered upon exercise. Unlike options settled through physical delivery of the underlying asset, cash-settled options involve multiplying the current interest value by a predetermined multiplier to arrive at the final settlement amount. This multiplier significantly influences the contracts value, amplifying potential gains or losses for the option holder. Typically standardized for specific options within an exchange, multipliers ensure consistency and transparency in trading.
Multiply listed options
Multiply listed options refer to options contracts that are available for trading on multiple options exchanges. These exchanges can include major options markets like the Chicago Board Options Exchange (CBOE), NYSE Arca Options, Nasdaq Options Market, and others.
Mutual fund inflows/outflows
A key metric used by Schaeffers Research to gauge investor sentiment towards sectors or the overall market. It measures the amount of money flowing into or out of mutual funds during a specific period. Increasing inflows suggest positive sentiment and potential for price gains, while decreasing inflows or outflows can signal waning confidence and potential for price declines.
Naked or uncovered option
An uncovered or naked option refers to a short options position where the writer (seller) of the option does not have an offsetting position that provides protection or collateral against potential losses if the option is exercised.
Nasdaq
Nasdaq (originally an acronym for National Association of Securities Dealers Automated Quotations) is a global electronic marketplace for buying and selling securities, notably stocks and options. Its one of the largest stock exchanges in the world, known for its technology-focused and electronic trading platforms.
Nasdaq-100 Trust (QQQ, or “cubes”)
The Nasdaq-100 Trust, commonly known as QQQ or cubes, is an exchange-traded fund (ETF) that aims to replicate the performance of the Nasdaq-100 Index. It does so by holding a portfolio of equity securities that mirror the composition of the Nasdaq-100 Index.
Nasdaq-100 Trust Volatility Index (QQV)
Nasdaq-100 Trust Volatility Index (QQV) serves as an indicator reflecting investor sentiment regarding the expected future volatility of the QQQ, an exchange-traded fund (ETF) tracking the Nasdaq-100 Index.
NAV Effect
The NAV Effect in a mutual fund refers to changes in the funds asset growth that are solely due to alterations in the funds Net Asset Value (NAV). These changes occur independently of mutual fund inflows or redemptions and are not directly linked to investor sentiment.
Near The Money Option:
A near-the-money option is one where the price of the underlying asset is very close to the strike price of the option. This closeness is a spectrum, ranging from slightly in-the-money to slightly out-the-money, depending on the difference between the two prices.
Net credit
Net credit refers to any activity that adds money to an account, increasing its available balance. This can come from various sources, such as depositing cash, receiving earnings like interest or dividends, completing successful transactions that result in sales proceeds, or even receiving refunds.
Net debit
Net debit refers to any activity that removes money from an account, decreasing its available balance. This can happen for various reasons, such as taking out cash, making purchases, incurring fees, or repaying loans.
Neutral
In the context of stocks or the broader market, being neutral suggests a stance where an investor or analyst believes that there will be limited or no significant movement in the stock price or market direction.
Neutral Market
A neutral market refers to a situation where the overall market sentiment is relatively stable and lacks a distinct bullish (upward-trending) or bearish (downward-trending) direction. Its a phase where there isnt a prevailing trend in the markets movement.
Neutral Outlook
A neutral outlook suggests an expectation that the market, or a particular financial instrument, will experience minimal price movement in the near future. This doesnt necessarily imply complete stagnation, but rather a range of potential fluctuations within a relatively flat trend.
Neutral spread
A neutral spread in options trading is a specific strategy designed to capitalize on minimal movement in the price of the underlying stock or asset. Traders use this strategy when they expect the stock to remain relatively stable or trade within a narrow price range.
Neutral strategy
A neutral strategy in options trading (or with stock and option positions) is designed to profit or benefit from a market or stock price that remains relatively unchanged or trades within a specific range. Examples include range-bound strategies like covered calls or calendar spreads, volatility arbitrage by exploiting price discrepancies between related options, or cash-secured puts for income generation and downside protection.
Neutral Trading Strategies
Neutral trading strategies offer ingenious ways to profit from a financial instrument remaining relatively flat or experiencing minimal price movement. From options spreads capitalizing on directional ambiguity to arbitrage techniques exploiting price discrepancies, a diverse toolbox exists to cater to different risk-reward preferences and market conditions.
Ninety-ten (90/10) strategy
The 90/10 strategy is a conservative investment approach favored for its focus on capital preservation and income generation. Typically, 90% of the portfolio is allocated to low-risk, yield-generating assets like T-bills, money market funds, or blue-chip dividend stocks. This provides a stable foundation and consistent income through interest or dividends. The remaining 10% is invested in call options on equities or other protected investment strategies. This small allocation offers potential for limited upside gains from the options while minimizing risk due to the large buffer provided by the 90% allocation. The specific asset choices and option strategies within the 90/10 framework can be adjusted based on individual risk tolerance, prevailing interest rates, and market conditions. This flexibility, along with its focus on risk management, makes the 90/10 strategy a popular choice for conservative investors seeking income and some potential for growth while protecting their capital.
No-load mutual fund
A no-load mutual fund refers to an investment fund where shares are sold directly to investors without charging a sales commission or front-end load. These funds are marketed and distributed directly by the fund company, bypassing the need for a sales intermediary.
NOBO
Nasdaq BX, Inc., operates NOBO, a rapidly growing alternative platform for trading U.S. Treasury securities. As a competitor to the established BrokerTec platform, NOBO leverages modern technology and offers a seamless trading experience for market participants. By providing an additional avenue for Treasury trades, NOBO fosters competition, potentially leading to lower fees and improved market efficiency. Furthermore, its user-friendly platform and focus on transparency may attract investors seeking a streamlined and efficient way to buy and sell Treasuries. With its increasing participation and growing recognition, NOBO is playing a significant role in shaping the landscape of the U.S. Treasury market.
Nominal price (or “nominal quotation”)
A nominal price or nominal quotation in the context of futures or options refers to a price quote calculated for a specific period when no actual trading has taken place. This quotation is an estimate or approximation derived from averaging the bid and ask prices of the financial instrument.
Non-equity option
A non-equity option refers to an options contract where the underlying asset is anything other than common stock. These options derive their value from assets other than shares of a company. Examples include currency options (e.g., EUR/USD), commodity options (e.g., gold futures), and interest rate options (e.g., bond options). They offer diverse risk-reward profiles depending on the underlying asset and market conditions.
