Options Glossary

ACAT (Automated Customer Account Transfer)

An automated system for transferring securities between brokerage firms. 

Accredited Investor

Any investor with a net worth of at least $7 million or annual income greater than $200,000. Accredited investors do not count toward the 35 investor maximum allowed to invest in limited partnerships.

Aggregate Exercise Price

The total exercise value of an option contract. It is found by multiplying the strike price by the number of shares represented by the contract. For example, if you hold 5 $50 calls, the aggregate exercise price is 5 * 50 * 100 = $25,000. This is the amount you would have to pay if you decided to exercise all five contracts. Whenever an option is adjusted (through splits are acquisitions, for example) the aggregate exercise price remains the same. For instance, if the above $50 call splits 2:1, then you would hold 10 $25 contracts for an aggregate exercise price of 10*$25*100 = $25,000. 

Alligator Spread

Any option spread where the price paid is greater than or equal to the difference in strikes thus guaranteeing a loss for the investor. The term gets its name from the fact that the buyer will “never get out alive.” Technically, any order such as this that has no economic benefit cannot be accepted by a broker.

All-or-None (AON)

An order restriction telling your broker that you do not want a partial fill. Any time you place a limit order, you are technically stating that you are willing to take up to the number of shares or contracts stated in the order. For example, if place an order to buy 20 call options at a limit price of $3, you’re really saying that you’re willing to buy up to 20 contracts and that it’s okay if the market maker can only fill a portion of that. If you only want all 20 contracts or nothing at all, you’d need to mark the order with an all-or-none (AON) restriction. Generally, AON orders should only be used for order greater than 20 contracts since all price quotes must be good for at least 20 contracts. 

Alpha

A risk-adjusted measure of risk. If a security has a return of 25% and the risk-free rate is 5% then it has an “excess” return of 20%. If the market’s return was 10% and the security has a beta of 1.5 then the expected excess risk is 1.5 * 10% = 15%. Therefore, alpha is 20% - 15% = 5%.

American Option

A style of option that allows the buyer to exercise any time prior to expiration. All stock (equity) options are American style, as is the OEX index. 

Amex

The American Stock Exchange.

Arbitrage

Any trade that generates a guaranteed profit for no out-of-pocket cash. Traders who look for arbitrage situations are called arbitrageurs or arbs, and serve important economic functions in the markets because they help to keep prices fair. 

Asking Price

The lowest price at which someone is willing to sell. It is also the price at which an investor knows he can buy the security. Also called the “offer” price.

Assignment

A notification from the Options Clearing Corporation (OCC) that you are required to either buy or sell stock due to an option that you sold. If you are assigned on a short call, you are required to sell stock. If you are assigned on a short put, you are required to buy stock.

At-the-Money

An option whose price is equal or nearly equal to the current price of the underlying stock.

Automatic Exercise
As a courtesy, the Options Clearing Corporation (OCC) will exercise a call or put that is at least 75-cents in-the-money, which is called an automatic exercise (index options are exercised if they are in-the-money by at least one cent). If you do not wish to have the in-the-money option exercised, you should either sell it in the open market or give instructions to the broker not to exercise.

Away From The Market

A limit order to buy below the current market price (the ask) or to sell above the current market price (the bid). These orders are held as either day or good-until-cancelled orders and may not be filled if the market does not reach these limits.

Bear (Bearish)
An investor who believes a stock or index will fall in value. A bear attacks by raising its paw and swiping down, which simulates the high to low price movement.

Bear Spread

Any spread that requires the underlying stock to fall in order to be profitable. The basic bear spread is constructed by purchasing a high strike put and selling a lower strike put.

Beta

A statistical measure showing the relative volatility of a stock compared to the S&P 500 index. If you hold a stock with a beta of 1.3, it is expected to perform 30% better than the S&P 500 index. If the S&P is up 10%, your stock should be up 13%. Likewise, if the index is down 20%, you should expect your stock to be down 26%. High beta stocks are therefore more volatile than the market and low betas are less volatile. High beta stocks will carry relatively high premiums on the options. 

