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This occurs when an option holder chooses not to exercise or offset an option.
The relationship between a client and a broker/dealer firm allowing the client to place trades.
A market in which there is frequent trading.
Adjusted exercise price
The final exercise price of the option accounts for the coupon rates carried on Ginnie Mae (Government National Mortgage Association) mortgages.
A trade made with the primary intention of maintaining certain position characteristics. For example, making an adjustment to keep a position Delta neutral.
A promise to sell an asset before the seller has lined up purchase of the asset.
Securities trading after regular trading hours on organized exchanges.
All or none
An order that must be filled completely or not at all.
The premium an investment earns above a set standard.
Alternate delivery procedure
A contract delivery method that permits buyers and sellers to settle delivery commitments, independently of the exchange.
American depository receipt (ADR)
Certificates issued by a U.S. depository bank, representing foreign shares held by the bank.
An option that can be exercised at any time prior to expiration.
The purchase and sale of the same product in different markets to take advantage of a price disparity between the two markets.
The amount at which someone is willing to sell a stock, option, commodity, or other financial instrument.
Categories of assets, such as stocks, futures, forex, options, bonds, etc.
To require the seller of an option to take either a short position, in the case of a Call, or long position, in the case of a Put, at the specified exercise price.
Assigned (an exercise)
Received notification of an assignment by OCC.
The process by which the seller of an option is notified of the buyer’s intention to exercise.
An option whose exercise price is equal to the current price of the underlying contract. On listed option exchanges the term is more commonly used to refer to the option whose exercise price is the closest to the current price of the underlying contract.
The exercise by the clearing house of an in-the-money option at expiration, unless the holder of the option submits specific instructions to the contrary.
The average cost of shares/contracts bought at different prices over time.
Buying more of a stock or an option at a lower price than the original purchase to reduce the average cost.
A spread (usually Delta neutral) where more options are purchased than sold, and where all options have the same underlying contract and expire at the same time.
Applying a set of entry and exit rules on historical data to measure performance.
A futures market in which the front month is higher in price than the back months. It is the opposite of contango.
Currency in which gains or losses from an international portfolio are measured.
The difference between the spot or cash price of a commodity and the price of the nearest futures contract for the same or a related commodity.
BATS Options Exchange
An expectation that an underlying market will go down in price. The term may also be applied to any position, which will profit from a decline in the underlying market.
A long period of time when prices in the market are generally declining, usually falling by 20% or more.
Any spread which will theoretically increase in value with a decline in the price of the underlying asset.
Bear spread (call)
The simultaneous writing of one call option with a lower strike price and the purchase of another call option with a higher strike price.
Bear spread (put)
The simultaneous purchase of one put option with a higher strike price and the writing of another put option with a lower strike price.
The performance of a predetermined set of securities used for comparison purposes.
The measure of an asset’s risk in relation to the market (for example, the S&P500) or to an alternative benchmark or factors.
The difference between the bid and the ask prices.
The amount someone is willing to pay to purchase a stock, commodity, or other financial instrument.
A type of option whose payoff is either zero or a fixed amount. For example, there could be a binary option that pays $1000 if a hurricane makes landfall in Hawaii before a specified date and zero otherwise.
A widely used option pricing model developed by John Cox, Stephen Ross, and Mark Rubenstein, sometimes referred to as the binomial model. The model approximates the price distribution of the underlying asset by constructing a binomial tree where the price of the underlying is assumed to move up or down a given amount over each time interval. This model is often used to evaluate American.
A variation from the original Black-Scholes model developed by Fischer Black. The Black model is designed to evaluate European options on a futures contract.
The first widely used pricing model for options, developed by Fischer Black and Myron Scholes. In its original form the model was designed to evaluate European options on stock.
Large quantity of stock or large dollar amount of bonds held or traded. As a rule of thumb, 10,000 shares or more of stock and $200,000 or more worth of bonds would be described as a block.
BOX Options Exchange
A four-sided option spread that involves a long call and a short put at one strike price in addition to a short call and a long put at another strike price.
Breadth of the market
In the context of general equities, percentage of stocks participating in a particular market move.
Refers to the price at which a transaction reaches its average entry price.
A firm that handles transactions for its customers.
An expectation than an underlying market will rise in price. The term may also be applied to any position, which will profit from a rise in the underlying market.
