Glossary of Terms

Ask Price

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

Assignment

The receipt of an exercise notice from an options seller that obligates him to sell (call seller) or buy (put seller) the underlying security at a specific price. This can occur when the security goes 'in the money'.

At-the-money

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

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.

Bearish

An adjective describing an opinion or outlook that expects a decline in price, either by the general market or by an underlying stock, or both. During such times, option's traders will use bearish strategies.

Beta

A measure of how a stock's movement correlates to the movement of the entire stock market. A Beta of 1 tracks the movement of the S & P 500. Most individual stocks will have a Beta greater than 1 meaning that they are more volatile than the overall market.

Bid Price

The price at which a buyer is willing to buy an option or stock. The seller may or may not be willing to sell at the bid price. They are hoping to receive their ask price.

Bullish

Describing an opinion or outlook in which one expects a rise in price, either by the general market or by an individual security. During such times, option's traders will use bullish strategies.

Call

An option contract that gives the holder the right to buy the underlying security at a specified price for a certain, fixed period of time. Calls are used to take advantage of an upward movement in the price of an equity.

CBOE

The Chicago Board Options Exchange; the first national exchange to trade listed stock options. The CBOE is an excellent source of options education.

Closing Purchase

A transaction in which the purchaser's intention is to reduce or eliminate a short position in a given series of options. This is also known as buying back and option.

Closing Sale

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

Collateral

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

Combination

Any position involving both put and call options that is not a straddle (see strategies tab). Combinations are used in complex trading strategies.

Contingent Order

An order which can be executed only if another event occurs. Option traders use these orders to trigger a trade due to the price movement of an underlying security or option.

Cover

To buy back as a closing transaction an option that was initially written. This is normally done to collect a profit or minimize a loss.

Covered

A written (sold) option is considered to be covered if the writer (seller) also has an opposing market position on a share-for-share basis in the underlying security. That is, a short call is covered if the underlying stock is owned, and a short put is covered (for margin purposes) if the underlying stock is also short in the account. In addition, a short call is covered if the account is also long another call on the same security, with a striking price equal to or less than the striking price of the short call. A short put is covered if there is also a long put in the account with a striking price equal to or greater than the striking price of the short put.

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. Credit trades create income for the trader.

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 trades have an up front expense to the trader.

Deliver

To take securities from an individual or firm and transfer them to another individual or firm. A call writer who is assigned must deliver stock to the call holder who exercised. A put holder who exercises must deliver stock to the put writer who is assigned.

Delivery

The process of satisfying an equity call assignment or an equity put exercise. In either case, stock is delivered.

Delta

The amount by which an option's price will change for a one-point change in price by the underlying entity. Call options have positive deltas, while put options have negative deltas. (see greeks tab)

Early Exercise (assignment)

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

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. Most index options use this form of settlement.

Ex-Dividend

The process whereby a stock's price is reduced when a dividend is paid. The ex-dividend date (ex-date) is the date on which the price reduction takes place. Investors who own stock on the ex-date will receive the dividend, and those who are short stock must pay out the dividend.

Equity Options

Options on shares of an individual common stock.

Exercise

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

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.

Expiration cycle

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

Expiration date

The day on which an option contract becomes void. The expiration date for listed stock options is the Saturday after the third Friday of the expiration month. Holders of options should indicate their desire to exercise, if they wish to do so, by this date.

Expiration time

The time of day by which all exercise notices must be received on the expiration date. Technically, the expiration time is currently 5:00PM on the expiration date, but public holders of option contracts must indicate their desire to exercise no later than 5:30PM on the business day preceding the expiration date. The times are Eastern Time.

Float

The number of shares outstanding of a particular common stock. Also known as the number of shares being traded in the market.

Floor Broker

A broker on the exchange floor who executes the orders of public customers or other investors who do not have physical access to the trading area.

Fundamental Analysis

A method of analyzing the prospects of a security by observing accepted accounting measures such as earnings, sales, assets, and so on. This type of analysis helps traders determine what to consider trading.

Gamma

The rate of change in an option's delta for a one-unit change in the price of the underlying security. (see greeks tab)

Good Until Canceled (GTC)

A designation applied to some types of orders, meaning the order remains in effect until it is either filled or canceled. Most contingent orders are set up this way.

Holder

The purchaser of an option.

Implied Volatility

A measure of the volatility of the underlying stock, it is determined by using option prices currently existing in the market at the time rather than using historical data on the price changes of the underlying stock. The implied volatility is set by the market maker in that particular option, and as such, can be manipulated.

Index

A compilation of the prices of several common entities into a single number. Examples include the S & P 500, Wilshire 5000, and the Russell 2000.

Index Option

An option whose underlying entity is an index.

In-the-money

A term describing any option that has intrinsic value. A call option is in-the-money if the underlying security is higher than the striking price of the call. A put option is in-the-money if the security is below the striking price.

Intrinsic value

The value of an option if it were to expire immediately with the underlying stock at its current price; the amount by which an option is in-the-money. For call options, this is the difference between the stock price and the striking price, if that difference is a positive number, or zero otherwise. For put options it is the difference between the striking price and the stock price, if that difference is positive, and zero otherwise.

LEAPS®

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

Leverage

In investments, the attainment of greater percentage profit and risk potential. A call holder has leverage with respect to a stock holder - the former will have greater percentage profits and losses than the latter, for the same movement in the underlying stock.

Limit Order

An order to buy or sell securities at a specified price (the limit). This would be as opposed to a market order which would get executed at the next available price.