Bid Price

The highest price at which someone is willing to pay. It is also the price at which a retail customer may sell.

Bid-Ask Spread

The difference between the bid price and asking price. If the bid is $3 and the ask is $3.25, then the spread is 25 cents. Spreads tend to be narrow for at-the-money and out-of-the-money options while the generally get wider for in-the-money options.

Big Board

The New York Stock Exchange (NYSE).

Black Friday

September 24, 1869 when two speculators attempted to corner the gold market on the New York Gold Exchange. It is also known as the Fisk-Gould Scandal named after the two speculators. It has sense been used to denote any significant drop occurring on a Friday. 

Black Monday

October 19, 1987 when the Dow Jones Industrials fell 508 points.

Black-Scholes Option Pricing Model

A theoretical option-pricing calculator developed by Fisher Black and Myron Scholes. It produces the theoretical value of an American call option with the following five inputs: stock price, exercise price, risk-free interest rate, volatility, and time. It is arguably the single most important development in modern finance and Myron Scholes was awarded a Nobel Prize for his contributions in 1997. 

Board of Governors of the Federal Reserve System

The managing body of the Federal Reserve System, which sets policies on bank practices and the money supply. 

Book-to-bill ratio

A number used by the high-tech industry which shows the supply ratio of orders on a firm’s book to the number of orders filled. If the company has more orders than it can deliver, its number will be greater than one; otherwise, it is less than one. It is released monthly and used to be widely watched and create wild price swings. However, it has since fallen out of favor as an indicator for the tech industry. 

Bottom Fisher

A term used to describe any speculator who buys securities whose prices have plummeted on the belief they are “at the bottom” and will rebound soon.

Box Spread

A long call and short put at one strike (synthetic long position) along with a short call and long put (synthetic short position) at another. The box spread can also be viewed as a bull vertical spread with calls and bear vertical spread with puts (or vice versa). The value of the box position is the present value of the difference in strikes and is considered to be riskless.

Bull (Bullish)

An investor who believes a stock or index will rise. Bulls attack by lowering their horns and throwing them high. If you think a stock will rise in price, you are bullish.

Bull Spread

Any spread that requires the underlying stock to rise in order to be profitable. The basic bull spread is constructed by purchasing a low strike call and selling a higher strike call. 

Butterfly Spread

An option strategy that entails the purchase of call with one strike, the sale of two calls of a higher strike, and the purchase of yet another higher strike call. All strikes must be equally spaced. The buyer of the butterfly spread wants the stock price to stay at the center strike. Butterfly spreads can also be constructed with puts or a combination of calls and puts.

Buy-Write

A type of order that allows the investor to enter a covered call position by simultaneously purchasing the stock and selling the call. Buy-writes are generally used to take advantage of the high premium in the call option. 

Cabinet Bid

An order for closing deep-out-of-the-money options. If you place an order to sell vs. cabinet bid, you will receive one-cent per share, or $1 for the contract. 

Calendar spread

See horizontal spread. 

Called Away

A term used by option traders who are assigned on a covered call position and required to deliver shares. They had their shares “called away.” The true term is “assigned.”

Call Option

A contract between two people that gives the owner the right, but not the obligation, to buy stock at a specified price over a given time period. The seller of the call has an obligation to sell the stock if the long put position decides to buy. 

Cash Settlement

A type of option settlement usually used by index options. These options do not deliver or receive shares in the underlying index. Instead, they are settled for the cash value between the closing of the index (subject to specific guidelines) and the strike price multiplied by the contract size. For example, if a particular index closes at $4,050 and a trader holds the 10 $4,000 strike calls, that trader will receive $50 * 10 * 100 = $50,000 cash the following business day. The trader cannot exercise the call and receive shares of the index.

CBOE

An acronym for the Chicago Board Options Exchange, which is the largest options exchange in the world. 

Chartist

Any technical analyst who uses charts of past price patterns to predict future price movements.

Class

All call or put options of a particular underlying. For example, all Microsoft calls are one class of options. All IBM puts are another class.

