OPTION TRADING GLOSSARY

Can't decide whether you should be bullish or bearish? Have yet to understand the concept behind the straddle? This glossary will give you the terms you need to get by in the world of options trading. The glossary has been divided into sections to make it easier for you to navigate. Click below to get started.

A | B | C | D | E | F | G | H | I | J | K | L | M | N | O | P | Q | R | S | T | U | V | W | X | Y | Z

Back to the Top

-A-

All-or-none order: An order that must be completely filled or not at all filled.

American-style option: An option contract that can be exercised at any time between the date of purchase and the expiration date. Most exchange-traded options are American-style. All stock options are American-style.

Amex/NASDAQ: One of four U.S. Exchanges that trade options. The other three are: the Chicago Board Options Exchange, the Pacific Stock Exchange and the Philadelphia Stock Exchange.

Arbitrage: The process in which professional traders simultaneously buy and sell similar securities for a profit at theoretically zero risk. Risk in arbitrage occurs when historical relationships that were expected to hold no longer apply, or when expected events like an announced takeover fail to materialize.

Asked price: The price a seller is willing to accept for the security; also called the offer price.

Asset: A resource that has economic value to its owner. Cash, accounts receivable, inventory, real estate and securities are examples of assets.

Assignment: The receipt of an exercise notice by an option seller (writer) that obligates him or her to sell (in the case of a call) or purchase (in the case of a put) the underlying security at the specified strike price.

At the market order (also market order): An order to purchase or to sell at the best available price. At the market orders must be executed immediately, and therefore takes precedence over all other orders. Market orders to buy tend to be executed at the asked price, and market orders to sell tend to be executed at the bid price.

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 (OCC) attempts to protect the holder of an expiring in the money option on behalf of the trader by automatically exercising the option.

Autotrading: The ability to have an options broker make option trades recommended by Schaeffer's Investment Research, as soon as the recommendation is sent out. You still receive a copy of the recommendation, but you give the autotrading broker partial discretion to enter and exit only those trades recommended by Schaeffer's Investment Research. This effectively maximizes your ability to get into and out of recommendations, even if you're away from the market for only a few minutes.

A | B | C | D | E | F | G | H | I | J | K | L | M | N | O | P | Q | R | S | T | U | V | W | X | Y | Z |

Back to the Top

-B-

Bearish: An outlook anticipating lower prices in the underlying security.

Bearish 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 puts or calls. In any case, an option with a higher striking price is purchased and the one with the lower strike price is sold.

Beta: A measure of how a stock's moves more or less than the movement of a broader stock market index.

Bid price: The highest price any potential buyer is willing to pay for a particular option.

Bid/Asked quotation: The latest available bid and asked prices for a particular option contract.

Bid/Asked spread: The difference in price between the latest available bid and asked quotations for a particular option contract.

Black Scholes formula: This version of the option pricing model is used most often in the standardized pricing on the floors of the various options exchanges. It factors in the current stock price, strike price, time until expiration, level of interest rates, any dividends and the volatility of the underlying security. The Black Scholes model won a Nobel Prize in 1997 for its contribution to the financial markets.

Bollinger Bands: Well-known analyst John Bollinger developed Bollinger Bands, which traditionally are plotted above and below the 21-day moving average. These upper and lower boundaries factor in two standard deviations (about 95%) of the price movement over the last 21 days.

Breakeven point: The stock price at which a particular option strategy neither gains or losses money.

Bullish: An outlook anticipating higher prices in the underlying security.

Bullish 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 the one with a higher striking price is sold, both generally having the same expiration dates.

A | B | C | D | E | F | G | H | I | J | K | L | M | N | O | P | Q | R | S | T | U | V | W | X | Y | Z |

Back to the Top

-C-

Calendar spread: The sale of an option with a nearby expiration against the purchase of an option with the same strike price, but a more distant expiration. The loss is limited to the net premium paid, while the maximum profit possible depends on the time value of the distant option when the nearby expires. The strategy takes advantage of time value differentials during periods of relatively flat prices.

Call: An option contract that gives the buyer (holder) the right to purchase, and gives the seller (the writer) the obligation to sell a specified number of shares of the underlying stock at the given strike price on or before the expiration date of the contract.

Capital - See  Trading Capital

Called away: The process whereby a call option writer is obligated to surrender the underlying stock to the option buyer at a price equal to the striking price of the call written.

