Options Definitions – All Option Trading Jargon Explained
The following Options Glossary is provided for your interest. It describes pretty much every option trading related term you might come across, in alphabetic order, and what it means. Enjoy!
Accumulation – When the underlying asset starts moving sideways after a significant drop as investors start accumulating it.
Adjusted Options – Non-standardized stock options with customized terms in order to price in major changes in the underlying stock’s capital structure. Read the full tutorial on Adjusted Options.
All-or-None (AON) Order – An order that must be completely filled or else it will not be executed. This is a useful order for option traders executing complex option strategies which needs to be precisely filled. Types Of Options Orders Explained.
American-Style Option – An option contract that may be exercised at any time between the date of purchase and the expiration date. Most exchange-traded options are American-style. Read The Tutorial On American Style Options.
Arbitrage – The simultaneous purchase and sale of financial instruments in order to benefit from price discrepancies. Option traders frequently look for price discrepancies of the same option contract between different option exchanges, thereby benefiting from a risk free trade. Read more about Options Arbitrage.
Ask Price- As used in the phrase ‘bid and asked’ it is the price at which a potential seller is willing to sell. Another way of saying this is the asking price for what someone is selling. You buy option contracts and stocks on their Ask price. Read more about Options Prices.
Assign – to designate an option writer for fulfillment of his obligation to sell stock (call option writer) or buy stock (put option writer). The writer receives an assignment notice from the Options Clearing Corporation. Read More About Options Assignment.
At the Money – When an option’s strike price is the same as the prevailing stock price. Read More About At The Money Options.
Automatic Exercise – A protection procedure whereby the Options Clearing Corporation attempts to protect the holder of an expiring in-the-money option by automatically exercising the option on behalf of the holder.
Backspread – see Reverse Strategy. Read More About Backspreads.
Barrier Options –Exotic options which comes into existence or goes out of existence when certain prices has been reached. Read More About Barrier Options Here!
Bearish – An opinion that expects a decline in price, either by the general market or by an underlying stock, or both.
Bearish Options Strategies – Different ways to use options in order profit from a downwards move in the underlying stock. Read the tutorial on Bearish Options Strategies.
Bear Spread – an option strategy that makes its maximum profit when the underlying stock declines and has its maximum risk if the stock rises in price. The strategy can be implemented with either puts or calls. In either case, an option with a higher striking price is purchased and one with a lower striking price is sold, both options generally having the same expiration date. See also Bull Spread. Option Strategy Library.
Bear Trap – Any technically unconfirmed downward move that encourages investors to be bearish. It usually precedes strong rallies and often catches the unwary.
Beta – A figure that indicates the historical propensity of a stock price to move with the stock market as a whole. The lowest theoretical Beta is zero indicating no movement. The highest Beta is 2 indicating wild gyrations for small movements in the market.
Bid Price – The price at which a potential buyer is willing to buy from you. This means that you sell at the Bid Price. Read more about Options Prices.
Bid/Ask Spread – The difference between the prevailing bid and ask price. Generally, option contracts that are more liquid tend to have a tighter Bid/Ask Spread while option contracts that are less liquid and are thinly traded tend to have a wider Bid/Ask Spread. Read more about Options Prices.
Black-Scholes Model – A mathematical formula designed to price an option as a function of certain variables-generally stock price, striking price, volatility, time to expiration, dividends to be paid, and the current risk-free interest rate. Read More About Black-Scholes model.
Box Spread – A complex 4 legged options trading strategy meant to take advantage of discrepanies in options prices for a risk-free arbitrage.
Learn More About Box Spreads.
Break – Even Point-the stock price (or prices) at which a particular strategy neither makes nor loses money. It generally pertains to the result at the expiration date of the options involved in the strategy. A “dynamic” break-even point is one that changes as time passes.
Breadth – The net number of stocks advancing versus those declining. When advances exceed declines the breadth of the market is inclining. When the declines exceed advances the market is declining.
Breakout – What occurs when a stock price or average moves above a previous high resistance level or below a previous low support level. The odds are that the trend will continue.
Bullish – An opinion in which one expects a rise in price, either by the general market or by an individual security.
Bullish Options Strategies – Different ways to use options in order profit from an upwards move in the underlying stock. Read the tutorial on Bullish Options Strategies.
Bull Call Spread – A bullish options strategy which aims to reduce the upfront cost of buying call options in order to profit from stocks that are expected to rise moderately. Read the Tutorial on Bull Call Spread.
Bull Spread – an option strategy that achieves its maximum potential if the underlying security rises far enough, and has its maximum risk if the security falls far enough. An option with a lower striking price is bought and one with a higher striking price is sold, both generally having the same expiration date. Either puts or calls may be used for the strategy. Option Strategy Library.
Bull Trap – Any technically unconfirmed move to the upside that encourages investors to be bullish. Usually precedes important declines and often fools those who do not wait form confirmation by other indicators.
Butterfly Spread – A neutral option strategy that has both limited risk and limited profit potential, constructed by combining a bull spread and a bear spread. Three strike prices are involved, with the lower two being utilized in the bull spread and the higher two in the bear spread. The strategy can be established with either puts or calls; there are four different ways of combining options to construct the same basic position. Learn Everything About The Butterfly Spread.