Closing Purchase

A transaction where an option seller buys the same contract to close. A closing transaction relieves the seller from the potential obligation under the original sale. For example, a trader sells 1 XYZ March $50 call to open. The trader may be forced to sell 100 shares of XYZ at a price of $50 if the long position exercises. At a later time, the trader decides he does not want to have this obligation so can buy 1 XYZ March $50 call to close. The trader's profits or losses depend on the opening selling price and closing purchase price. See also Closing Sale, Opening Purchase, Opening Sale.

Closing Sale

A transaction where an option buyer sells the same contract to close. A closing transaction removes the rights from the original purchase. For example, a trader buys 1 XYZ March $50 call to open. This trader may purchase 100 shares of XYZ by expiration in March for $50. At a later time, the trader may decide to sell this right to someone else so could sell 1 XYZ march $50 to close. The trader's profits or losses depend on the opening purchase price and closing selling price. See also Closing Purchase. Opening Purchase, Opening Sale.

Collar

A strategy where an investor sells calls against a long stock position to finance the purchase of protective puts. From a profit and loss standpoint, it is effectively a bull spread so has limited upside potential and limited downside risk. For example, an investor who owns stock at $100, sells a $105 call and purchases a $95 put is utilizing a collar strategy. The investor will give up all gains in the stock above $105 but not take any losses below $95. Also called funnels, range-forwards, cylinders and split-price conversions.

Combination

Also known as a combo, this is not a uniquely defined term. Many in the equities market use it to mean a strangle -- a strategy where the investor buys a call and a put at different strike prices on the same underlying. For example, a long $50 call and a long $45 put would be a long combo. Other traders, especially in the futures markets, use combo to mean synthetic long or short position.  For example, long $50 call and short $50 put (synthetic long stock) would be called a combo.

Condor

A spread involving at least four commissions. The condor trader has similar intentions as the butterfly except the middle two strikes are split. For example, buy 1 $50 call, sell 1 $55 call, sell 1 $60 call, and buy 1 $65 call. The condor is a lower risk, lower return strategy compared to the butterfly. The condor is really two laddered butterfly spreads.

Consumer Price Index

The CPI measures the prices of set basket of consumer goods and services and used as a measure of inflation. It is published each month by the U.S. Department of Labor.

Contango

A term used by futures traders to describe a situation when futures prices are higher for the distant delivery months.

Contrarian Investor

An investment style where the investor buys or sells assets against the general trend of the market. They will buy assets that have performed poorly and sell assets that have performed well. The idea is that investors generally overreact and the “best” performing stocks are probably those due for a fall and vice versa. 

Conversion

A position usually used by market makers to hedge risk. A conversion is long stock, long put and short call with the options having the same strike and time to expiration. The trader is long stock and long synthetic short stock, which is why the position is hedged. Because of this, the trader is guaranteeing the sale of his long stock at the exercise price. The cost of the conversion is the present value of the exercise price. See also Reversal.

Cost-of-Carry

The interest charge to “carry” a position over time. If interest rates are 5% and you buy 100 shares of a $100 stock, the cost of carry for one year is $10,000 * .05 = $500. In other words, had you not bought the stock, you could have earned $500 interest so your “cost to carry” the 100 shares for one year is $500.

Covered Call (Covered Write)

The sale of a call option against a long stock position. The investor will always be able to deliver the shares regardless of how high the underlying moves, hence the name “covered.”   

Credit Spread

Any purchase and sale of an option that results in a credit to the account. For example, if you buy a $50 call and sell a $45 call, the net will be a credit paid to your account assuming the two options are traded simultaneously. This is because the lower strike call will always be more valuable and therefore carry a higher price. Likewise, you can buy a $50 put and sell a $55 put simultaneously, which will result as a net credit to your account. With puts, the higher strike will always be more valuable and carry a higher price. With any credit spread, the initial credit is always yours to keep regardless of what happens to the underlying stock. The trade is not risk-free, however, as limited losses will occur if the stock lands in a particular range. See also Debit Spread.

A time limit specification that states the order is only good for that trading day. If the order does not fill by the end of the day, it is automatically cancelled.

Day Order
An order whose time limit is good only for the trading day. If the order is not filled by the end of the day, it is cancelled. All "market" orders must be day orders since they are guaranteed to fill. See also Good-til-cancelled (GTC).