Non-qualified Stock Options
Non-qualified stock options (NSOs) offer employees the opportunity to buy a certain number of their companys shares at a predetermined price (exercise price) within a specific timeframe. Unlike Incentive Stock Options (ISOs), NSOs dont qualify for favorable tax treatment upon exercise. This means youll owe ordinary income and Medicare taxes on the difference between the exercise price and the fair market value of the stock at that time.
Normal Distribution
Often referred to as the Gaussian distribution or bell curve, is a fundamental concept in statistics and probability theory. Its a mathematical model representing the distribution of a set of random variables or data points that exhibit a symmetrical and bell-shaped curve when plotted on a graph.
Not-held order
A not-held order is a type of trading order in the financial markets that grants the executing broker or trader a degree of discretion in executing the order. With a not-held order, the broker is released from certain obligations and has some flexibility in executing the trade.
NSDQ
NSDQ typically stands for the Nasdaq Options Market, LLC. The Nasdaq Options Market is a part of Nasdaq, Inc. and operates as a designated options market for trading various options contracts.
NYSE
The New York Stock Exchange (NYSE), towering prominently in Lower Manhattan, stands as a global symbol of financial power and economic progress. As the worlds largest stock exchange by market capitalization, it boasts a prestigious roster of renowned blue-chip and large-cap companies, representing the backbone of the American economy.
NYSE Amex
NYSE Amex Options, now known as NYSE American Options, is a part of the New York Stock Exchange (NYSE) and operates as an options trading platform. It provides a marketplace for trading options contracts on various underlying assets.
NYSE Arca
NYSE Arca Options is an electronic options trading platform operated by the New York Stock Exchanges subsidiary, NYSE Arca. It serves as an exchange for trading various options contracts.
One Cancel Other Order
One Cancels Other (OCO) order is a combination order type used in trading, particularly in the stock market, options, and other financial markets. Its designed to manage risk and potentially capitalize on specific market conditions while allowing traders to set multiple orders simultaneously.
One Sided Market
A one-sided market occurs when theres a significant imbalance between buyers and sellers for a particular asset. This can be driven by various factors, like strong news, technical signals, or large institutional orders. As one side dominates, the bid-ask spread widens, and volatility can surge due to rapid price movements in the dominant direction.
One Trigger Other Order
The One Trigger Other (OTO) order, also known as One-Triggers-the-Other, is a combination order type utilized in trading to link two separate orders on a particular asset, typically in the stock market or other financial markets.
One-cancels-other order (OCO)
Its a conditional order that combines multiple orders involving the same security or asset. In the case of options, it could involve different types of options or different expiration dates for the same underlying asset. An OCO order allows an investor to place two or more separate orders linked together. If one order gets executed, the other order(s) are automatically canceled. This is used to manage risk or capitalize on specific market conditions. For instance, an investor might use an OCO order for options by placing a buy limit order for an option contract above the current market price and a sell limit order for the same option below the current market price. If the market price moves up and triggers the buy order, the sell order gets automatically canceled, and vice versa.
Online Broker
Online brokers revolutionized trading by allowing individuals to buy and sell securities through user-friendly digital platforms. These platforms offer access to various markets, diverse research tools, and advanced order types, all directly from your computer or mobile device.
Open interest
Open interest refers to the total number of outstanding option or futures contracts for a specific series or underlying asset at a given point in time. These contracts represent unfilled positions held by market participants and havent been settled through exercise, assignment, or offsetting trades.
Open Interest Configuration
Its a snapshot of the number of outstanding options contracts (open interest) at each available strike price for a given underlying security. Typically displayed as a graph or chart, with strike prices on the horizontal axis and open interest on the vertical axis.
Open outcry
Open outcry was a traditional trading method where market makers and floor brokers representing public orders competed on exchange floors to buy and sell financial instruments. Bids and offers were communicated loudly and openly, often accompanied by a specific language of hand signals, within designated trading pits. This dynamic auction-like system facilitated direct interaction between participants, providing liquidity and contributing to price discovery.
Opening Order
An instruction placed by an investor or trader to establish a new position in a financial asset, such as stocks, options, or futures contracts.
Opening price
The opening price is the first price at which a stock or option trades on a given day. It marks the initial benchmark for daily trading activity and holds significant importance, especially for short-term traders and technical analysis.
Opening sale (sell to open)
An opening sale, or sell to open, refers to a transaction where an investor becomes the writer of an option contract. This means they sell the option to another investor and receive the upfront premium. Opening sales can be motivated by the potential to generate income, hedge existing positions, or express a market view.
Opening transaction
Opening transactions in trading refer to creating or adding to a market position. In options trading, it specifically involves acquiring new option contracts, either through buying calls or puts. An opening purchase transaction adds long options to your portfolio, while an opening sale adds short options. These transactions directly affect the total open interest of the specific option contract, increasing it when you buy and decreasing it when you sell.
Opportunity cost
Opportunity cost in option pricing refers to the potential profit investors sacrifice by choosing to buy an option instead of putting their money into another investment.
Option
An option is a contract between two parties that grants the buyer the right, but not the obligation, to buy or sell a specific asset at a predetermined price by a specific date. In simpler terms, its like buying the opportunity to make a future trade. There are two main types of options: calls, which give the right to buy, and puts, which give the right to sell.
Option contract
An option contract grants the buyer the right, but not the obligation, to buy or sell a specific financial asset (underlying asset) at a predetermined price (strike price) by a certain date (expiration date) in exchange for a fee (option premium). Options come in two main types: calls, granting the right to buy, and puts, granting the right to sell.
Option in the Money Amount
The option in-the-money amount (intrinsic value) tells you how much profit you could make by exercising your option right now. For a call option, its the difference between the current market price of the underlying asset and the strike price. For a put option, its the strike price minus the current market price. While options also have time value, the in-the-money amount focuses on the immediate profit potential.
Option Pain
Option pain, also known as max pain, refers to the theoretical price of an underlying security that would cause the highest combined losses for traders holding options contracts about to expire worthless. While calculating this point is complex, understanding its potential implications can be valuable for informed options trading decisions.
Option period
The option period, also known as an options lifetime, refers to the timeframe from when an option contract is traded to its expiration date. This crucial period defines the window for exercising the option right, influences the rate of time decay, and plays a significant role in strategizing option trades based on anticipated market movements within that timeframe.
Option price
The option price, also known as the option premium, is the fee paid by the buyer for the right to buy or sell a security at a predetermined price in the future. This price comprises two key components: intrinsic value, reflecting the immediate benefit of exercising the option, and time value, representing the potential future value based on remaining time until expiration.
Option pricing curve
An option pricing curve, also known as an options pricing graph or a theoretical value graph, is a graphical representation illustrating the estimated theoretical values of an option at a specific point in time across various prices of the underlying asset or stock.