Buy To Open – To establish an options position by going long. Read the Buy To Open tutorial.
Call –see Call Option.
Call Broken Wing Butterfly Spread – A Butterfly Spread with a skewed risk/reward profile which makes no losses or even a slight credit when the underlying stock breaks to downside. This is achieved by buying further strike out of the money call options than a regular butterfly spread. Read the tutorial on Call Broken Wing Butterfly Spread.
Call Broken Wing Condor Spread – A Condor Spread with a skewed risk/reward profile which makes no losses or even a slight credit when the underlying stock breaks to downside. This is achieved by buying further strike out of the money call options than a regular Condor spread. Read the tutorial on Call Broken Wing Condor Spread.
Call Ratio Backspread – A credit options trading strategy with unlimited profit to upside and limited profit to downside through buying more out of the money calls than in the money calls are shorted. Read the tutorial on Call Ratio Backspread.
Call Ratio Spread – A credit options trading strategy with the ability to profit when a stock goes up, down or sideways through shorting more out of the money calls than in the money calls are bought. Read the tutorial on Call Ratio Spread.
Call Time Spread – Another name for Call Calendar Spread. An Options Trading strategy where long term call options are bought and near term call options are written in order to profit from time decay. Read the tutorial on Call Time Spread.
Called Away – The process in which a call option writer is obligated to surrender the underlying stock to the option buyer at a price equal to the strike price of the call option.
Calendar Spread – A type of options trading strategy that uses a combination of options with different expiration dates in order to profit primarily from time decay. Read all about Calendar Spreads.
Calendar Straddle or Combination-A complex neutral options strategy involving the purchase of a long term straddle and the sale of a short term straddle. Read all about Calendar Straddle.
Calendar Strangle –A complex neutral options strategy involving the purchase of a long term strangle and the sale of a short term strangle. Read all about Calendar Strangle.
Call Options –Options which gives the holder the right to buy the underlying security at a specified price for a certain, fixed period of time. Read All About Call Options .
Capitalization – The total amount of securities issued by a corporation. This may include: bonds, debentures, preferred stock, common stock and surplus.
Cash Settlement / Cash Delivered – Options which, when exercised, delivers the profit in cash instead of an underlying asset. Read All About Cash Settled Options.
CBOE – The Chicago Board Options Exchange; the first national exchange to trade listed stock options.
CBOE VIX – See VIX.
Chain – A list of options quotes across multiple strike prices. Read more about Options Chains.
Class of Options – Option contracts of the same type and style that covers the same underlying asset.
Close – Period at the end of a trading day where final prices for the day are calculated.
Closing Order – The buying back or selling off of an option for which an option trader has the opposite position. An option trader who writes a call option will execute a closing order by “buying to close” that call option. An option trader who bought a call option will execute a closing order by “selling to close” that call option. Types Of Options Orders Explained.
Condor Spread – A complex neutral option strategy that profits from a stock trading within a predetermined range. Read All About Condor Spreads Here!
Contango – A term originating from the oil market. This is when farther month implied volatility is higher than nearer month implied volatility. This is indicative of a normal market condition.
Contingent Order – An order to buy stock and sell a covered call option that is given as one order to the trading desk of a brokerage firm. Also called a “net order.” This is a “not held” order. Types Of Options Orders Explained.
Correction – When a stock drops in price temporarily before rebounding later.
Contract Size – The amount of underlying asset covered by the option contract. This is generally 100. If an option is quoted for $2.50, then one contract would cost $2.50 x 100 = $250 and would cover 100 shares.
Contract Neutral Hedging – A static hedging technique involving buying 1 put option or selling 1 call option for every 1 share held. Read More About Contract Neutral Hedging Here!
Contrary Opinion – The belief opposite that of the general public and/or Wall Street. It is most significant at major market turning points. An overall consensus of opinion, whether bullish or bearish, usually marks an extreme. An investor taking a contrary view will usually benefit in time.
Conversion – The transformation of a long stock position into a position which is short the stock using options, without closing the original long stock position, through the use of synthetic positions. Read more about Conversions.
Consolidation – When stocks starts going sideways after a significant rise as investors start selling some of their holdings to take profit.
Contract Range – The highest and lowest price that an options contract has traded at. Find out more about Contract Range.
Cover – to buy back as a closing transaction an option that was initially written.
Covered Call Write – a strategy in which one writes call options while simultaneously owning an equal number of shares of the underlying stock. Read All About Covered Calls Here!
Covered Put Write – a strategy in which one sells put options and simultaneously is short an equal number of shares of the underlying security. Learn Everything About The Covered Put.
Covered Straddle Write – the term used to describe the strategy in which an investor owns the underlying security and also writes a straddle on that security. This is not really a covered position.
Covered Warrant – the term used for structured warrants that works almost exactly the same as call options and put options. Read about the Differences Between Warrants & Options.
Credit – Money received in an account. A credit transaction is one in which the net sale proceeds are larger than the net buy proceeds (cost), thereby bringing money into the account. There are many credit option strategies. Read All About Debit And Credit Spreads Here!
Credit Spread- A Credit Spread position is an option spread in which the net sale proceeds are larger than the net buy proceeds (cost), thereby bringing money into the account. Read more about Credit Spreads.
Day Order – An order that expires at the end of the trading day if it is not executed. Read All About Options Orders Here!