A market characterized by rising prices. Any market in which prices are in an upward trend.
Any spread which will theoretically increase in value with a rise in the price of the underlying asset.
Bull spread (call)
The simultaneous purchase of one call option with a lower strike price and the writing of another call option with a higher strike price.
Bull spread (put)
The simultaneous writing of one put option with a higher strike price and the purchase of another put option with a lower strike price.
The undoing of a trade that previously was reported in error.
An order to a broker to purchase a specific quantity of a security.
A covered call position that includes a stock purchase and an equivalent number of calls written at the same time. This position may be a combined order with both sides (buying stock and writing calls) executed simultaneously.
The sale of two options with the same exercise price, together with the purchase of one option with a lower exercise price and one option with a higher exercise price. All options must be of the same type, have the same underlying contract, and expire at the same time, and there must be an equal increment between exercise prices.
C2 Options Exchange
The purchase of one option expiring on one date and the sale of another option expiring on a different date. Typically, both options are of the same type, have the same exercise price, and have the same underlying stock or commodity. Calendar spreads are sometimes referred to as time spreads.
A contract between a buyer and a seller whereby the buyer acquires the right, but not the obligations to purchase a specified underlying contract at a fixed price on or before a specified date. The seller of the Call option assumes the obligation of delivering the underlying contract should the buyer wish to exercise his option.
To void an order to buy or sell.
The amount of interest which must be paid to finance a cash debit, or the amount of interest which can be earned on a cash credit, over some period of time.
Also called spot markets, these are markets that involve the immediate delivery of a security or instrument.
Cash settlement amount
The difference between the exercise price of the option being exercised and the exercise settlement value of the index on the day the index option is exercised.
Chicago Board Options Exchange
The set of tools used in technical analysis in which charts are used to plot price movements, volume, settlement prices, open interest, and other indicators.
All options of the same type with the same expiration date and the same underlying instrument(asset).
The organization that guarantees the integrity of all trades made on an exchange.
The price at which a security closed for trading on a given day or the closing price of a bar in a chart.
The final price of a security at which a transaction was made.
A protective strategy in which a written call and a long put are taken against a previously owned long stock position. The options typically have different strike prices (put strike lower than call strike). Expiration months may or may not be the same.
Securities against which loans are made. If the value of the securities (relative to the loan) declines to an unacceptable level, this triggers a margin call. As such, the investor is asked to post additional collateral or the securities are sold to repay the loan.
An arrangement of options involving two long, two short, or one long and one short positions. The positions can have different strikes or expiration months. The term combination varies by investor.
The fee paid to a broker to execute a trade, based on the number of shares or contracts.
Option strategy consisting of both puts and calls at different strike prices to capitalize on a narrow range of volatility.
The written statement that follows any "trade" in the securities markets.
A market condition in which futures prices are higher in the distant delivery months.
An order to execute a transaction in one security that depends on the price of another security.
A unit of trading in futures. Also, the actual bilateral agreement between buyer and seller in a futures transaction.
The amount of the underlying asset covered by the option contract. This is 100 shares for 1 equity option unless adjusted for a special event.
An investment strategy in which a long put and a short call with the same strike price and expiration combine with long stock to lock in a nearly riskless profit.
Statistical measure of the degree to which the movements of two instruments are related.
To close out an open position. This term most often describes the purchase of an option or stock to close out an existing short position for either a profit or loss.
A strategy in which one call and one put with the same expiration, but different strike prices, are written against each 100 shares of the underlying stock.
An open short option position completely offset by a corresponding stock or option position. A covered call could be offset by long stock or a long call, while a covered put could be offset by a long put or a short stock position. This insures that if the owner of the option exercises, the writer of the option will not have a problem fulfilling the delivery requirements.
Covered put / Covered cash-secured put
The cash-secured put is an option strategy in which a put option is written against a sufficient amount of cash (or Treasury bills) to pay for the stock purchase if the short option is assigned.
An option strategy in which one call and one put with the same strike price and expiration are written against each 100 shares of the underlying stock.
The sale of a Call or Put option against an existing long or short position in the underlying contract.
Money received in an account either from a deposit or from a transaction that results in increasing the account's cash balance.
A spread strategy that increases the account's cash balance when established. A bull spread with puts and a bear spread with calls are examples of credit spreads.