Option pricing model
Black-Scholes option pricing model is a renowned mathematical formula used to estimate the theoretical price of European-style options. Developed by Fischer Black, Myron Scholes, and Robert Merton, this model revolutionized options pricing and has been fundamental in financial markets.
Option spread
An option spread is a trading strategy involving the simultaneous purchase and sale of two different options on the same underlying security. This can be done with calls or puts, at different strike prices, and results in a net premium paid or received depending on the spread type.
Option writer
An option writer is the seller of an option contract, responsible for fulfilling the terms if the buyer exercises their right. This involves receiving the premium upfront but also carrying the obligation to buy or sell the underlying asset at the agreed-upon price and date if the option is exercised. Writing options can be motivated by the potential to earn premium and express market views, but it also carries significant risks, including unlimited losses, margin requirements, and assignment risk.
Option writing
Option writing involves selling options contracts to other investors in an opening transaction. This grants the writer the upfront premium regardless of whether the option is exercised.
Optionable stock
An optionable stock is a publicly traded stock for which there are listed options contracts available for trading on an exchange. This means investors can buy and sell options contracts that give them the right, but not the obligation, to buy or sell shares of that stock at a predetermined price by a specific date. Optionable stocks generally meet specific criteria for liquidity, market capitalization, and investor interest.
Optionee
An individual who has been granted stock options by a company as part of their compensation or incentive plan and currently holds those options.
Options Broker
Options brokers arent just order executors; theyre specialists facilitating options trading for clients. Beyond order routing, they might offer market research, educational resources, and risk management tools tailored to options strategies.
Options Clearing Corporation (OCC)
The Options Clearing Corporation (OCC) plays a vital role in ensuring the smooth and secure functioning of the financial markets. As the worlds largest equity derivatives clearing organization, OCC acts as a central counterparty (CCP) for options, futures, and securities lending transactions on 16 exchanges and trading platforms. This means OCC steps in between buyers and sellers, guaranteeing the fulfillment of contracts even if one party defaults, significantly reducing risk for investors and market participants.
Options Exchange
Options exchanges are the regulated marketplaces where buyers and sellers come together to trade options contracts. These platforms ensure fair and transparent price discovery through their trading platforms, while exchange members like broker-dealers and market makers contribute to liquidity and orderly trading.
Options specialized broker
Options specialized brokers are firms dedicated to supporting options traders of all levels. They possess deep expertise in options pricing, strategies, and research, offering unique services like advanced analysis tools, educational resources, and automated trading platforms.
Options Symbol
Also known as an options ticker, is a unique string of characters that represents a specific options contract and provides essential information about that contract.
Options Trader
Options trader is an investor who actively participates in buying and/or selling options contracts within financial markets.
Options Trading
Options trading involves buying or selling contracts that grant the right, but not the obligation, to buy or sell an underlying asset at a specific price by a certain date.
Order
An order in financial markets, including options trading, refers to an investors directive or instruction to buy or sell a financial instrument, such as an option contract, at a specified price and quantity.
Oscillators
Oscillators in trading are technical indicators used to assess the momentum or strength of price movements in a stock, asset, or market. These indicators operate based on the premise that price movements tend to alternate between periods of upward and downward trends, creating cycles of highs and lows.
OTC option
OTC options, traded directly between two parties instead of on an exchange, offer greater flexibility in terms of customized features and potentially higher returns compared to standardized exchange-traded options. However, this flexibility comes with increased counterparty risk and potentially lower liquidity, especially for less common assets or complex structures.
Out of the money
An out-of-the-money option has no immediate financial benefit from exercise because its strike price is above the current market price for calls or below for puts. While they lack intrinsic value, out-of-the-money options retain time value, which can potentially increase if the underlying asset price moves significantly before expiration.
Out-of-the-money / Out-of-the-money option
An out-of-the-money option is one that doesnt have any intrinsic value because the underlying assets price is too far away from the options strike price. This means the options price consists entirely of time value, reflecting the potential for the asset price to move closer to the strike price before expiration. Out-of-the-money options generally cost less than in-the-money options but hold the possibility of higher returns if the underlying asset moves in the predicted direction.
Outlook
Refers to an individuals or entitys anticipation or expectation regarding the potential direction of a market, a specific asset, or a financial instrument.
Over-the-counter / Over-the-counter market
The over-the-counter (OTC) market is a decentralized trading network where various financial instruments, including stocks, bonds, derivatives, currencies, and commodities, are traded directly between market participants through a network of brokers or dealers. Unlike traditional exchanges, the OTC market lacks a physical location and operates electronically, offering flexibility and access to less liquid or specialized assets.
Overbought/oversold
Overbought and oversold are terms used in technical analysis to describe potential turning points in a stocks price movement. Identified using indicators like the RSI, they suggest periods of excessive buying (overbought) or selling (oversold) that might lead to price reversals.
Overwrite
Overwriting involves selling call options against existing long stock positions. This strategy allows investors to collect the option premium and potentially benefit from upward price movement in the underlying asset. However, it also caps potential gains if the stock price rises significantly above the strike price and carries the risk of forced selling through assignment if the option is exercised. Overwriting can be used to generate income, hedge existing holdings, or express a neutral to slightly bullish market view.
Owner
Refers to an individual or entity that holds a long position resulting from initiating an opening purchase transaction for a call or put option and maintains that position within their brokerage account.
Parity
Parity in options trading refers to scenarios where the total premium of an option contract equals its intrinsic value. This implies that the options price reflects only the immediate profit potential from exercising it if the underlying asset price remains fixed.
Payoff diagram
Also known as a profit and loss diagram or risk graph, is a graphical representation used by traders and investors to visualize the potential profit or loss of an options strategy at different prices of the underlying security.
PHLX
PHLX stands for Nasdaq PHLX, LLC. Its the official name of the Philadelpia Stock Exchange, which was acquired by Nasdaq in 2007. The Nasdaq PHLX is one of the major options trading platforms where various options contracts are listed and traded.
Physical delivery option
Physical delivery options offer the right to receive or deliver the actual underlying asset, typically commodities like oil or gold, upon exercise. Unlike cash-settled options, physical delivery involves specific contractual terms defining the asset quality, delivery location, and timeline.
Physical Option
Physical options involve contracts granting the right to buy or sell a specific quantity of a physical commodity (e.g., gold, wheat, oil) at a predetermined price and date. Unlike cash-settled options, physical options result in the delivery of the underlying asset upon exercise.