Day trader / Daytrader – Traders who open and close option positions or multiple option positions all within the same trading day.
Day trading / Daytrading – Trading methodolody that involves making multiple trades that are opened and closed all within the same trading day. Read more about Options Trading Styles.
Debit – An expense, or money paid out from an account. A debit transaction is one in which the net cost is greater than the net sale proceeds.
Debit Spread – Option spreads which you have to pay money to put on. Read more about Debit Spreads .
Decay – See Time Decay
Deliverables – The financial assets that are delivered to the options holders when options are exercised.
Delta – the amount by which an option’s price will change for a corresponding change in price by the underlying entity. Call options have positive deltas, while put options have negative deltas. Technically, the delta is an instantaneous measure of the option’s price change, so that the delta will be altered for even fractional changes by the underlying entity. Consequently, the terms “up delta” and “down delta” may be applicable. They describe the option’s change after a full 1-point change in price by the underlying security-either up or down. The “up delta” may be larger than the “down delta” for a call option, while the reverse is true for put options. For more detailed explanation on Delta and other option greeks, please go to Options Delta.
Delta Neutral – When positive delta options and negative delta options offset each other to produce a position which neither gains nor decreases in value as the underlying stock moves slightly up or down. Such a position will return a profit no matter which way the underlying stock eventually moves as long as the move is significant. Learn How To Perform Delta Neutral Trading.
Delta Spread – A ratio spread that is established as a neutral position by utilizing the deltas of the options involved. The neutral ratio is determined by dividing the delta of the purchased option by the delta of the written option.
Derivatives – A financial instrument whose value is derived in part from the value and characteristics of another financial instrument. Examples of derivatives are options, futures and warrants.
Diagonal Call Time Spread – A neutral options trading strategy profiting primarily through time decay by buying long term at the money call options and shorting short term out of the money call options against them. Read the Diagonal Call Time Spread Tutorial.
Diagonal Spread – An options spread on the same underlying, same type but different expiration month and strike. Read the Diagonal Spread Tutorial.
Discount – An option is trading at a discount if it is trading for less than its intrinsic value. A future is trading at a discount if it is trading at a price less than the cash price of its underlying index or commodity. See also Intrinsic Value and Parity.
Discount Broker – A brokerage firm that offers low commission rates. Get A List Of Option Brokers Here!
Dividend – When a company pays a share of the profit to existing shareholders. This share of profit may be in cash or options. Read about the Effects of Dividends on Stock Options.
Downside Protection – Generally used in connection with covered call writing, this is the cushion against loss, in case of a price decline by the underlying security, that is afforded by the written call option. Alternatively, it may be expressed in terms of the distance the stock could fall before the total position becomes a loss (an amount equal to the option premium), or it can be expressed as percentage of the current stock price.
Dynamic Hedging – A hedging technique which requires constantly rebalancing in order to maintain the hedge ratio.
Early Exercise (assignment) – The exercise or assignment of an option contract before its expiration date.
Employee Stock Options – Stock options granted to employees by their companies as a mean of compensation and incentive. Read More About Employee Stock Options.
Equity Option – An option that has common stock as its underlying security.
ETF – Exchange Traded Funds. Open ended funds tradable over an exchange just like a stock. ETFs made it possible for investors to invest in a variety of other instruments like gold and silver just like investing in stocks.
European Exercise – A feature of an option that stipulates that the option may only be exercised at its expiration. Therefore, there can be no early assignment with this type of option. Read The Tutorial On European Style Options.
Exercise – To invoke the right granted under the terms of a listed options contract. The holder is the one who exercises. Call holders exercise to buy the underlying security, while put holders exercise to sell the underlying security. Read the tutorial on how to Exercise an Option.
Exercise Limit – The limit on the number of contracts which a holder can exercise in a fixed period of time. Set by the appropriate option exchange, it is designed to prevent an investor or group of investors from “cornering” the market in a stock.
Exercise Price – The price at which the option holder may buy or sell the underlying security, as defined in the terms of his option contract. It is the price at which the call holder may exercise to buy the underlying security or the put holder may exercise to sell the underlying security. For listed options, the exercise price is the same as the Strike Price.
Expected Return – A rather complex mathematical analysis involving statistical distribution of stock prices, it is the return which an investor might expect to make on an investment if he were to make exactly the same investment many times throughout history.
Expiration Date – The day on which an option contract becomes void. The expiration date for listed stock options is the Saturday after the third Friday of the expiration month. All holders of options must indicate their desire to exercise, if they wish to do so, by this date. Read the full tutorial on Options Expiration.
Expiration Time – The time of day by which all exercise notices must be received on the expiration date. Technically, the expiration time is currently 5:00 PM on the expiration date, but public holders of option contracts must indicate their desire to exercise no later than 5:30 PM on the business day preceding the expiration date. The times are Eastern Time.
Extrinsic Value – Also known as “Premium Value” or “Time Value”. It is the difference between an option’s price and the intrinsic value. Read the full tutorial on Extrinsic Value.
Fair Value – A term used to describe the worth of an option or futures contract as determined by a mathematical model.
Fiduciary Call – An option trading stratey which buys call options as a replacement for a protective put or married put in the same proportion. Read More About Fiduciary Calls Here!