A measure of the rate of change in an option's Delta for a one-unit change in the price of the underlying stock.
The expiration dates applicable to the different series of options. Traditionally, there were three cycles:
Today, most equity options expire on a hybrid cycle, which involves four option series: the two nearest-term calendar months and the next two months from the traditional cycle to which that class of options has been assigned.
Daily price limit
The level at which many commodity, futures, and options markets are allowed to rise or fall in a day. Exchanges usually impose a daily price limit on each instrument.
The difference between the high and low during one trading day.
A type of option order that instructs the broker to cancel any unfilled portion of the order at the close of trading on the day the order was first entered.
Buying or selling the one of more securities within the same day.
Money paid out from an account from either a withdrawal or a transaction that results in decreasing the cash balance.
Difference in the value of two options, when the value of the option bought exceeds the value of the one sold.
A term used to describe how the theoretical value of an option erodes or declines with the passage of time. Time decay is specifically quantified by Theta.
The tender and receipt of an actual commodity or financial instrument in settlement of a futures contract.
The sensitivity of an option’s theoretical value to a change in the price of the underlying asset.
A position where the sum totals of all the positive and negative Deltas add up to near zero.
An instrument that derives its value from some underlying instrument or instruments. The most common types of derivatives are Futures contracts, options, and swaps.
A long Call or Put at one exercise price and expiration date, together with a short Call or Put at a different exercise price and expiration date. All options must have the same underlying asset. This is simply a time spread using different exercise prices.
An adjective used to describe an option that is trading at a price less than its intrinsic value (i.e., trading below parity).
Accounts over which an individual or organization, other than the person in whose name the account is carried, exercises trading authority or control.
Dividing investment funds among a variety of securities with different risk, reward, and correlation statistics so as to minimize unsystematic risk.
An amount paid by a company to the shareholders in the company. Dividends are usually paid from one to four times annually, with the quoted dividend representing the amount paid for each share of stock held.
A trade made at a price less than the previous trade price or at a price equal to the previous trade price if that price was itself made on a down-tick.
The exercise or assignment of an option prior to expiration.
Electronic Communications Network; frequently used for routing orders into the stock markets.
ETF (Exchange Traded Fund)
An investment vehicle holding a group of stocks, commodity, or other assets that issues shares that are traded like a stock on a securities exchange.
A smaller version of a futures contract that is traded exclusively on an electronic trading facility. E-Mini is a trademark of the CME Group, Inc.
In a margin account, equity is the difference between the securities owned and the margin loans owed. The investor keeps this amount after all positions are closed and all margin loans paid off.
An option on shares of an individual common stock or exchange traded fund.
A strategy that has the same risk-reward profile as another strategy. For example, a long May 60-65 call vertical spread is equivalent to a short May 60-65 put vertical spread.
An option which can only be exercised at expiration.
An organization whose members meet for the purpose of buying and selling stock commodities, foreign currencies, or other financial instruments. Depending on the type of exchange, members may conduct their trading either physically in a single location, or electronically over a computer network.
The first day of trading when the seller, rather than the buyer, of a stock will be entitled to the most recently announced dividend payment.
The day on which a dividend-paying stock is trading without the right to receive the dividend.
The process by which the holder of an option notifies the seller of his intention to take delivery of the underlying contract in the case of a Call, or to make delivery of the underlying contract in the case of a Put, at the specified exercise price.
Exercise by exception processing
A procedure used by OCC as an operational convenience for clearing members. Under these proceedings, OCC assumes a clearing member tendered exercise notices for options that are in-the-money by threshold amounts, unless specifically instructed not to do so. This procedure protects the owner from losing the intrinsic value of the option because of failure to exercise. Unless instructed not to do so, all expiring equity options held in customer accounts are exercised if they are in-the-money by a specified amount.
The price at which the underlying contract will be delivered in the event an option in exercised.
Exercise settlement amount
Refers to options that are more complex than simple puts or call options. For example, a caput is a call option on a put option.
The date and time after which an option may no longer be exercised.
Today, equity options expire on a hybrid cycle that involves four option series: the two nearest-term calendar months and the next two months from the traditional cycle to which that class of options has been assigned.
The last business day prior to the option's expiration date during which purchases and sales of options can be made. For equity options, this is generally the third Friday of the expiration month. If the third Friday of the month is an exchange holiday, the last trading day is the Thursday immediately preceding the third Friday.