Physical Settlement
Physical settlement is the common settlement style for stock options in many markets, meaning that shares of the underlying stock change hands upon option exercise. However, cash-settled options for equities also exist, and other types of equity options may have different settlement mechanisms.
Physically Settled Option
Physically settled options are a type of option contract where the actual underlying asset, such as shares of stock, commodities, or other physical assets, is physically delivered to the option holder upon exercise. This contrasts with cash-settled options, where the contract is settled in cash based on the difference between the strike price and the underlying assets market price.
Pin risk
Pin risk lurks for option writers when the underlying asset price hovers around the strike price at expiration. This creates uncertainty whether short options will be assigned or expire, potentially leaving you with unwanted long or short positions depending on last-minute price movements. On the following Monday, you might face unexpected exposure to the underlying asset, jeopardizing your risk management strategies and exposing you to potentially significant losses.
Plan Number
The plan number is a unique identifier assigned by your company to its specific stock option plan. This plan will have one plan number that remains consistent throughout its existence. In contrast, each individual award of stock options within the plan will have its own unique grant ID.
Portfolio
A portfolio represents the collective holdings of financial instruments, encompassing stocks, bonds, funds, and potentially even alternative assets like real estate or private equity. Its composition is tailored to individual investment goals, risk tolerance, and desired risk-return profile.
Position
In trading and investing, a position refers to the overall holding or combination of securities that an investor or trader currently owns or has committed to via various financial instruments like options and stocks.
Position Trader
Position traders are not solely focused on exploiting options for time decay and volatility. While these factors can play a role, their primary focus is on identifying trends and capitalizing on them by holding positions, often options positions, for extended periods. They typically employ fundamental and technical analysis to inform their decisions and are less concerned with short-term market fluctuations. Position traders focus on various trends, like secular, cyclical, or momentum.
Position trading
Position trading isnt about holding passively like buy-and-hold investing; its an active strategy for capitalizing on identified long-term trends in the market. You hold positions for weeks, months, or even years, requiring patience, discipline, and effective risk management.
Premium
The term premium in options trading refers to the total price paid or received for an options contract. It encompasses both intrinsic value and time value, which together make up the total cost of the option.
Preview Exercise Button
The Preview Exercise button is a feature provided by Fidelity, a brokerage platform, that allows you to review and verify the details of a stock option exercise order before finalizing and submitting it to the brokerage for execution.
Pricer
A pricer chain is a visual tool used by options traders to analyze the theoretical price and behavior of an option contract based on different underlying asset prices. It provides essential information beyond just the options price, including the Greeks and other standard parameters.
Pricing Model
Pricing models are mathematical tools used to estimate the theoretical value of option contracts. While models like Black-Scholes and Binomial methods are familiar examples, a range of models exist each considering various factors like underlying asset price, time to expiration, volatility, and interest rates to generate valuations.
Primary market
Refers to the market where newly issued securities are first offered and sold by companies or governments to investors. Its the initial marketplace where these securities are created and sold directly by the issuer.
Prior Business Day’s Close
The Prior Business Days Close is the value used to calculate your taxable gain, withholding taxes for non-qualified stock options, and Alternative Minimum Tax (AMT) for incentive stock options. This means that the closing price of the underlying stock on the previous trading day is used as the reference point for these calculations. In simpler terms, if you exercise your options today, your tax and AMT calculations will be based on the stocks price the day before, not the current market price.
Profit/loss graph
A profit/loss graph, also known as a risk graph or payoff diagram, is a visual representation used by investors and traders to illustrate the potential profit or loss at expiration for a specific investment or trading strategy.
Protected Strategy
Protected strategies utilize multiple legs with options contracts to limit potential losses while maintaining some upside potential. For instance, a protected short sale combines a short stock position with a long call option, capping the downside risk if the stock price unexpectedly rises.
Protective Call
A protective call is a strategy used to limit potential losses on a short stock position by purchasing call options on the same stock.
Protective Put
A protective put is a strategy used to limit potential losses on a long stock position.
Public Offering
A public offering refers to the sale of a companys stock to the general public for the first time (Initial Public Offering) or on subsequent occasions (Secondary Offering). This process, overseen by the Securities and Exchange Commission (SEC), usually involves investment banks who market the offering to potential investors and help determine the offering price.
Put Call Parity
Put-call parity is a fundamental concept in options pricing that establishes a theoretical relationship between the prices of European put and call options with the same strike price and expiration date, on the same underlying asset. It ensures market efficiency and prevents arbitrage opportunities where traders could exploit price discrepancies for risk-free profit.
Put option
A put option is a type of financial contract that grants the owner (holder) the right, but not the obligation, to sell a specified quantity of an underlying asset (usually stocks) at a predetermined price (strike price) within a specified period (until expiration) to the option seller (writer).
Put ratio backspread
A options trading strategy that involves selling one in-the-money put with a strike price slightly above the current market price and buying two out-of-the-money puts with lower strike prices. This provides downside protection as you receive a premium upfront by selling the in-the-money put, and your potential profit is unlimited if the stock price falls sharply. However, remember that time decay and volatility can affect the outcome.
Put Ratio Spread
A put ratio spread is an advanced options strategy used by traders with the anticipation of a neutral or moderately bullish stance on an underlying security.
Put Writing (or “Put Selling”)
Put writing, also known as put selling, is an options trading strategy where an investor (the put writer or seller) grants the buyer the right, but not the obligation, to sell a specific quantity of an underlying asset (usually stocks) at a predetermined price (strike price) at any time before the option expires. The writer has the obligation to buy the underlying asset at the strike price if the buyer chooses to exercise the option. In return for accepting this obligation, the put writer receives an upfront premium from the buyer.
Put/call ratio
The put/call ratio is a metric used in options trading that compares the volume of put options traded or the open interest in puts relative to that of call options traded or their open interest. Its calculated by dividing the total volume of put options traded by the total volume of call options traded in a given period (usually a day). Alternatively, it can be calculated by dividing the open interest in put options by the open interest in call options. The put/call ratio is used as an indicator of market sentiment, specifically in terms of bullishness or bearishness among options traders.
Ratio spread
A ratio spread is an options trading strategy that involves purchasing a specific number of options contracts (either calls or puts) while simultaneously writing a greater number of the same type of options contracts, which are typically out-of-the-money compared to the purchased options.
Ratio write
A ratio write is an investment strategy where an investor purchases a certain number of shares of a particular stock and then writes a greater number of call options than the number of shares they own. This strategy is a type of ratio spread, specifically involving writing call options in a ratio higher than one-to-one concerning the underlying shares owned.