Debit Spread

The purchase of one option and the sale of another that results in a debit (net cost) to the account. 

Delta

One of the "Greeks" denoting an option's sensitivity to the underlying price. Deltas on calls will always range between 0 and 1 and between 0 and -1 for puts (sometimes delta can exceed these ranges but only in unusual circumstances and then only for a short while). If a $50 call option is priced at $5 with delta of 0.5, the option will be worth approximately $5.50 if the underlying moves up one full point (the option gained 1/2 point to the stocks one point). Deltas constantly change and are highly dependent on the strike price, time to expiration and volatility of the underlying.

Delta Neutral

A trading strategy typically used by market makers where the total deltas of all positions add to zero (or at least very close to it). Because the underlying stock or index moves, traders must continually adjust their positions to remain delta neutral. Retail commissions often make this strategy too costly to use.

Derivative Security

Any financial asset whose value is determined by the value of another security. Options and futures are examples of derivatives.

Diagonal Spread

A spread where the investor is long a strike at one month and short a strike at another month with both options being calls or puts and on the same underlying. If the trade results in a net debit (credit), it is a long (short) diagonal spread. For example, a trader buys a March $50 call and sells a January $60 call would be holding a diagonal spread. Quotes are listed in the newspaper with months across the top and strikes down the side. You will see the quotes for a diagonal spread appear on the diagonal of the quote matrix -- hence the name.

European Option

A style of option that allows the holder (buyer) to exercise only at expiration. Most index options are European style with the exception of OEX. See American Option.

Exercise

The procedure where a trader notifies the broker of his intent to buy the stock (by exercising a call) or selling a stock (if exercising a put).

Exercise Price

Same as strike price. This is the price at which you can buy stock (with a call option) or sell stock (with a put option).

Expiration

Technically, stock options expiration on the Saturday following the third Friday of the expiration month. But for trading purposes, the last day to buy or sell an option is the third Friday of the month. Equity options can be traded until 4:02 EST and 4:15 EST for index options.

Extrinsic Value

Same as time value. An option's price can be separated into two components time value (extrinsic) and intrinsic. The intrinsic value is the amount by which the option is in-the-money and the extrinsic value is the remaining amount. The following equation may help: Option Premium - Intrinsic value = time value.

Fair Value

The theoretical value of an asset. It is the price at which the buyer and seller are expected to break even in the long run. 

Fill Or Kill (FOK)

An order time frame (as opposed to the standard "day" or "good 'til cancelled" order) where the trader is attempting to have the order filled immediately in entirety or not at all. Fill or kill orders are not generally a good idea to use. In most cases, the floor traders kill it immediately to avoid making a hasty decision.

Gamma

One of many "Greeks" used in options. It denotes the sensitivity of an option's delta with respect to the underlying stock. It can be viewed as the delta of the delta. Long call and put positions have positive gamma while the short positions have negative gamma. It measures the speed component of the option and therefore it's risk. High gamma positions are riskier relative to low gamma with all other factors the same. 

Gearing

A British term used to describe one aspect of leverage of an option. It is not uniquely defined but the two most common definitions are (1) The price of the stock divided by the price of the option (2) The strike price of the option divided by the price of the options. Under definition 1, if the underlying stock is trading for $100 and you purchase a call option for $2, the gearing is $100/$2 = 50. In other words, you are controlling $100 worth of stock for $2 so have leveraged the asset by a factor of 50. Definition 2 views the options price in relation to the strike price. If the above option is a $110 strike, the gearing is $110/2 = 55. This method is saying you have potentially committed yourself to a price of $110 but only paid $2 for it so have leveraged the asset by a factor of 55. 

Good 'Til Cancelled (GTC)

An order time limit that specifies to leave the order open until it is either filled or cancelled by the investor. The New York Stock Exchange allows for a maximum time limit of six months but brokerage firms have the liberty to make the restrictions tighter if they feel. Check with your brokerage firm for the specific time frame designated by their GTC orders. See also Day Order, Fill Or Kill, Immediate Or Cancel. 