Financial Instrument – A physical or electronic document that has intrinsic monetary value or transfers value. For example, cash, shares, futures, options and precious metals are financial instruments.
Frontspreads – Options strategies designed to profit from neutral market conditions where prices change very little. Read more about Frontspreads.
Fundamental Analysis – A method of analyzing the prospects of a security by observing accepted accounting measures such as earnings, sales, assets, and so on.
Gamma – The rate of change of a stock option’s delta for one unit change in the price of the underlying stock. Read All About Options Gamma.
Gamma Neutral – A position which has zero or near zero gamma value resulting in the delta value of the position staying stagnant no matter how its underlying stock moves. Read All About Gamma Neutral.
Goldilock Economy – An economy that has steady growth and moderate inflation which is neither too heated nor cold and allows for stock market friendly monetary policies.
Good Until Canceled (GTC) – A designation applied to some types of orders, meaning that the order remains in effect until it is either filled or cancelled. Read All About Options Orders Here!
Going Forward – Analyst’s Jargon. Meaning “In The Future”. 12 months going forward means 12 months in the future.
Greeks – A set of mathematical criteria involved in the calculation of stock option prices. Please read more about Option Greeks.
Grocession – A prolonged period of 0 to 2% growth in GDP that will feel like a recession.
Hedge – Transactions that will protect against loss through a compensatory price movement. Read All About Hedging Here!
Hedge Ratio – The mathematical quantity that is equal to the delta of an option. It is useful in facilitation in that a theoretically riskless hedge can be established by taking offsetting positions in the underlying stock and its call or put options. Read All About Hedge Ratio Here!
Historical Volatility – Volatility of past price movement of the underlying asset. Also known as Realised Volatility.
Horizontal Call Time Spread – An option strategy in which longer term at the money call options are bought and short term at the money call options are written in order to profit when the underlying stock remains stagnant. Read the tutorial on Horizontal Call Time Spread.
Horizontal Put Time Spread – An option strategy in which longer term at the money put options are bought and short term at the money put options are written in order to profit when the underlying stock remains stagnant. Read the tutorial on Horizontal Put Time Spread.
Horizontal Spread – An option strategy in which the options have the same strike price, but different expiration dates.
Implied Volatility – A measure of the volatility of the underlying stock, it is determined by using prices currently existing in the market at the time, rather than using historical data on the price changes of the underlying stock. Read more about Implied Volatility.
Incremental Return Concept – A strategy of covered call writing in which the investor is striving to earn an additional return from option writing against a stock position which he is targeted to sell-possibly at substantially higher prices.
Index – A compilation of the prices of several common entities into a single number.
Index Option – An option whose underlying asset is an index instead of a hard asset such as stocks. Most index options are cash-based. Read the full tutorial on Index Options !
In the Money – A term describing any option contract that has intrinsic value. A call option is in-the-money if the underlying security is higher than the strike price of the call. A put option is in-the-money if the security is below the strike price. Read ALL About In The Money Options here.
Intrinsic Value – The value of an option if it were to expire immediately with the underlying stock at its current price; the amount by which an option is in-the-money. For call options, this is the difference between the stock price and the striking price, if that difference is a positive number, or zero otherwise. For put options it is the difference between the striking price and the stock price, if that difference is positive, and zero otherwise. Read the full tutorial on Intrinsic Value !
Last Trading Day – The third Friday of the expiration month. Options cease trading at 3:00 PM Eastern Time on the last trading day.
Leg – (Verb) A risk oriented method of establishing a two-sided position. Rather than entering into a simultaneous transaction to establish the position (a spread, for example), the trader first executes one side of the position, hoping to execute the other side at a later time and a better price. The risk materializes from the fact that a better price may never be available, and a worse price must eventually be accepted.
(Noun) In an option strategy involving many kinds of options, each option type is known as a leg.
Legging – Entering each leg of a complex options trading position seperately and individually. Read the full tutorial on Legging !
LEAPS – Long-Term Equity Anicipation Securities. Simply said, it is option contracts that expires 1 year or more in the future. Sometimes option contracts that expires 6 months to a year later are also known as a LEAPS. Read more aboutLEAPs.
Level II Quotes – Real time quotes provided by NASDAQ outlining the specific bid ask spread provided by each market maker. Read All About Level II Quotes Here.
Leverage – In investments, the attainment of greater percentage profit and risk potential. A call holder has leverage with respect to a stock holder-the former will have greater percentage profits and losses than the latter, for the same movement in the underlying stock. Read About How To Calculate Options Leverage.
Limit – See Trading Limit.
Limit Order – An order to buy or sell securities at a specified price (the limit).
Liquid / Liquidity – The ease at which a purchase or sale can be made without disrupting existing market prices. Read About What Affects Stock Option Liquidity Here!
Listed Option – A put or call option that is traded on a national option exchange. Listed options have fixed striking prices and expiration dates.
Long – To be long is to own something.
LookBack Options –Exotic options which allows the holder to “Look Back” at the price action of the underlying asset during expiration to decide the optimal price at which to exercise the Lookbacks Options. Read More About LookBack Options Here!
Margin (stocks) – To buy a security by borrowing funds from a brokerage house. The margin requirement-the maximum percentage of the investment that can be loaned by the brokerage firm-is set by the Federal Reserve Board.