The month that the expiration date occurs.
The difference between an option’s price and the intrinsic value. Also known as time value.
An option value generated by a mathematical model given certain prior assumptions about the terms of the option, the characteristics of the underlying contract, and prevailing interest rates.
A protective strategy in which a written call and a long put are added to a previously owned long stock position, also referred to as a collar. The options may have the same strike price or different strike prices. The expiration months may or may not be the same.
The price at which an order is executed.
Fill or kill
An order which will automatically be cancelled unless it can be executed immediately and in its entirety.
FINRA (Financial Industry Regulatory Authority)
The largest independent regulator for all securities firms doing business in the United States.
First notice date
The day after which an investor who has holds a futures contract may be required to take physical delivery of the contract's underlying commodity.
A trader on an exchange floor who executes trading orders for other people.
An exchange member on the trading floor who buys and sells for their own account.
Currency of another country, often abbreviated as forex or FX
A method of predicting stock prices based on the study of earnings, sales, dividends, and so on.
Interchangeability resulting from standardization. Options listed on national exchanges are fungible, while over-the-counter options generally are not. Classes of options listed and traded on more than one national exchange are referred to as multiple-listed/multiple-traded options.
A contract, usually exchange-traded, between a buyer and a seller whereby the buyer is obligated to take delivery and the seller is obligated to make delivery of a fixed amount of a commodity at a predetermined price on some future date. All profits and losses are realized immediately, and result in a cash credit or debit based on daily changes in the settlement price of the contract.
The sensitivity of an option’s Delta to a change in the price of the underlying contract. Gamma is the acceleration of Delta.
A variation on the original Black-Scholes model. It was developed by Mark Garman and Steven Kohlhagen. The model is designed to evaluate European options on foreign currencies.
Good thru date
This order works until executed or cancelled or until the end of the trading session on the date specified by the trader.
Good til cancelled
An order to be held by a broker until it can either be executed or is cancelled by the customer.
A secondary position taken to protect the value of some primary position. If the value of the primary position declines, the losses are at least partially offset by an increase in the value of the hedge position.
The theoretically correct number of underlying contracts to option contracts required to establish a neutral hedge.
High Frequency Trading
Computerized or algorithmic trading in which transactions are completed in small fractions of a second.
A statistical measure of the volatility (specifically, the annualized standard deviation) of a futures contract, security, or other instrument over a specified number of past trading days.
Any person who has made an opening purchase transaction, call or put, and has that position in a brokerage account.
The purchase of one option expiring on one date and the sale of another option expiring on a different date. Typically, both options are of the same type, have the same exercise price, and have the same underlying stock or commodity.
A lightly traded investment such as a stock or future that is not easily converted into cash.
Immediate or canceled order (IOC)
Market or limited price order that is to be executed in whole or in part as soon as such order is represented in the trading crowd. The portion not executed is to be treated as canceled.
Assuming all other inputs are known, the volatility that would have to be input into a theoretical pricing model in order to yield a theoretical value identical to the price of the option in the marketplace.
A number that represents the composite value of a group of similar or related items. The most common types of financial indices are stocks (a stock index), foreign currencies (a currency index), bonds (a bond index), or physical commodities (a commodity index).
An option whose underlying interest is an index. Generally, index options are cash-settled.
The volatility percentage that justifies an option's price, as opposed to historic volatility or implied volatility. A theoretical pricing model can be used to generate an option's individual volatility when the five remaining quantifiable factors (stock price, time until expiration, strike price, interest rates and cash dividends) are entered along with the price of the option itself.
Initial margin requirement
When buying securities on margin, the proportion of the total market value of the securities that the investor must pay for in cash.
The highest price at which someone is willing to buy a security.
A professional investment management company. Typically, this term describes money managers such as banks, pension funds, mutual funds and insurance companies.
The cost or value of money. Interest rates are typically quoted as an annual percentage, that can be earned on funds that have been loaned, or that must be paid on funds that have been borrowed.
An option which could be exercised and immediately closed out against the underlying contract for a cash credit. A Call is in-the-money if its exercise price is lower than the current market price of the underlying. A Put is in-the-money if its exercise price is higher than the current market price of the underlying.
The amount by which an option is in-the-money. Out-of-the-money options have no intrinsic value.