Greeks

There are five main Greek letters used to specify an option's price sensitivity. The five Greek letters are: (1) Delta (sensitivity in relation to movements of the underlying stock), (2) Gamma (sensitivity in relation to speed of movement of the underlying), (3) Vega (sensitivity in relation to volatility), (4) Theta (sensitivity in relation to time) (5) Rho (sensitivity in relation to interest rates)

 Guts

Any of a number of strategies where the call strike is lower than the put strike leaving the trader with a built-in box position and a guaranteed minimum value at expiration. One of the basic guts positions, for example, is long $50 call and long $60 put which is a guts strangle. Because the call strike is below the put strike, the position will always have at least $10 (the difference in strikes) in value; pick any stock price and the above strangle will be worth at least ten.

Hedge

Any strategy that is used to limit investment loss by adding a position that offsets an existing position.

Holder

The long position or owner of an option.

Horizontal Spread

A spread where the trader buys and sells options of the same type -- either calls or puts -- on the same underlying with the same strike but different times to expiration. For example, if a trader buys a March $50 and sells a January $50, that is a horizontal spread. If the trade results in a debit, it is called a long horizontal and short if a credit is received. Quotes used to be listed on the exchanges with months across the top and strikes down the side. You will see the quotes for a horizontal spread appear horizontally of the quote matrix -- hence the name. Also called a time or calendar spread. 

Immediate Or Cancel (IOC)

An order time frame (as opposed to the standard "day" or "good 'til cancelled" order) where the investor is requesting an immediate fill or cancellation of the trade. Unlike its Fill-Or-Kill counterpart, the IOC order does not need to be filled in its entirety. 

Implied Volatility

The volatility necessary to put into the Black-Scholes Option Pricing Model to produce the current quote on the option. It is the forward volatility of the underlying stock that is implied by the market price.

In-the-Money

A call option with a strike below and a put option with a strike above the current stock price are said to be in-the-money. This is also the amount of intrinsic value of an option -- the amount that would be received if exercised immediately. For example, if the stock is $103 1/2, a $100 call is $3 1/2 points in-the-money. If the trader exercised the call immediately, he would receive stock worth $103 1/2 and pay only $100 for a net gain of $3 1/2. Any amount above this $3 1/2 figure in the option's premium is called time or extrinsic value. See also Out-Of-The-Money, Extrinsic Value.

Intrinsic Value

An option's intrinsic value is the amount by which it is in-the-money. If the stock is $53, then a $50 call has $3 intrinsic value. A $60 put would have $7 intrinsic value. See also In-The-Money, Extrinsic Value. 

Iron Butterfly

A butterfly spread constructed by a bull spread with calls and a bear spread with puts with all options representing the same underlying and expiration date. It can also be viewed as a long straddle paired with a short strangle. A long iron butterfly is equivalent to a short butterfly. 

Jelly Roll

A strategy using a long call and short put (synthetic long position) and a short call and long put (synthetic long position) at another date with all options represent the same underlying. If the position is initiated for a debit (credit) it is a long (short) jelly roll. The value of a jelly roll is the cost of carry between months less the present value of dividends received. 

Kappa

See Vega.

LEAPS®

Long-term options whose expiration dates are more than nine months and up to three years away. Their name is derived from the acronym Long Term Equity Anticipation Securities.

Limit Order

An order that guarantees the price but not the execution.

Long Position

A position initiated from the purchase of the security. If a trader buys a June $50 call, he is long the position. 

Margin

The use of borrowed funds to purchase stock. If you have a margin account, you are required to only pay for half the position (assuming the stock is marginable) and pay interest on the remainder. For example, an investor can buy $50,000 worth of IBM but only needs to deposit 50% or $25,000 (called the Regulation T or Reg T amount). The trader would pay interest on the remaining $25,000. Margin accounts provide additional leverage, which can work for and against the trader. If IBM is up 10%, the margin trader will be up 20%. Most of the popular stocks are marginable but options never are; they must be paid in full. However, this does not mean you can't be on margin for an option trade. For example, an investor owns $50,000 worth of IBM outright in a margin account. The brokerage firm is willing to send the investor a check for $50,000 (half the amount) because he is only required to have half the position paid for. This is sometimes called margin cash available. It is this cash that can be used to fully pay for options, but you will have a debit balance and pay interest on it. This is a very basic overview and there are other restrictions, such as minimum amounts that can be margined, so check with your broker before placing your margin trades.