Margin (options) – Cash deposit needed to be held in account when writing options. Read the full tutorial on Options Margin.
Marked-To-Model – A valuation method using financial models for level 2 assets, which are less liquid assets that are hard to value due to an absence of a readily available market.
Market Maker – An exchange member whose function is to aid in the making of a market, by making bids and offers for his account in the absence of public buy or sell orders. Several market-makers are normally assigned to a particular security. The market-maker system encompasses the market-makers and the board brokers. Read All About Market Makers Here!
Market Order – An order to buy or sell securities at the current market. The order will be filled as long as there is a market for the security. Read All About Options Orders Here!
Market On Close (MOC) – An option trading order that fills a position at or near market close. Read All About Options Orders Here!
Married Put and Stock –a put and stock are considered to be married if they are bought on the same day, and the position is designated at that time as a hedge. Read More About Married Puts Here!
Model – A mathematical formula designed to price an option as a function of certain variables-generally stock price, striking price, volatility, time to expiration, dividends to be paid, and the current risk-free interest rate. The Black-Scholes model is one of the more widely used models.
Moneyness – The strike price of an option in relation to the prevailing price of the underlying asset. Read More About Moneyness Here!
Multiple Compression – Where the overall market sell off over a period of time in order to generally reduce PE ratios across the board due to pessimism about the macro economy.
Multiple Expansion – Where the overall market rallies over a period of time in order to generally increase PE ratios across the board due to optimism about the macro economy.
NASDAQ – National Association of Securities Dealers Automatic Quotation System. It is an electronic market place in USA where securities are listed and traded electronically.
Naked Option – see Uncovered Option.
Narrow Based – Generally referring to an index, it indicates that the index is composed of only a few stocks, generally in a specific industry group. Narrow-based indices are NOT subject to favorable treatment for naked option writers.
Neutral – Describing an opinion that is neither bearish or bullish. Neutral option strategies are generally designed to perform best if there is little or no net change in the price of the underlying stock.
Neutral Options Strategies – Different ways to use options in order profit a stock remains stagnant or within a tight trading range. Read the tutorial on Neutral Options Strategies.
Non-Equity Option – An option whose underlying entity is not common stock; typically refers to options on physical commodities, but may also be extended to include index options.
One Sided Market – A market condition where there are significantly more sellers than buyers or more buyers than sellers. In this case, there are not enough buyers putting up offers to buy from sellers or that there are not enough sellers putting up offers to sell to buyers.
Open Interest – The net total of outstanding open contracts in a particular option series. An opening transaction increases the open interest, while any closing transaction reduces the open interest. Read More About Volume and Open Interest.
Option – The right to buy or sell specific securities at a specified price within a specified time. A put gives the holder the right to sell the stock, a call the right to buy the stock.
Options Chains – Tables presenting the various options that a stock offers over various strike price and expiration dates. Read the full tutorial on Options Chains.
Optionable Stocks – Stocks with tradable options.
Option Pain – Also known as Max Pain or Max Option Pain. It is the stock price which will result in the most number of options contracts expiring out of the money. Read More About Option Pain.
Option Pricing Curve – A graphical representation of the projected price of an option at a fixed point in time. It reflects the amount of time value premium in the option for various stock prices, as well. The curve is generated by using a mathematical model. The delta (or hedge ratio) is the slope of a tangent line to the curve at a fixed stock price.
Option Trader – Also known as Options Trader. It is anyone who buys and sells options in the capital market. Read more about Option Trading.
Option Trading – Also known as Options Trading. It is the buying and selling of stock and index options in the capital market so as to speculate for leveraged profits in every market condition or perform hedging to reduce portfolio risk. Read more about Option Trading.
Options Clearing Corporation (OCC) – The issuer of all listed option contracts that are trading on the national option exchanges.
Options Margin – See “Margin (Options)”.
Options Trading – The buying and selling of stock and index options in the capital market so as to speculate for leveraged profits in every market condition or perform hedging to reduce portfolio risk. Read more about Options Trading.
Options Trader – Anyone who buys and sells options in the capital market. Read more about Option Trading.
Options Strategist – An investment professional who specializes in research, analysis and execution of options strategies.
Options Symbol – A string of alphabets that define specific options contracts. Can be referred to as the name of an options contract. Read more about Reading Options Symbols.
Out of the Money – Describing an option that has no intrinsic value. A call option is out-of-the-money if the stock is below the strike price of the call, while a put option is out-of-the-money if the stock is higher than the strike price of the put. Read More About Out Of The Money Options.
Over-the-Counter Option (OTC) – An option traded over-the-counter, as opposed to a listed stock option. The OTC option has a direct link between buyer and seller, has no secondary market, and has no standardization of striking prices and expiration dates.
Overvalued – Describing a security trading at a higher price than it logically should. Normally associated with the results of option price predictions by mathematical models. If an option is trading in the market for a higher price than the model indicates, the option is said to be overvalued.
Parity- Describing an in-the-money option trading for its intrinsic value: that is, an option trading at parity with the underlying stock. Also used as a point of reference-an option is sometimes said to be trading at a half-point over parity or at a quarter-point under parity, for example. An option trading under parity is a discount option.
Physical Option – An option whose underlying security is a physical commodity that is not stock or futures. The physical commodity itself typically a currency or Treasury debt issue-underlies that option contract.