Real-time Price
Real-time Price refers to the current market value of a stock used by certain stock option plans when you exercise and hold an option. Unlike some plans that use fixed prices, real-time pricing offers greater transparency and reflects the fair market value at the time of execution. This value directly impacts various key calculations, including taxable gain, withholding taxes, and alternative minimum tax.
Realized gains and losses
Realized gains and losses represent the profit or loss on an investment when you sell it. This is calculated by subtracting the original purchase price (opening transaction cost) from the selling price (closing transaction price). A positive difference is a realized gain, meaning you made money, while a negative difference is a realized loss, meaning you lost money.
Registered Sale of Securities
A Registered Sale of Securities signifies that a company has followed the Securities and Exchange Commissions (SEC) guidelines to offer and sell shares to the public. This registration process prioritizes investor protection by ensuring transparency through thorough company disclosures, promoting market fairness with standardized procedures, and enhancing liquidity by making the securities accessible on public exchanges.
Registration Statement
A Registration Statement is a legally required document filed with the Securities and Exchange Commission (SEC) by any company offering securities for public sale. It acts as a comprehensive prospectus, providing potential investors with essential information about the company, its operations, financials, management, and associated risks.
Regression channels
Regression channels are statistically derived linear regression trendlines with upper and lower bands calculated based on a stocks historical price data and incorporating volatility. Schaeffers Investment Research utilizes these channels to identify potential options trading opportunities, focusing on breakouts (significant movements) above or below the bands, which can signal potential trend continuation or reversals.
Relative Strength Index (RSI)
Developed by Welles Wilder, the Relative Strength Index (RSI) is a popular oscillator used by traders to gauge the oversold or overbought nature of a security. It ranges from 0 to 100, with values below 20 suggesting an oversold condition and those above 80 indicating overbought territory. While not a perfect predictor, RSI can offer valuable insights when combined with other analysis. Its calculated based on the average gain and average loss of recent price changes, providing a relative measure of momentum.
Resistance
In technical analysis, resistance refers to a price area where an upward trend is expected to pause or reverse due to increased selling pressure. This area can be a specific price level, a zone, or even a trendline established by historical data.
Resistance Level
A resistance level is a price point in an assets history that has acted as a hurdle, preventing the price from rising significantly beyond it for a specific time period. This happens due to various factors like investor psychology, technical indicators, or institutional activity. While the price might not have crossed the level exactly, it may have approached and then reversed, suggesting significant selling pressure at that point. The significance of a resistance level depends on the specific timeframe, as market changes can alter its relevance.
Restricted Securities
Restricted securities are stocks, warrants, or other securities that cannot be freely traded on public markets due to restrictions imposed by the Securities and Exchange Commission (SEC) or by contractual agreements. These transactions might occur through corporate mergers, exercising stock options, receiving bonus shares, or as compensation for services rendered.
Restricted Stock Award
A Restricted Stock Award (RSA) grants employees ownership in the companys stock, subject to vesting conditions. Vesting typically occurs over a defined period, during which the employees rights to the shares are limited. RSAs offer benefits like improved retention, aligned interests, and competitive compensation.
Return if called
Return if called refers to the maximum achievable gain for a covered call writer if the underlying stock price reaches the strike price and the option is assigned (called away). This return comprises the original option premium received, any dividends earned before assignment, and the stock price appreciation up to the strike price. While offering a guaranteed return upon assignment, its important to remember that it caps potential upside if the stock price continues to rise significantly beyond the strike price.
Return On Investment
Return on Investment (ROI), often abbreviated as ROI, is a percentage measure of the profit (both realized and potential) made from an investment. Its typically calculated by dividing the net profit (gain minus initial cost) by the initial investment cost, then multiplying by 100.
Reversal / Reverse conversion
Reversal / reverse conversion is an advanced options strategy where professional traders combine a short put, long call, and short stock (or covered call) with the same strike price and expiration. This strategy aims to lock in nearly riskless profits by capturing gains from stock price movements in either direction.
Reverse Iron Albatross Spread
The Reverse Iron Albatross Spread is an advanced options strategy designed to profit from a volatile market. It combines elements of a bull put spread and a bear put spread, but using puts instead of calls, and covering a wider range of strike prices.
Rho
In options trading, Rho measures the potential change in an options theoretical value for a 1% shift in interest rates. It doesnt predict direction, but gives traders insight into how sensitive an option might be to these changes. While not solely determining the actual price, Rho is crucial for understanding potential impacts on portfolio value, especially for longer-term option positions.
Risk Graph
A risk graph is a visual tool used to illustrate the potential profit or loss (risk) for a given position in relation to a specific variable (reward). This variable can be the price of an underlying asset, the remaining time until an option expires, or other relevant factors depending on the type of position.
Risk Reversal
A risk reversal is a straightforward yet powerful hedging strategy involving buying a put option and selling a call option on the same underlying asset with the same expiration date. This effectively offers downside protection while generating some income from the sold call option. It can be used to hedge both long and short positions, with different strike prices chosen depending on the desired level of protection and risk tolerance.
Risk to Reward Ratio
The Risk-to-Reward Ratio is a crucial indicator in financial analysis, reflecting the potential profitability of a position relative to its associated risk. Its calculated by dividing the potential profit (reward) by the potential loss (risk), providing a numerical value for comparison.
Rolling
Rolling in options trading refers to simultaneously closing an existing option position and opening a new one with different characteristics. Traders roll for various reasons, including adjusting risk/reward, capitalizing on market movements, or managing expiration.
Rolling Down
Rolling down, a strategy in options trading, involves simultaneously closing an existing option position and opening a new one with a lower strike price but the same expiration date. This can be done to lock in some profit in a falling market, reduce risk of expiration or potential loss, or maintain exposure while adjusting to market changes.
Rolling Forward
Rolling forward, an options strategy, involves closing an existing option position and simultaneously opening a similar one with the same strike price but a later expiration date. This is done to extend your investment horizon, delay closing a profitable position, or adjust your strategy.
Rolling out
Rolling out an option involves replacing an existing contract with a new one of the same class (call or put) and strike price, but with a later expiration date. This strategy is often used by traders to buy more time, manage risk, or capitalize on changing market conditions.
Rolling up
Rolling up in options trading involves closing an existing call option position and simultaneously opening a new call option with the same expiration date but a higher strike price. For put options, its the opposite: rolling down to a lower strike price.