Marketable Limit Order

A limit order to buy at the offer or sell at the bid. For example, if the quote is $5 on the bid and $5 1/4 on the offer, an order to sell at a limit of $5 is called a marketable limit order. Likewise, an order to buy at a limit of $5 1/4 is a marketable limit too.

Market On Close (MOC)

An order qualifier that says to buy/sell the position very close to the closing price (usually within the last five minutes of trading) if the limit order does not execute during the day. For example, a trader has an order to sell 100 shares at a limit of $50 MOC. If the stock does not trade high enough to execute the order, it will covert to a market order within the final minutes of the trading day and fill.

Market Order

An order to buy or sell that is guaranteed to fill and, consequently, cannot guarantee the price. 

Naked (Uncovered)

A short position not covered by an offsetting position. If you sell a call by itself, that is a naked position. If you sell the call against shares that are in your account, it is a covered call.

Not Held

An order qualifier designating that the floor broker or specialist has discretion over how and when to fill the order. 

Opening Purchase

A transaction where an option seller buys the contract to open. An opening purchase is initiating a "long" position. See also Opening Sale, Closing Purchase and Closing Sale.

Opening Sale

A transaction where an option buyer sells the contract to open. An opening sale put the option seller in a potential obligation to buy stock (if short puts) or sell stock (if short calls). The trader receives a premium to the account for this transaction. If the trader desires to get out of this position, he must enter a closing purchase. See also Opening Purchase, Closing Sale, Closing Purchase. 

Open Interest

The net long and short positions for any option contract. If a trader "buys to open" and another "sells to open," then open interest will increase by the number of contracts. This is because both traders are opening. If one "buys to open" and the other "sells to close," then open interest will remain unchanged. Finally, if one "buys to close" and another "sells to close," then open interest will decrease by the amount of the contracts. 

Options Clearing Corporation (OCC)

The organization that acts as a buyer to every seller and a seller to every buyer, thereby guaranteeing the performance of the exchange-traded contracts. You can find out more about them at www.OptionsClearing.com.

Out-of-the-Money

Any option that does not have an immediate benefit in exercising. All call options with strikes above the current stock’s price and all puts with strikes below the current stock’s price are out-of-the-money.

Parity

An option trading with only intrinsic value; the time value is zero. For example, with the stock at $104 1/2, the $100 call trading at $4 1/2 is trading at parity. See also In-The-Money and Extrinsic Value.

Pin Risk

The risk encountered by the seller of an option that expires exactly at-the-money.  The trader is unsure if he will be assigned. This risk is especially critical for market makers using conversions and reversals. Say the stock closes at exactly $50 (or very, very close) on expiration day. If the market maker is long stock, long $50 put and short $50 call (conversion), he is unsure whether to exercise the put because he's unsure about the assignment of the $50 call. In these situations, you can almost always close vertical spreads for the full spread amount as market makers love to offset this risk for an even trade.

Premium

The price of an option. If you see an option trading for $4, then that is the premium for the option (the total price would be $400). The option's premium can be further broken down into intrinsic value and time value.

Put-Call Ratio

A contra-indicator found by dividing the total put volume by the total call volume. It is believed that when this ratio gets sufficiently high that too many people are bearish and the market is about to turn up. This validity of this ratio, however, is becoming questionable since much of the put buying today is for hedging and it's impossible to say whether a put is purchased to take advantage of a downturn in which case it is bearish or to hedge a long stock position in which case it is bullish.

Put Option

A contract between two people that gives the owner the right, but not the obligation, to sell stock at a specified price over a given time period. The seller of the put has an obligation to buy the stock if the long put position decides to sell.

RAES (Retail Automated Execution System)

A proprietary electronic trading system of the Chicago Board Options Exchange. Any retail market order (or marketable limit order) for 20 contracts or less is usually filled immediately through RAES.  