Listed Option

A put or call option that is traded on a national options exchange. Listed options have fixed striking prices and expiration dates.

Long Position

A position wherein an investor's interest in a particular series of options is as a net holder.

Margin

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

Margin Requirement (for options)

The amount an uncovered (naked) option writer is required to deposit and maintain to cover a position. The margin requirement is calculated daily.

Market-Maker

An exchange member whose function is to aid in the making of a market, by making bids and offers for his account in the absence of public buy or sell orders. Several market-makers are normally assigned to a particular security. The market-maker system encompasses the market-makers, floor brokers, and order book officials.

Market Order

An order to buy or sell securities at the current market. The order will be filled as long as there is a market for the security.

Married Put and Stock

The simultaneous purchase of stock and the corresponding number of put options. This is a limited risk strategy during the life of the puts because the stock can be sold at the strike price of the puts.

Married Put Strategy

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

Neutral

Describing an opinion that is neither bearish nor bullish. Neutral option strategies are generally designed to perform best if there is little or no net change in the price of the underlying stock or index.

Opening Purchase

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

Opening Sale

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

Opening Transaction

A trade which adds to the net position of an investor. An opening buy transaction adds more long securities to the account. An opening sell transaction adds more short securities.

Open Interest

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

Options Clearing Corporation (OCC)

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

Out-of-the-money

A call option is out-of-the-money if the strike price is greater than the market price of the underlying security. A put option is out-of-the-money if the strike price is less than the market price of the underlying security.

Parity

Describing an in-the-money option trading for its intrinsic value; that is, an option trading at parity with the underlying stock. Also used as a point of reference - an option is sometimes said to be trading at a half-point over parity or at a quarter-point under parity. An option trading under parity is a discount option.

Position

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

Position Limit

The maximum number of put or call contracts on the same side of the market that can be held in any one account or group of related accounts. Short puts and long calls are on the same side of the market. Short calls and long puts are on the same side of the market.

Premium

The price of an option contract, determined in the competitive marketplace, which the buyer of the option pays to the option writer for the rights conveyed by the option contract.

Profit Range

The range within which a particular position makes a profit. Generally used in reference to strategies that have two break-even points - an upside break-even and a downside break-even. The price range between the two break-even points would be the profit range.

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).

Put

An option contract that gives the holder the right to sell the underlying security at a specified price for a certain fixed period of time.

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.

Resistance

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

Return (on investment)

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

Rho

The expected change in an option's theoretical value for a 1 percent change in interest rates. (see greeks)

Roll Down

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

Roll Forward (Out)

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

Rolling

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

Roll Up

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

Secondary Market

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

Series

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

Settlement Price

The official price at the end of a trading session. This price is established by The Options Clearing Corporation and is used to determine changes in account equity, margin requirements, and for other purposes.

Short Position

A position wherein a person's interest in a particular series of options is as a net writer (i.e., the number of contracts sold exceeds the number of contracts bought).

Specialist

An exchange member whose function it is to both make markets--buy and sell for his own account in the absence of public orders--and to keep the book of public orders. Most stock exchanges and some option exchanges utilize the specialist system of trading.

Spread Order

An order to simultaneously transact two or more option trades. Typically, one option would be bought while another would simultaneously be sold.

Spread Strategy

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

Standard Deviation

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

"Static" Return

The return that an investor would make on a particular position if the underlying stock were unchanged in price at the expiration of the options in the position.

Stop-Limit Order

Similar to a stop order, the stop-limit order becomes a limit order, rather than a market order, when the security trades at the price specified on the stop.

Stop Order

An order, placed away from the current market, that becomes a market order if the security trades at the price specified on the stop order. Buy stop orders are placed above the market while sell stop orders are placed below.

Strategy

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

Strike Price

The stated price per share for which the underlying security may be purchased (in the case of a call) or sold (in the case of a put) by the option holder upon exercise of the option contract.

Striking Price Interval

The distance between striking prices on a particular underlying security. Normally, the interval is 2.50 points for stocks under $25, 5 points for stocks selling over $25 per share, and 10 points (or greater) is acceptable for stocks over $200 per share. There are, however, exceptions to this general guideline.

Suitability

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

Suitable

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

Support

A term in technical analysis indicating a price area lower than the current price of the stock, where demand is thought to exist. Thus a stock would stop declining when it reached a support area.

Synthetic Put

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

Synthetic Stock

An option strategy that is equivalent to the underlying stock. A long call and a short put is synthetic long stock. A long put and a short call is synthetic short stock.

Technical Analysis

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

Terms

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

Theoretical Value

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

Theta

A measure of the rate of change in an option's theoretical value for a one-unit change in time to the option's expiration date. (see greeks)

Time Decay

A term used to describe how the theoretical value of an option "erodes" or reduces with the passage of time.

Time Value

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

Time Value Premium

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

Trader

An investor or professional who makes frequent purchases and sales. This is in opposition to and investor who buys and holds positions.

Type

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

Uncovered Call Writing

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

Uncovered Option

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

Uncovered Put Writing

A short put option position in which the writer does not have a corresponding short position in the underlying security or has not deposited, in a cash account, cash or cash equivalents equal to the exercise value of the put.

Underlying Security

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

Undervalued

Describing a security that is trading at a lower price than it logically should. Usually determined by the use of a mathematical model.

Unit of Trading

The minimum quantity or amount allowed when trading a security. The normal minimum for common stock is 1 round lot or 100 shares. The normal minimum for options is one contract (which normally covers 100 shares of stock).

Vega

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

Vertical Spread

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

Volatility

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

Write

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

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