A long straddle, together with a short strangle. All options must expire at the same time and have the same underlying contract.
International Securities Exchange
International Securities Exchange Gemini
A long Call and short Put with one expiration date, together with a short Call and long Put with a different expiration date. All four options must have the same exercise price and the same underlying contract.
A measure of the rate of change in an option's theoretical value for a one-unit change in the volatility assumption.
Measures the peakedness of a probability distribution.
A measure of leverage. The expected percentage change in the value of an option for a 1% change in the value of the underlying product.
Last notice day
The final day on which notices of intent to deliver on futures contracts may be issued.
Last trading day
Day on which trading ceases for the maturing (current) delivery month.
The amount of time that elapses between the placement of a market order or marketable limit order on an electronic trading system and the execution of that order.
Long-term options with expirations up to 2-1/2 years.
One side of a spread position, or component in a multi-leg option position or strategy.
The ability to control large dollar amounts of a commodity with a comparatively small amount of capital.
The maximum allowable price movement over some time period for an exchange traded contract.
An order to be executed at a specific price or better.
Trading environments characterized by high trading volume, a narrow spread between the bid and ask prices, and the ability to trade larger sized orders without significant price changes.
A put or call traded on a national options exchange. In contrast, over-the-counter options usually have non-standard or negotiated terms.
A statistical distribution that implies that a stock price can rise forever, but cannot fall below zero.
A position resulting from the purchase of a contract. The term is also used to describe a position that will theoretically increase in value should the underlying market rise. Note that a long Put position is a short market position.
A position that will theoretically increase in value should the underlying contract make a large move in either direction. The position will theoretically decrease in value, because of time decay, if the underlying market sits still.
Long stock position
A position in which an investor has purchased and owns stock..
A call for additional money or securities when a margin account falls below its exchange-mandated required level.
Money deposited by a trader with the clearinghouse to ensure the integrity of his trades.
An independent trader or trading firm that stands ready to buy or sell contracts in a designated market. Market makers perform duties similar to locals on commodity exchanges, the primary difference being that a market maker is obligated to make a two-sided (bid and ask) market in his designated contract.
Market maker system (competing)
A method of supplying liquidity in options markets by having market makers in competition with one another. As an alternative to a specialist system, they are also responsible for making fair and orderly markets in a given class of options.
Market on close
A market order to be executed as closely as possible to the close of that day’s trading.
An order to be executed immediately at the current market price.
Quotations of the current best bid/ask prices for an option or stock in the marketplace (an exchange trading floor). The investor usually obtains this information from a brokerage firm. However, for listed options and stocks, these quotes are widely disseminated and available through various commercial quotation services.
Adjustment of the book value or collateral value of a security to reflect current market value.
An arrangement whereby the profits or losses on a futures contract are settled each day.
A type of market order that allows the investor to give discretion to the floor broker regarding the price and/or time of trade execution.
Married put strategy
The simultaneous purchase of stock and put options representing an equivalent number of shares. This is a limited risk strategy during the life of the puts because the stock can always be sold for at least the strike price of the purchased puts.
Miami Options Exchange
A mathematical formula used to calculate the theoretical value of an option.
In technical analysis, the relative change in price over a specific time interval. Often equated with speed or velocity and considered in terms of relative strength.
Any option contract listed and traded on more than one national options exchange.
A short market position with no offsetting long market position.
A national securities exchange (Operated by NASDAQ OMX).
The expiration date of an option or future that is closest to the present.
Money received in an account either from a deposit or a transaction that results in increasing the account's cash balance.
Money paid from an account either from a withdrawal or a transaction that results in decreasing the cash balance.
A position that has no particular preference as to changes in a given market condition.
A spread that is Delta neutral.
An option strategy (Or stock and option position) expected to benefit from a neutral market outcome.
Ninety-ten (90/10) strategy
A conservative option strategy in which an investor buys Treasury bills (or other liquid assets) with 90% of their funds, and buys call options (or put options or a mixture of both) with the balance. The proportions of this strategy are subject to change based on prevailing interest rates.
NASDAQ OMX BX Options Market
NASDAQ Options Market
Any option that does not have common stock as the underlying asset. Non-equity options include options on futures, indexes, foreign currencies, Treasury security yields, etc.