Rydex Nova/Ursa Ratio
The Rydex Nova/Ursa Ratio is calculated by dividing the total assets in the bullish Nova fund (targeting 1.5x S&P 500 performance) by the total assets in the bearish Ursa fund (tracking the S&P 500 inversely). This ratio offers a snapshot of investor sentiment towards the broader market. While not a perfect predictor, historically, a ratio below 0.4 has often coincided with market bottoms, and a surge above 1.3 has sometimes signaled corrections.
Rydex OTC/Arktos Ratio
The Rydex OTC/Arktos Ratio, calculated by dividing the assets in the Nasdaq 100-mirroring OTC fund by those in the inverse-tracking Arktos fund, offers a valuable gauge of investor sentiment towards the technology sector. While not a perfect predictor, it provides insights often associated with market movements. Historically, a ratio below 0.5 has sometimes signaled tech sector bottoms, while exceeding 1.5 could precede corrections.
Seasoned Issues
Refer to shares that have been actively traded in the market for a significant period, often implying a track record of trading history and stability. These stocks have established themselves in the market and are recognized for their reliability and consistent trade volumes.
SEC
The Securities and Exchange Commission (SEC) is a vital agency within the federal government of the United States responsible for overseeing and regulating the securities industry, including securities exchanges, brokers, investment advisors, and various market participants.
Second-Order Greeks
Also known as second-order derivatives, are measures that quantify how much the sensitivities of options (represented by the first-order Greeks) change in response to movements in the underlying variables. Popular examples include Gamma, which measures the change in Delta with respect to underlying price, and Vanna, which measures the change in Delta with respect to volatility. These metrics provide deeper insights into option behavior and risk under dynamic market conditions.
Secondary market
The secondary market is where previously issued securities are bought and sold, acting as the engine for investor activity beyond the initial purchase. It enables investors to trade existing stocks, bonds, options, and other financial instruments, providing vital functions like liquidity, price discovery, and risk management.
Sector index
A sector index tracks the performance of a specific industry or market segment, providing valuable insights for investors beyond overall market trends.
Secured put / Cash-secured put
Also known as a cash-secured put, is an options trading strategy where an investor sells or writes a put option while simultaneously setting aside enough cash (or holding an equivalent amount in Treasury bills or other highly liquid assets) to cover the potential purchase of the underlying stock if the put option is exercised.
Sell To Close Order
A Sell To Close Order is an instruction you give to your broker to sell options contracts that you already own, effectively closing your long position in those contracts.
Sell To Open Order
A Sell To Open Order is an instruction you give to your broker to create a new short position in options contracts by selling new contracts that havent been previously owned.
Series of options
A series refers to a group of option contracts that share certain common characteristics. Specifically, a series of options includes contracts on the same class (either calls or puts), with the same strike price, and expiring in the same month. For example, All XYZ May 60 calls would constitute a series, as they all have the same underlying asset (XYZ stock), are call options, have a strike price of $60, and expire in May.
Series of options
Refers to a collection of options contracts that have the same underlying security, expiration date, and strike price but differ in their exercise price or expiration date.
Settlement
Settlement in the context of equity options refers to the execution process following the exercise of an options contract, specifically involving the transfer of the underlying stock from one brokerage account to another.
Settlement price
The settlement price acts as a standardized reference point for valuing securities at the end of a trading session. This facilitates accurate calculations of changes in account equity, margin requirements, and other calculations.
Share Proceeds
Refer to the number of shares an individual holds after exercising stock options, considering various deductions such as exercise costs, commissions, fees, and taxes. It represents the net number of shares obtained after accounting for the associated expenses and taxes resulting from the exercise of options.
Shares
Units of ownership in a company or mutual fund. Each share represents a proportional claim on the companys assets and earnings.
Shelf Registered Stock (S-3 or S-8)
Shelf registration allows a company to register securities with the Securities and Exchange Commission (SEC) to be sold to the public over a period of time, often streamlining the process for subsequent offerings. Shelf registration is commonly filed under SEC forms like S-3 (for public companies) or S-8 (for employee benefit plans). S-3 is used for registering securities for public offerings by well-established companies, while S-8 is used for registering securities issued in employee benefit plans.
Short
Being short on a financial instrument refers to a situation where an individual or investor has taken a position in the market that benefits from the decrease in the value of that particular financial asset.
Short Call
A short call is a basic options strategy employed when an investor has a bearish outlook on an underlying security.
Short Gut
The Short Gut strategy is a bit different from a neutral strategy. Its more about capitalizing on the underlying securitys significant movement, regardless of the direction.
Short option position
A short option position is established when an options trader or writer sells an options contract but does not own the underlying asset (stocks, commodities, etc.).
Short Position
In simple terms, a short position means you have borrowed or sold a financial instrument (e.g., stocks, bonds, options) with the intention of buying it back later at a lower price.
Short Put
A strategy where you sell, or write, a put option on an underlying security (like a stock) you believe will increase in price or remain stable until the option expires.
Short Put Calendar Spread
An advanced options strategy designed to capitalize on volatile market movements, regardless of direction. It involves simultaneously selling a near-term put option and buying a longer-term put option with the same strike price on the same underlying security.
Short Selling
The selling of a financial instrument that isnt currently owned, with the expectation of buying it back in the future at a lower price.
Short Strangle
A short strangle is an options trading strategy employed when an investor anticipates minimal movement or stability in the price of an underlying security.
Specialist / Specialist group / Specialist system
Specialists played a more prominent role in maintaining market order on traditional exchanges, where they physically stood on trading floors and facilitated buy and sell orders. Nowadays, specialist functions are often performed electronically by designated market makers (DMMs) on automated trading platforms.
Spin-off
A spin-off is a corporate action where a company decides to separate and create a new, independent company out of a segment of its existing business. Its not precisely a stock dividend but rather a strategic move involving the distribution of shares in a subsidiary or a division to the existing shareholders of the parent company.
Spread / Spread order
A spread, in the context of trading refers to a position or order strategy involving two or more options or futures contracts (legs) with different characteristics. Spreads capitalize on specific price movements or relationships between the underlying assets, often focusing on the relative value differences rather than individual price changes.
Spread Strategy
An options trading strategy that involves simultaneously buying and selling options contracts of the same class (calls or puts) on the same underlying security, but with different strike prices and/or expiration dates.
Standard deviation
Standard deviation is a statistical measure that quantifies the amount of variation or dispersion of a set of values from their mean (average). In finance and stock market analysis, its often used to assess the volatility or fluctuation of stock prices around their average value.