Ratio Spread

Any spread having unequal long and short positions is a type of ratio spread. Specifically, if the trader has unlimited risk, it is a ratio spread. If the trader has unlimited profit potential, it is a backspread. 

Reversal (Reverse Conversion)

A three-sided position used primarily by market makers to hedge risk. A position of short stock, short put and long call is a reversal. Both options must have the same strike price and expiration. The reversal grows to a guaranteed payment at expiration. The market maker puts on the position when the credit from the interest earned will be higher than the required payment. 

Rho

One of the "Greeks" representing the sensitivity of an option's price for a small change in interest rates (usually considered to be a 1% change in rates). 

Series

All option contracts on the same underlying instrument with the same exercise price and time to expiration. For example, IBM Jan $100 calls are one series of options, IBM Jan $105 calls are another. Likewise, all IBM Jan $100 put options designate another series.

Short Position

A position initiated by the sale of stock or options. Traders who sell options are also said to "write" the contract, so written positions are synonymous with short positions.

Spot Market

See Cash Market

Spread

Any position consisting of a long and short position. If the spread is on the same underlying stock, it is an intra-market spread. If it is over different securities, it is an inter-market spread. For example, long $50 call and short $55 call is a vertical spread. See also Horizontal Spread, Time Spread, Vertical Spread, Diagonal Spread. 

Stop Order

Previously known as a stop loss order. A contingency order that becomes a market order if the stock trades at a certain limit. For example, say a stock is trading for $100. A trader placing an order to sell the stock at a stop price of $98 is instructing the broker to make the order a market order if the stock trades at $98 or lower. Stop orders do not prevent losses! The reason is the order will trigger a market order if the stock trades below $98 as well. The stock could open for trading at $80 and the trader will be sold at this price instead of the $98 he was expecting. Because they do not stop losses, the Securities Exchange Commission (SEC) determined the previous term stop loss order cannot be used. See also Stop Limit. 

Stop Limit

A contingency order that becomes a limit order if the stock trades at a certain limit or lower. For example, say a stock is trading at $100. A trader placing an order to sell the stock at a stop price of $98 and a stop limit of $98 is instructing the broker to sell the stock at a limit of $98 (or higher) if the stock trades at $98 or lower. Notice that two prices must be given: a stop price and a stop limit. The stop price activates the order and the stop limit designates the minimum price the trader is willing to accept. The stop price can be equal to or less than the stop price (but not greater). Because of this limit, stop limit orders are not guaranteed to execute even if the stop price is triggered. Stop limit orders do not prevent losses. See also Stop Order.

Spread

Any position consisting of a long and short position. If the spread is on the same underlying stock, it is an intra-market spread. If it is over different securities, it is an inter-market spread. For example, long $50 call and short $55 call is a vertical spread. See also Horizontal Spread, Time Spread, Vertical Spread, Diagonal Spread.

Stop Limit
A contingency order that becomes a limit order if the stock trades at a certain limit or lower. 

Stop Order

Previously known as a stop-loss order. A contingency order that becomes a market order if the stock trades at a certain limit. 

Straddle

A strategy using a long call and long put (or short call and short put) with both options having the same exercise price and expiration. The long straddle position is hoping for a large move in either direction while the short straddle is hoping for the market to sit fairly flat. 

Strangle (Combo)

See Combination.

Strap

A strategy using two long calls and one long put (or two short calls and one short put) with all options having the same exercise price and expiration . It can be viewed as a ratio straddle as well. See also Strip. 

Strip

A strategy using two long puts and one long call (or two short puts and one short call) with all options having the same exercise price and expiration. It can be viewed as a ratio straddle as well. See also Strap.

Theoretical Value

The fair value of an option based on a known pricing method such as the Black-Scholes Option Pricing Model. If an option trades higher (lower) than its theoretical value, traders will become sellers (buyers) with all else constant. 

Theta

One of the "Greeks" that measures an option's price sensitivity in relation to time. Usually it is expressed as the amount of money an option will lose if one day passes with all other factors the same. 