Physically Settled Option – An option which the actual underlying asset exchange hands when exercised. Read more about Physically Settled Options.
Portfolio –Holdings of securities by an individual or institution. A portfolio may contain options of different stocks or a combination of shares, options and other financial instruments.
Position – Specific securities in an account or strategy. A covered call writing position might be long 1,000 XYZ and short 10 XYZ January 30 calls. It also refers to facilitate; buy or sell a block of securities, thereby establishing a position.
Position Trading – The use of options trading strategies in order to profit from the unique opportunities presented by stock options, such as time decay, volatility and even arbitrage to make safe, fixed, albeit lower profit. Read more about Options Trading Styles.
Premium – The total price of an option contract is made up of the sum of the intrinsic value and the time value premium. Even though most people refer to the price of an option contract as the “Premium”, it is actually an inaccurate expression. The Premium of an option contract is the part of the price that is not intrinsic. Please read more about How Stock Options Are Priced.
Premium Over Parity – See Extrinsic Value.
Profit Range – The range within which a particular position makes a profit. Generally used in reference to strategies that have two break-even points-an upside break-even and a downside breakeven. The price range between the two break-even points would be the profit range.
Profit Table – A table of results of a particular strategy at some point in time. This is usually a tabular compilation of the data drawn on a profit graph.
Protected Strategy – A position that has limited risk. A protected short sale (short stock, long call) has limited risk, as does a protected straddle write (short straddle, long out-of-the-money combination). The Ride The Flow System is an example of a protected strategy.
Protective Call – An option trading hedging strategy that protects profits made in a short stock position using call options. Read More About Protective call Here!
Protective Put – An option trading hedging strategy that hedges against a drop in stock price using put options. Read More About Protective Put Here!
Public Book (of orders) – The orders to buy or sell, entered by the public, that are away from the current market. The board broker or specialist keeps the public book. Market-makers on the CBOE can see the highest bid and lowest offer at any time. The specialist’s book is closed (only he knows at what price and in what quantity the nearest public orders are).
Pull back – A temporary fall in price after a rally. The rally usually continues after a Pull Back. This is also known as a “Correction”.
Put Broken Wing Butterfly Spread – A Butterfly Spread with a skewed risk/reward profile which makes no losses or even a slight credit when the underlying stock breaks to upside. This is achieved by buying further strike out of the money put options than a regular butterfly spread. Read the tutorial on Put Broken Wing Butterfly Spread.
Put Broken Wing Condor Spread – A Put Condor Spread with a skewed risk/reward profile which makes no losses or even a slight credit when the underlying stock breaks to upside. This is achieved by buying further strike out of the money put options than a regular put condor spread. Read the tutorial on Put Broken Wing Condor Spread.
Put – An option granting the holder the right to sell the underlying security at a certain price for a specified period of time. See also Call. Read About Put Options Here.
Put Call Parity – Put Call Parity is an option pricing concept that requires the extrinsic values of call and put options to be in equilibrium so as to prevent arbitrage. Put Call Parity is also known as the Law Of One Price. Read About Put Call Parity Here.
Put Call Ratio – The ratio of the number of open put options against the number of open call options. The higher the resulting number, the more put options are bought or shorted on the underlying asset. For daily total equity put call ratio, please visit Option Trader’s HQ. Read more about Put Call Ratio.
Put Ratio Backspread – A credit options trading strategy with unlimited profit to downside and limited profit to upside through buying more out of the money puts than in the money puts are shorted. Read the tutorial on Call Ratio Backspread.
Put Ratio Spread – A credit options trading strategy with the ability to profit when a stock goes up, down or sideways through shorting more out of the money puts than in the money puts are bought. Read the tutorial on Put Ratio Spread.
Quadruple Witching – The third Friday of March, June, September and December when Index Futures, Index Options, Stock Futures and Stock Options expire. This is one of the most volatile trading days of the year, with exceptionally high trading volume. Read all about Quadruple Witching.
Quarterlies / Quarterly Options – Options with quarterly expiration cycle. Read more about Quarterly Options.
Ratio Backspread – Credit volatile options trading strategy that opens up one leg for unlimited profit through selling a smaller amount of in the money options against the purchase of at the money or out of the money options of the same type. Read the Tutorial on Ratio Backspreads.
Ratio Calendar Combination – A strategy consisting of a simultaneous position of a ratio calendar spread using calls and a similar position using puts, where the striking price of the calls is greater than the striking price of the puts.
Ratio Calendar Spread – Selling more near-term options than longer-term ones purchased, all with the same strike; either puts or calls.
Ratio Spread – Constructed with either puts or calls, the strategy consists of buying a certain amount of options and then selling a larger quantity of out-of-the-money options.
Ratio Strategy – A strategy in which one has an unequal number of long securities and short securities. Normally, it implies a preponderance of short options over either long options or long stock.
Ratio Write – Buying stock and selling a preponderance of calls against the stock that is owned.
Realize (a profit or loss) – The act of closing a position, incurring a profit or a loss. As long as a position is not closed, the profit or loss remains unrealized.
Resistance – A term in technical analysis indicating a price area higher than the current stock price where an abundance of supply exists for the stock, and therefore the stock may have trouble rising through the price.