Standardization
Standardization in options markets refers to the process of establishing consistent terms and conditions for contracts, ensuring that options of the same class are virtually identical and interchangeable. Options become fungible, meaning they can be easily traded or replaced with identical contracts, regardless of where they were originally purchased. This enhances liquidity and market efficiency. Standardization promotes transparency and price discovery, as investors can easily compare prices and make informed decisions across different exchanges.
Stock
A stock represents ownership in a company, and its divided into shares that individuals or entities can buy or sell.
Stock dividend
A stock dividend is a distribution made by a company to its shareholders in the form of additional shares of stock rather than cash. Its a way for companies to share their profits with shareholders without utilizing cash reserves.
Stock Option
A financial contract that gives the buyer the right, but not the obligation, to buy or sell a specific number of shares of a publicly traded company at a predetermined price (strike price) by a certain date (expiration date).
Stock Option Plan
A formal agreement between a company and its employees that grants specific employees the right to purchase a certain number of shares of the companys stock at a predetermined price (strike price) within a designated timeframe (exercise period). The plan outlines the terms and conditions under which employees can acquire company ownership through options.
Stock Repair Strategy
The Stock Repair Strategy is a method employed by investors who have incurred losses due to a decline in the value of their held stock.
Stock Replacement Strategy
An options strategy aimed at replicating exposure to a desired stock, but with lower upfront capital compared to buying the shares outright. This is achieved by purchasing deep in the money call options on the underlying stock.
Stock split
A stock split is a corporate action where a company increases its number of outstanding shares by distributing additional shares to existing shareholders, proportionally based on their current holdings. In a stock split, a company increases the total number of its outstanding shares. For instance, in a 2-for-1 stock split, each existing shareholder receives an additional share for every share they already own. As a result, the total number of shares doubles.
Stock Swap
A Stock Swap typically refers to a situation where two parties exchange shares of different companies, potentially for various reasons like portfolio diversification, tax benefits, or merger agreements. Stock Swap can also refer to a method of exercising certain employee stock options (ESOs) where the employee uses existing company shares they own to pay for the exercise price of newly acquired ESOs. This allows them to avoid selling other assets or using cash to exercise the options.
Stock’s Full Name and Symbol
The full name of a stock typically comprises the name of the company, while the stock symbol or ticker is the abbreviated code used to uniquely identify that companys stock on a stock exchange.
Stop order
A stop order is a type of contingent order placed with a broker, intended to buy or sell a security once it reaches a predetermined price known as the stop price or trigger price.
Stop-limit order
A stop-limit order is a conditional order placed with a broker that combines aspects of both stop and limit orders.
Straddle
A straddle is an options strategy that involves simultaneously buying or selling a call option and a put option with the same strike price, expiration date, and underlying stock.
Strike / Strike price
The strike price, also known as the exercise price, refers to the pre-agreed price at which the owner (holder) of an option can either buy (in the case of a call option) or sell (in the case of a put option) the underlying asset.
Strike price interval
The strike price intervals determine the price differentials between consecutive strike prices available for trading on options contracts. While historically, there were standard rules for strike price intervals, these rules have evolved over time, especially for equity options.
Suitability
Suitability is a regulatory principle that ensures investment professionals (brokers, and financial advisors) recommend strategies that match a clients individual financial situation and goals.
Support
Support in technical analysis acts like the safety net below a price level where the downward momentum of a stock is expected to pause or even reverse, thanks to increased buying activity.
Support Level
A price point at which a financial instrument, like a stock or a market index, has historically struggled to fall below. It represents a perceived lower boundary for the price of that asset, creating a level of price stability.
Swing Trader
A trader who focuses on identifying and capitalizing on short- to medium-term price movements in financial instruments like stocks, options, or currencies. Unlike day traders who hold positions for minutes or hours, swing traders typically hold positions for days to weeks, potentially even months.
Swing Trading
Its a trading strategy where positions are typically held for a short to medium term, ranging from a few days to a few weeks, aiming to profit from the price swings or fluctuations in the market. Swing trading is a trading style employed by traders aiming to capitalize on short-term price movements in financial markets.
Synthetic long stock
A synthetic long stock position is created by combining options to replicate the profit and risk characteristics of owning the underlying stock.
Synthetic position
A synthetic position in trading involves combining different financial instruments to replicate the risk-reward profile of another single instrument or strategy. This method allows traders and investors to achieve similar outcomes or exposures without necessarily using the exact instrument they want to replicate.
Synthetic short call
A synthetic short call is achieved by combining positions to replicate the risk and reward profile of holding a short call option without directly engaging in the option itself.
Synthetic short stock
The synthetic short stock strategy goes all-in on a bearish market outlook by combining short call and long put position.
Synthetic Short Straddle
An intermediate-level options strategy designed to replicate the economic effect of a Short Straddle (selling a call and put option at the same strike price) using a combination of other options contracts.
Synthetic Straddle
An intermediate-level options strategy designed to replicate the economic effect of a Long Straddle (buying a call and put option at the same strike price) using a combination of other options contracts. T
Target exit point
A target exit point is a predefined price level at which an options trader plans to sell their holdings to realize a profit.
Technical analysis
Technical analysis involves analyzing historical market data to forecast future price movements and make trading decisions. It primarily focuses on studying price patterns, volume trends, and various indicators derived from market data.
Theoretical option pricing model
A mathematical formula used to estimate the fair value of an option contract based on known variables like underlying asset price, strike price, time to expiration, volatility, interest rates, and dividends (optional).
Theoretical value
The theoretical value of an option refers to the calculated or estimated worth of that option derived from a mathematical model. Its the value that the option theoretically should have based on the inputs and assumptions of a particular pricing model.
Theta
Theta refers to the rate of decline in an options theoretical value as time passes one day closer to its expiration date. It is often expressed as a negative number and represents the time decay aspect of options.
Tick
A tick refers to the smallest possible price movement or increment allowed for a particular asset, including options. It represents the minimum price change permitted for the bid or ask price of an option.
Time decay
The phenomenon in options trading where the extrinsic value (the portion of the premium exceeding the intrinsic value) of an option contract gradually decreases as it approaches its expiration date. This decrease occurs because the closer the option gets to expiry, the less time remains for the underlying assets price to move favorably for the option holder to profit from exercising it. The rate of time decay typically accelerates as the option nears expiration and can be influenced by factors like volatility and interest rates.
Time stop
A conditional order to automatically close a position if the price of the underlying asset does not reach a specified target level within a predetermined timeframe. This essentially sets a time limit for a trade to show progress in the desired direction, minimizing potential losses if the position remains stagnant or moves against you.