A theoretical distribution resulting from an infinite number of random events. A normal distribution is symmetrical, with most of the events concentrated near the middle of the distribution and progressively fewer events falling at the tails of the distribution. A normal distribution is often referred to as a bell-curve distribution.
An order submitted to a broker, but over which the broker has discretion as to when and how the order is executed.
Any day on which notices of intent to deliver on futures contracts may be issued.
A national securities exchange (Operated by NYSE Euronext).
NYSE Amex Options
NYSE Arca Options
Offer / Offer price
The price at which a seller is offering to sell an option or a stock. Also known as ask or ask price.
One-cancels-other order (OCO)
A type of option order that treats two or more option orders as a package, whereby the execution of any one of the orders causes all the orders to be reduced by the same amount.
The total number of outstanding option contracts on a given series or for a given underlying stock.
The trading method by which competing market makers and floor brokers representing public orders make bids and offers on the trading floor.
The range of prices at which the first bids and offers are made or the first transactions are completed on an exchange.
An addition to, or creation of, a trading position. An opening purchase transaction adds long options to an investor's total position, and an opening sale transaction adds short options. An opening option transaction increases that option's open interest.
The right to buy or sell a specific product over some period of time at a predetermined price.
Options Clearing Corporation (OCO)
A registered clearing agency whose shares are owned by the exchanges that trade listed equity options, OCC is an intermediary between option buyers and sellers. OCC issues and guarantees all listed option contracts.
The time from when a buyer or writer of an option creates an option contract to the expiration date; sometimes referred to as an option's lifetime.
Option pricing curve
A graphical representation of the estimated theoretical value of an option at one point in time, at various prices of the underlying stock.
Option pricing model
The first widely used model for option pricing was the Black Scholes. This formula can be used to calculate a theoretical value for an option using current stock prices, expected dividends, the option's strike price, expected interest rates, time to expiration and expected stock volatility. While the Black-Scholes model does not perfectly describe real-world options markets, it is still often used in the valuation and trading of options.
The seller of an option contract who is obligated to meet the terms of delivery if the option owner exercises his or her right. This seller has made an opening sale transaction, and has not yet closed that position.
A stock on which listed options are traded.
An option that currently has no intrinsic value. A Call is out-of-the-money if its exercise price is higher than the current market price of the underlying. A Put is out-of-the-money if its exercise price is lower than the current price of the underlying.
Over the counter (OTC)
A market where products such as stocks or foreign currencies are bought and sold by telephone and other electronic means of communication, rather than on a designated exchange.
Over the counter (OTC) option
An over-the-counter option is traded in the over-the-counter market. OTC options are not listed on an options exchange and do not have standardized terms. These are to be distinguished from exchange-listed and traded equity options, which are standardized.
An option strategy involving the writing of call options (wholly or partially) against existing long stock positions. This is different from the buy-write strategy that involves the simultaneous purchase of stock and writing of a call.
The amount by which an option is in-the-money.
A chart of the profits and losses for a particular options strategy prepared in advance of the execution of the strategy. The diagram is a plot of expected profits or losses against the price of the underlying security.
NASDAQ OMX PHLX
Physical delivery option
An option whose underlying entity is a physical good or commodity, like a common stock or a foreign currency. When its owner exercises that option, there is delivery of that physical good or commodity from one brokerage or trading account to another.
The risk to an investor (option writer) that the stock price will exactly equal the strike price at expiration (that option will be exactly at-the-money). The investor will not know how many of their written(short) options will be assigned or whether a last second move in the underlying will leave any long options in- or out-of-the-money. The risk is that on the following Monday the option writer might have an unexpected long (in the case of a written put) or short (in the case of a written call) stock position, and thus be subject to the risk of an adverse price move.
The smallest price movement increment of a commodity or currency.
A collection of investments or positions.
The sum total of a trader’s open contracts in a particular underlying market.
An investing strategy in which open positions are held for an extended period.
The price of an option.
Given a prevailing interest rate, the amount of money that would have to be invested at the present time in order to yield a given amount at the end of some period of time. This can often be approximately by deducting the carrying costs over the period from the terminal amount.
For securities traded in more than one market, the primary market is usually the exchange where trading volume in that security is highest.
A graphical presentation of the profit and loss possibilities of an investment strategy at one point in time (usually option expiration), at various stock prices.