Three-Way

Similar to a conversion or reversal except the stock position is replaced with a deep-in-the-money option. For example, a market maker who is long stock, long put and short a call is long a conversion. If the market maker replaces the long stock position with a deep-in-the-money call, the position is called a three-way. Note too that the market maker in this example could have shorted a deep-in-the-money put which will also behave like long stock. Three-ways eliminate pin risk to the market maker. See also Conversion, Reversal, Pin risk.

Tick Value (Tick Size)

The smallest allowable price move in a particular option. For example, an option trading up to $3 can trade in 5-cent increments. Options with prices over $3 must trade in 10-cent increments.

Time Decay

A property of options that states some or all of an option's value will erode with the passage of time and are consequently known as wasting assets. Time attacks shorter-term options much harder than longer term. All else equal, an option seller will prefer to sell shorter term options while option buyers will prefer to buy longer term.

Time Spread

See horizontal spread.

Time Value

The amount of an option's price not accounted for by intrinsic value. If an option is out-of-the-money, its premium will consist entirely of time value. For example, say there is a $55 call trading at $3 with the stock at $50. This option is out-of-the-money, so the entire $3 is time premium. If the stock were at $57, then the $55 call would be in-the-money by $2; the intrinsic value would be $2 and the time premium would be $1.

Total Exercise Value

The total cost or proceeds generated by exercising an option contract. It is found by multiplying the strike price by the number of shares represented by the contract. For example, if you hold five $50 calls, the aggregate exercise price is 5 x 50 x 100 = $25,000. 

Write (Writing)

Another term for a short option position. If you sell an option (opening trade) then you are “writing” the contract. If an option trader says he is going to “write the IBM $100 calls,” then he is entering into the trade by selling.

Triple Witching
Any day where futures, index options and equity options all expire. Usually this is the third Friday in the end month of each quarter (March, June, September, December). It is of interest to traders because market makers must buy and sell the underlying stocks to unwind (get out of) their positions. This usually causes great volatility in the market.

Uncovered Position

See Naked.

Unwind

Unwind refers to the specific strategy of "undoing" a buy-write position where the investor would sell the stock and buy the call to close. Unwind can be used loosely to mean the reversing of any position. 

Vega

One of the "Greeks" (although not technically a Greek letter) denoting an option's price sensitivity for a small change in volatility (usually a 1% change in volatility). Vega is sometime denoted by the Greek letter Kappa too. 

Vertical Spread

A spread where a trader buys options of the same type -- either calls or puts -- at different strikes with all else the same. For example, if a trader buys a $50 call and sells a $55 call they would have a vertical 
spread. Quotes are listed in the newspaper with months across the top and strikes down the side. You will see the quotes for a vertical spread appear vertically on the quote matrix -- hence the name. Also called a time or calendar spread. See also Bull Spreads, Bear Spreads.

VIX

An index created by the Chicago Board Options Exchange (CBOE) that tracks the volatility of the S&P 500. Generally, when the VIX is high the market is down and vice versa.
 

Volatility

Statistically, it is the annualized standard deviation of the price movements in the underlying. It basically measures the amount of expected movement over time. In layman's terms, a stock that has large price swings from one day to the next is volatile. The more volatile the underlying stock, the higher the price of the option (calls and puts) with all other factors the same. 

Wrangle

A basic option strategy used primarily by market makers. It is the combination of two long ratio spreads. A long (short) wrangle is a long (short) call ratio spread paired with a long (short) put ratio spread. For example, a long wrangle may be constructed by selling 1 $50 call and buying 2 $55 calls (long call ratio spread) and also selling 1 $55 put and buying 2 $50 puts (long put ratio spread). The profit and loss diagram for a wrangle is the same a strangle.

Selling an option to open. Any time a trader sells an option to open, he is said to have "written" the contract.

Zero-Sum Game

In game theory, it describes a situation where no person can be made better off without making another worse off. When applied to the market, many derivatives are zero-sum games. For every dollar that is gained in a futures contract, one dollar is lost. Options are also an example of a zero-sum game between the long position, the short position, and 100 shares of the underlying stock. 

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