Time value
Time value is a crucial component of an options premium that reflects the potential for the underlying assets price to move before the option expires. It is the difference between the options premium and its intrinsic value and is influenced by factors like remaining time, market volatility, interest rates, and supply and demand. As the option approaches expiration, time value continuously decreases, eventually reaching zero at expiration.
Today’s Close
Refers to the fair market value of a stock on a specific day, typically the market close, used for various calculations related to stock options, particularly in the context of exercising and holding stock options.
Total Stock Options Outstanding
The aggregate number of stock options currently held by a company or an individual, encompassing both vested and unvested options. This metric essentially represents the potential future claim on the companys stock associated with all outstanding options.
Total Vested Stock Options/Exercisable
Refers to the total number of stock options across all your grants that have both vested (reached the point of ownership) and are currently available for exercise. This represents your immediate opportunity to convert those options into actual shares of the companys stock, realizing the ownership benefits associated with them.
Trader
An individual or entity actively buying and selling financial instruments in a financial market for the purpose of generating profit or managing risk.
Trading capital
The amount of money an individual or firm allocates specifically for the purpose of engaging in financial trading activities. This represents a dedicated portion of their overall investment portfolio set aside for trading strategies like stock trading, options trading, or forex trading.
Trading Levels
Also known as approval levels is a system employed by brokers to categorize traders based on their risk tolerance, experience, knowledge, and financial capacity. This classification determines the types of trades, strategies, and financial instruments a trader is permitted to execute within their account. The primary purpose of trading levels is to protect traders from engaging in unsuitable investments or strategies that exceed their risk capacity, while also fulfilling regulatory and compliance requirements for the brokerage firm.
Trading Limit
An exchange-imposed restriction on the maximum daily price movement of a security, usually expressed as a percentage change from the previous days closing price.
Trading pit/Trading floor
A designated area on an exchanges trading floor where traders physically gathered to buy and sell securities through open outcry, a system of hand signals and verbal calls.
Trading Plan
A trading plan is a comprehensive blueprint that outlines a traders approach to the financial markets. Its a structured document that encapsulates the traders objectives, methodologies, risk management strategies, and guidelines for executing trades.
Trading Style
An individuals specific approach or methodology for buying and selling financial instruments with the aim of generating profit.
Trailing Stop Order
A conditional order type in which the stop price automatically trails the current market price of the underlying asset by a predetermined percentage or absolute amount.
Transaction costs
The aggregate expenses incurred when entering, holding, and exiting a financial position. These costs encompass various fees and charges associated with trading activities, impacting the net return on an investment.
Trend
A trend in financial markets refers to a consistent and identifiable direction in which the price of a specific asset or the overall market is moving. It represents a sustained pattern or tendency in price movement over a certain period.
Truncated risk
A characteristic of certain investments, particularly options, where the potential downside loss is limited to a predetermined amount, regardless of how much the underlying assets price moves against the investors position.
Type of options
Options can be classified based on various attributes, but primarily they fall into two main types: calls and puts.
Vanna
Vanna is a measurement used in options trading to assess the rate at which the delta of an option changes concerning variations in both the underlying assets price and the implied volatility of the option.
Vega
Vega measures the rate of change in the price of an option for a 1% change in the implied volatility of the underlying asset. It represents the impact of volatility changes on the options price.
Vera
Vera measures the rate of change in an options Vega with respect to changes in implied volatility (IV). In other words, it tells you how the options sensitivity to IV (Vega) changes as IV itself fluctuates.
Vertical Debit Spread
A directional options strategy involving the simultaneous purchase of one option and the sale of another option, both with the same expiration month and the same type (call or put) but with different strike prices.
Vertical spread
An options trading strategy involving the simultaneous purchase and sale of either call or put options with the same expiration date but different strike prices. Its a popular strategy used by traders to capitalize on directional moves in the underlying asset while mitigating some risk through its limited profit potential and defined risk. The two most common types of vertical spreads are debit spreads (where you pay a net premium) and credit spreads (where you receive a net credit).
Vested
It means earning the right to exercise your options and acquire ownership of the underlying shares.
Vested Stock Options/Exercisable
Vested stock options or exercisable options refer to the portion of stock options granted to an individual employee that has met the necessary conditions for ownership rights and is available for exercise.
Vesting
A crucial process associated with stock option grants, outlining the conditions under which employees gain ownership rights over these options.
Vesting Date
Vesting date refers to the specific date on which a portion or all of your options become exercisable. This effectively marks the transition from potential rights to actual ownership opportunities.
Vesting Schedule
A vesting schedule is a predetermined roadmap outlining the timeline and conditions under which your granted options become exercisable and transform from potential rewards to tangible assets. Essentially, it dictates when you earn the right to purchase the underlying shares at a pre-determined price.
Veta
Measures the rate of change in an options Vega concerning the passage of time. As a second-order Greek, Veta provides insight into how an options sensitivity to changes in implied volatility (Vega) changes as time passes.
VIX (also “CBOE Market Volatility Index”)
VIX, also known as the CBOE Market Volatility Index, is a widely used measure that reflects investors expectations of market volatility over the next 30 days. Its calculated based on the implied volatilities of S&P 500 index options and is often referred to as the markets fear gauge.
Volatile
It is when a financial instrument or an entire market experiences unexpected or dramatic price movements within a short period.
Volatile Market
A volatile market is characterized by continuous and unpredictable fluctuations in prices, resulting in a high level of instability and uncertainty. In such markets, the prices of financial assets can swing dramatically and frequently within short time frames.
Volatility
Refers to the degree of fluctuation in the price of a security, typically a stock. It essentially measures how much and how quickly the price changes over a given period.
Volatility Crunch
A volatility crunch occurs when implied volatility (IV), a measure of expected price movements of an asset, experiences a significant and rapid decline. This can happen across the entire market or for a specific underlying asset like a stock or index.
Volatility Skew
A phenomenon in options markets where implied volatility (IV) varies across different strike prices for options with the same underlying security and expiration date. This results in a graph of IV against strike prices that is not a straight line, but rather a curve, typically skewed to the right (positive skew).
Volatility Smile
A graphical shape formed when plotting the implied volatility against the strike prices of options for a particular underlying security, typically within the same expiration period. This curve often resembles a smile due to its concave shape on the graph.
Volume
Refers to the total number of options contracts traded within a specific timeframe, typically a day, week, or month. It reflects the level of activity and interest in a particular option or the underlying asset.
Vomma
Also recognized as Vega Convexity, measures the rate of change in an options Vega concerning alterations in the implied volatility of the underlying asset. Vomma provides insight into how an options sensitivity to changes in implied volatility (Vega) itself changes with alterations in the level of implied volatility.