Reward / Risk Ratio – A gauge of how risky a position can be by dividing its maximum profit potential against the maximum loss potential. A ratio of above 1 means that the potential reward is higher than the potential loss.
Return On Investment (ROI) – The percentage profit that one makes, or might make, on his investment.
Return If Exercised – The return that a covered call writer would make if the underlying stock were called away.
Return If Unchanged – The return that an investor would make on a particular position if the underlying stock were unchanged in price at the expiration of the options in the position.
Reversal – The transformation of a short stock position into a position which is long the stock using options, without closing the original short stock position, through the use of synthetic positions. Read more about reversals and synthetic positions.
Reverse Hedge – A strategy in which one sells the underlying stock short and buys calls on more shares than he has sold short. This is also called a synthetic straddle and is an outmoded strategy for stocks that have listed puts trading.
Reverse Strategy – A general name that is given to strategies which are the opposite of better known strategies. For example, a ratio spread consists of buying calls at a lower strike and selling more calls at a higher strike. A reverse ratio spread also known as a backspread consists of selling the calls at the lower strike and buying more calls at the higher strike. The results are obviously directly opposite to each other.
Risk Graph – A graphical representation of the risk/reward profile of an option position. Learn All About Risk Graphs Now!
Risk Free Return – Profit on a risk free investment instrument such as the Treasury bills. It is a common standard of measuring the opportunity cost of having your money in anything other than Treasury bills.
Roll Down – Close out options at one strike and simultaneously open other options at a lower strike.
Roll Forward – Close out options at a near-term expiration date and open options at a longer-term expiration date.
Rolling – A follow up action in which the strategist closes options currently in the position and opens other options with different terms, on the same underlying stock.
Roll Up – Close out options at a lower strike and open options at a higher strike.
Rotation – A trading procedure on the option exchanges whereby bids and offers, but not necessarily trades, are made sequentially for each series of options on an underlying stock.
Russell Sage – Renowned American Politician and Financier who introduced OTC call and put options in 1872. Read about the History of Options Trading
Security / Securities – (finance) A tradable financial instrument signifying ownership in financial assets issued by companies or governments. Such financial assets includes but are not restricted to stocks, bonds, futures and debts.
Sell To Close – Closing a position by selling an option contract you own. Learn About Sell To Close Now!
Sell To Open – Opening a position by selling an option contract to a buyer. Learn About Sell To Open Now!
Selling Climax – Exceptionally heavy volume created when panic-stricken investors dump stocks.Often this marks the end of a bear market and is a spot to buy.
Series – An option contracts on the same underlying stock having the same striking price, expiration date, and unit of trading.
Settlement – The resolution of the terms of an options contract between the holder and the writer when the options contract is exercised. Read the full tutorial on Options Settlement.
Short (to be short) – To Short means to Sell To Open. That means to write or sell an options contract to a buyer. This gives you the obligation to fulfill the exercise of the option should the buyer decides to do so.
Short Backspread – Volatile options strategies which are set up with a net credit and unlimited profit potential in one direction.
Short Calendar Spread – Volatile options strategies that profit primarily through the difference in time decay of long term and short term options, achieved through writing longer term options and buying short term options. Read the full tutorial on Short Calendar Spreads.
Short Horizontal Calendar Call Spread – Short Calendar Spread that uses only call options. Read the full tutorial on Short Horizontal Calendar Call Spreads.
Short Covering – The process of buying back stock that has already been sold short.
Spread Order – An order to simultaneously transact two or more option trades. Typically, one option would be bought while another would simultaneously be sold. Spread orders may be limit orders, not held orders, or orders with discretion. They cannot be stop orders, however. The spread order may be either a debit or credit.
Spread Strategy – Any option position having both long options and short options of the same type on the same underlying security.
Static Hedging – A hedging technique where a hedging trade is established and held without needing to rebalance.
Stock Options – Options contracts with shares as the underlying asset. Read All About Stock Options.
Stock Replacement Strategy – A trading strategy that seeks to reduce risk and volatility through owning deep in the money call options instead of the stock itself and using the remaining cash for hedging. Read All About Stock Replacement Strategy.
Stock Repair Strategy – An options strategy that aims to recover lost value in a stock quickly through writing call options against it. Read All About Stock Repair Strategy.
Stop Limit Order – Similar to a stop order, the stop-limit order becomes a limit order, rather than a market order, when the security trades at the price specified on the stop.
Stop Order – A traditional stop loss method which closes a position when a predetermined price is hit. Read All About Options Orders Here!
Straddle – The purchase or sale of an equal number of puts and calls having the same terms.
Strip Straddle – A Straddle with more put options than call options. Read the full tutorial on Strip Straddle.
Strap Straddle – A Straddle with more call options than put options. Read the full tutorial on Strap Straddle.
Strategy – With respect to option investments, a preconceived, logical plan of position selection and follow-up action.
Strike Arbitrage – An options arbitrage strategy that locks in discrepancies in options pricing between strike prices for a risk-free arbitrage. Read More About Strike Arbitrage.
Strike Price – The price at which the buyer of a call can purchase the stock during the life of the option or the price at which the buyer of a put can sell the stock during the life of the option. Read More About How Stock Options Are Priced.
Structured Warrants- An alternative to stock options which works almost exactly like stock options and traded in markets such as the Singapore market. See how Structured Warrants Are Traded In The Singapore Market.