An arbitrage strategy involving the purchase or sale of mispriced stock index futures contract against an opposing position in the stocks underlying the index.
Option pricing principle that says, given a stock`s price, a put and call of the same class must have a static price relationship because arbitrage opportunities or activities will always reestablish such a relationship.
A contract between a buyer and a seller whereby the buyer acquires the right, but not the obligation, to sell a specified underlying contract at a fixed price on or before a specified date. The seller of the Put option assumes the obligation of taking delivery of the underlying contract should the buyer wish to exercise his option.
The actual price or the bid or ask price of either cash commodities or futures or options contracts at a particular time.
A spread, usually Delta neutral, where more options are purchased than sold, and where all options have the same underlying contract and expire at the same time.
Any spread where the number of long market contracts (long underlying, long Call, or short Put) and short market contracts (short underlying, short Call, or long Put) are unequal.
Ratio vertical spread
A spread, usually Delta neutral, where more options are sold than are purchased, and where all options have the same underlying contract and expire at the same time.
The sale of multiple options against an existing position in an underlying contract. This is simply a covered write using more than one option.
Realized gains and losses
The net amount received or paid when a closing transaction is made and matched with an opening transaction.
A term used in technical analysis to describe a price area at which rising prices are expected to stop or meet increased selling activity. This analysis is based on historic price behavior of the stock.
Reversal / Reverse conversion
An investment strategy used mostly by professional option traders in which a short put and long call with the same strike price and expiration combine with short stock to lock in a nearly riskless profit.
The sensitivity of an option’s theoretical value to a change in interest rates.
Move a position to the following delivery date; by closing the current position and taking a new position in a future delivery date.
Gradually taking a position in a security or market over time.
A floor trader on an exchange who hopes to profit by continually buying at the bid price and selling at the ask price in a specific market.
The Securities and Exchange Commission. The SEC is an agency of the federal government that is in charge of monitoring and regulating the securities industry.
A market where securities are bought and sold after their initial purchase by public investors.
An index that measures the performance of a narrow market segment, such as biotechnology or small capitalization stocks.
Secured put / Cash-secured put
An option strategy in which a put option is written against a sufficient amount of cash (or Treasury bills) to pay for the stock purchase if the short option is assigned.
Sell refers to the selling of a security.
All options with the same underlying instrument, same exercise price, and same expiration date.
The process by which the underlying stock is transferred from one brokerage account to another when equity option contracts are exercised by their owners and the inherent obligations assigned to option writers.
The official price at the end of a trading session. OCC establishes this price and uses it to determine changes in account equity, margin requirements and for other purposes.
A position resulting from the sale of a contract. The term is also used to describe a position that will theoretically increase in value should the underlying market fall.
Short option position
The position of an option writer that represents an obligation on the part of the option's writer to meet the terms of the option if its owner exercises it. The writer can terminate this obligation by buying back (cover or close) the position with a closing purchase transaction.
A position that will theoretically increase in value should the underlying market sit still. The position will theoretically decrease in value should the underlying contract make a large move in either direction.
Short ratio spread
A spread, usually Delta neutral, where more options are sold than are purchased, and where all options have the same underlying contract and expire at the same time.
The sale of a security that is not owned by the seller. In order to complete a short sale, the seller must borrow the security in order to make delivery to the buyer.
Short stock position
A strategy that profits from a stock price decline. It is initiated by borrowing stock from a broker-dealer and selling it in the open market. This strategy is closed (covered) later by buying back the stock and returning it to the lending broker-dealer.
Describes the asymmetry from a normal distribution.
Specialist / Specialist group / Specialist system
One or more exchange members whose function is to maintain a fair and orderly market in a given stock or a given class of options. This is accomplished by managing the limit order book and making bids and offers for their own account in the absence of opposite market side orders.
A stock dividend issued by one company in shares of another corporate entity, such as a subsidiary corporation of the company issuing the dividend.
Spot exchange rates
Exchange rate on currency for immediate delivery.
A long market position and an offsetting short market position usually, but not always, in the same underlying market.
Period when stocks or commodities futures increase in price and investors who have sold short must cover their short positions to prevent loss of large amounts of money.
Interchangeability resulting from standardization. Options listed on national exchanges are fungible, while over-the-counter options generally are not. Classes of options listed and traded on more than one national exchange are referred to as multiple-listed / multiple-traded options.
In a normal distribution, a measure of how the events are distributed. A low standard deviation indicates that a large number of the events are concentrated near the middle of the distribution. A high standard deviation indicates that more of the events fall near the tails of the distribution.
A dividend paid in shares of stock rather than cash.
An increase in the number of outstanding shares by a corporation through the issuance of a set number of shares to a shareholder for a set number of shares that the shareholder already owns.
Stop limit order
A contingency order that becomes a limit order if the contract trades at a specific price.
A contingency order that becomes a market order if the contract trades at a specific price.
A long Call and a long Put, where both options have the same underlying contract, the same expiration date, and the same exercise price
A long Call and a long Put, where both options have the same underlying contract, the same expiration date, but different exercise prices.
The price at which the underlying contract will be delivered in the event an option is exercised.
Strike price interval
The normal price differential between option strike prices. Exchange rules for strike intervals have changed over the years, and many stocks are now listed in $1 increments or smaller. In general, strike intervals in equity options are listed in $2.50 increments for strikes under $50 and in $5 increments from $50 up to $200. Over $200, strikes are listed in $10 increments. As mentioned, many stocks are now exempt from standard listing procedures and strike increments will vary.
A requirement that any investing strategy fall within the financial means and investment objectives of an investor or trader.
A term used in technical analysis to describe a price area at which falling prices are expected to stop or meet increased buying activity. This analysis is based on previous price behavior of the stock.
A combination of contracts having approximately the same characteristics as a different contract.
A long underlying position together with a long Put.
Synthetic long underlying
A long Call and a short Put, where both options have the same underlying contract, the same expiration date, and the same exercise price.
A short underlying position together with a long Call.
Synthetic short underlying
A short Call and a long Put, where both options have the same underlying contract, the same expiration date, and the same exercise price.
The price that an investor hopes a stock will reach in a certain time period.
A method of predicting future stock price movements based on the study of historical market data such as the prices themselves, trading volume, open interest, the relation of advancing issues to declining issues, short selling volume and others.
Theoretical pricing model
A mathematical model designed to evaluate a security or contract given certain assumptions about the characteristics of the contract as well as other conditions in the marketplace.
An option value generated by a mathematical model based on the inputs to the model, which are the terms of the option contract, the price of the underlying contract, and prevailing interest rates.
The sensitivity of an option’s theoretical value to a change in the amount of time remaining to expiration.
Is the minimum price change up or down for a financial instrument. An up-tick means that the last trade was at a higher price than the one preceding it. A down-tick means that the last price was lower than the one preceding it.
A term used to describe how the theoretical value of an option erodes or reduces with the passage of time. Time decay is specifically quantified by Theta.
The price of an option less its intrinsic value. The entire premium of an out-of-the-money option consists of time value.
1. Any investor who makes frequent purchases and sales.
2. A member of an exchange who conducts his or her buying and selling on the trading floor of the exchange.
A specific location on the trading floor of an exchange designated for the trading of a specific option class or stock.
All of the charges associated with executing a trade and maintaining a position. These include brokerage commissions, fees for exercise and/or assignment, exchange fees, SEC fees and margin interest. In academic studies, the spread between bid and ask is taken into account as a transaction cost.
The designation of an option as either a Call or Put.
A short call option position in which the writer does not own shares of underlying stock represented by the option contracts.
A short put option position in which the writer does not have a corresponding short stock position or has not deposited, in a cash account, cash or cash equivalents equal to the exercise value of the put.
The stock, commodity, futures contract, or cash index to be delivered in the event an option is exercised.
The security subject to being purchased or sold upon exercise of the option contract.
A trade made at a price greater that the previous trade price, or at a price equal to the previous trade price if that price was itself made on an up-tick.
A rule that sets the conditions under which a stock may be sold short. An up-tick is when the current inside bid moves higher.
The sensitivity of an option’s theoretical value to a change in volatility.
The purchase of one option and sale of one option, where both options are of the same type, have the same underlying contract, and expire at the same time, but have different exercise prices.
The degree to which the price of an underlying asset tends to fluctuate over time.
The characteristic of most option markets to have different volatilities at different exercise prices, even though all options have the same underlying contract and expire at the same time.
To sell an option.
XYZ / XYZ Corporation
A fictitious company used as the underlying stock throughout the OIC website.
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