Support – A term in technical analysis indicating a price area lower than the current price of the stock, where demand is thought to exist. Thus a stock would stop declining when it reached a support area. See also Resistance.
Swing Trading – A trading methodology that trades short term price swings for short term profits. Read more about Options Trading Styles.
Synthetic Position – A combination of stocks and/or options that return the same payoff characteristics of another stock or option position.
Synthetic Put – A security which some brokerage firms offer to their customers. The broker sells stock short and buys a call, while the customer receives the synthetic put. This is not a listed security, but a secondary market is available as long as there is a secondary market in the calls.
Synthetic Stock – An option strategy that is equivalent to the underlying stock. A long call and a short put is synthetic long stock. A long put and a short call is synthetic short stock.
Synthetic Short Straddle – A combination of stocks and call options which produces the same payoff characteristics as a Short Straddle. Read More About Synthetic Short Straddle.
Synthetic Straddle – A combination of stocks and call options which produces the same payoff characteristics as a Long Straddle. Read More About Synthetic Straddle.
Take Delivery – To fulfill the obligation of buying stocks when put options that you sold becomes exercised.
Technical Analysis – The method of predicting future stock price movements based on observation of historical stock price movements.
Thales of Miletus – The creator of options back in 332BC. Read about the History of Options Trading
Theoretical Value – The price of an option, or a spread, as computed by a mathematical model.
Theta – One of the 5 option greeks. Theta determines the rate of time decay of an option contract’s premium. For more details on how Theta works and how it is calculated, please visit Option Greeks.
Ticker Symbol – Symbol representing the shares and options of a company’s shares traded in the stock market. MSFT is the ticker symbol for Micrsoft shares while MSQFB is the ticker symbol for Microsoft’s June29Call options.
Time Decay – The reduction of a stock option’s extrinsic value as expiration date draws nearer. See “Theta” above. Read the full tutorial on Time Decay.
Time Spread – see Calendar Spread. Read the full tutorial on Time Spreads.
Time Value – Also known as “Premium Value” or “Extrinsic Value”. It is the difference between an option’s price and the intrinsic value. Read more about how Stock Options Are Priced.
Topping Out – A peak point where the sellers begin to outnumber the buyers.
Total Return Concept – A covered call writing strategy in which one views the potential profit of the strategy as the sum of capital gains, dividends, and option premium income, rather than viewing each one of the three separately.
Trading Limit – The exchange imposed maximum daily price change that a futures contract or futures option contract can undergo.
Trend – The direction of a price movement. A trend in motion is assumed to remain intact until there is a clear change.
Triple Witching – Prior to 2001. The third Friday of March, June, September, and December, when stock options, index futures and options on index futures expire. After 2001, the introduction of Single Stock Futures transformed Triple Witching into Quadruple Witching as single stock futures expire on the third Friday of every quarterly month as well.
Type – The designation to distinguish between a put or call option.
Uncovered Option – A written option is considered to be uncovered if the investor does not have a corresponding position in the underlying security.
Underlying Asset – The security which one has the right to buy or sell via the terms of a listed option contract. An underlying asset can be any financial instrument on which option contracts can be written based on. Some examples are : Stocks, ETFs, Commodities, Forex, Index.
Undervalued – Describing a security that is trading at a lower price than it logically should. Usually determined by the use of a mathematical model.
Variable Ratio Write – An option strategy in which the investor owns 100 shares of the underlying security and writes two call options against it, each option having a different striking price.
Vertical Spread – Any option spread strategy in which the options have different striking prices, but the same expiration date. Read the full tutorial on Vertical Spreads.
Vertical Ratio Spread – Vertical spreads that buy and short an unequal number of options on each leg. Read the full tutorial on Vertical Ratio Spreads.
VIX – An index measuring the level of implied volatility in US index options and is used as a measurement of volatility in the US stock market. Read More About VIX.
VIX Options – Non-equity options based on the CBOE VIX. Read More About VIX Options.
Volatile – A stock or market that is expected to move up or down unexpectedly or drastically is known as a volatile market or stock.
Volatile Strategy- An option strategy that is constructed to profit no matter if the underlying stock moves up or down quickly. Read All About Volatile Option Strategies.
Volatility – A measure of the amount by which an underlying security is expected to fluctuate in a given period of time. Generally measured by the annual standard deviation of the daily price changes in the security, volatility is not equal to the Beta of the stock. Read More About Volatility.
Volatility Crunch – A sudden, dramatic, drop in implied volatility resulting in a sharp reduction in extrinsic value and hence the price of options. Read More About Volatility Crunch.
Volatility Index – Also known as VXN, is an index by the CBOE that measures volatility in the market using implied volatility of S&P500 stock index options.
Volatility Skew – A graphical characteristic of the implied volatility of options of the same underlying asset across different strikes forming a right skewed curve. Read More About Volatiliy Skew.
Volatility Smile – A graphical characteristic of the implied volatility of options of the same underlying asset across different strikes forming the concave shape of a smile. Read More About Volatiliy Smile.
Volume – The number of transactions that took place in a trading day. Read More About Volume and Open Interest.
Write – To short an option. This is the act of creating a new options contract and selling it in the exchange using the Sell To Open order. The person who writes an option is known as the “Writer”.