Cash settlement option: An option through which exercise is accomplished by a payment in cash, rather than by delivery of the underlying security. The amount of cash settlement is determined by the difference between the option striking price and the price of the underlying security. Stock index and industry group options are cash settlement options.

Chicago Board Options Exchange (CBOE): In 1973, the Chicago Board Options Exchange created "listed options" that became the standard, and option prices were set in an auction market nearly identical to the stock exchanges. Today equity and index options are traded on four U.S. Exchanges: the Chicago Board Options Exchange, Amex/NASDAQ, the Pacific Stock Exchange, and the Philadelphia Exchange.

Chicago Board of Trade (CBOT): Founded in 1848 with 82 original members, it had an active cash and forward contracting business at first. Although the records were destroyed in the fire of 1871, it is agreed that futures contracts were being traded there during the 1860s. Today, the CBOT is the largest exchange in the world. It is known for its grain, gold, and Treasury Bond futures, as well as options on T-Bond futures.

Chicago Mercantile Exchange (CME): The second largest futures exchange in the United States. Originally formed in 1874 as the Chicago Produce Exchange, the "Chicago Merc" was primarily a perishable agricultural products market (butter, eggs, poultry, etc.).The name was changed in 1919, and since then the CME has been an innovator in the industry. The CME trades financial futures, options, and stock index futures contracts. The CME is the largest exchange for futures contracts in live commodities, foreign currencies, and Eurodollars.

Class of options: Options contracts of the same type (call or put) and style (American, European or capped) that cover the same underlying security.

Clearinghouse: An agency associated with an exchange, which guarantees all trades, thus assuring contract delivery and/or financial settlement. The clearinghouse becomes the buyer for every seller and the seller for every buyer. In the case of listed equity option, the clearing house is the Options Clearing Corporation (OCC).

Closeout date: The date by which an options trade decides to close a position if it has not achieved its profit objectives. Using such "time stops" is a key component of The Option Advisor's overall strategy of risk/reward management.

Closing price: The price of a stock (or option) at the last transaction of the day.

Closing purchase: A transaction in which an investor who had initially sold an option intends to liquidate his or her written position by buying, in a closing purchase transaction, an option having the same terms as the option he or she wrote.

Closing sale: A transaction in which an investor who had initially bought an option intends to liquidate his or her purchased position by selling, in a closing sale transaction, an option having the same terms as the option he or she purchased.

Combination (position): A combination involves two different option positions and can take a variety of forms. You can buy both a call and a put on a given stock (if both are at the same strike price, this is known as a straddle; if at different strike prices this is known as a strangle), or you can also use options in conjunction with stock. For example, in a covered combination, you sell a covered call against stock you own, while also selling a put below the current price of the stock. This allows you to enhance your total returns in flat to up markets, while allowing you to buy more stock at lower prices and effectively lower your net cost to acquire the stock.

Commission: One of the costs of trading is commission, which are fees you must pay your brokerage firm when you actively enter or exit a position. Commissions vary among brokerage firms, so you should search for a firm with reasonable commission rates.

Confirmation statement: After an options position has been initiated or closed, a statement must be issued to the customer by the brokerage firm. The statement contains the number of contracts bought or sold and the prices at which the transactions occurred, and is sometimes combined with a purchase and sale statement.

Consensus estimates: When a stock reports earnings each quarter, the analysts which follow that stock will each have their own earnings estimate for the quarterly results that the company will report. The average of all of these analyst forecasts for the stock's earnings is known as the consensus estimate. An earnings report that is above the consensus estimate is considered a positive earnings surprise, and a positive market reaction to such earnings announcements typically confirms that the news is indeed good.

Contingency order: When you place an order to buy stock or options, you can choose to place contingencies on that order, meaning that some specific occurrence must happen for that order to be filled. For example, stock traders betting on breakout may only want to buy if a stock trades above a certain level and would place a "buy-stop" order to get in immediately after the stock trades at a defined price. Options traders may want to only be in an options trade if they can get in right now and they can place a "fill or kill" order, meaning the order either gets executed at the price specified as soon as it reaches the trading floor, or it is immediately canceled if it is not filled. Another order is the "all or none" order, which means that you will only be filled if you can get all of the contracts you requested, not just a partial order.

Contract: A call or put option issued by The Options Clearing Corporation.

Contract size: The amount of the underlying asset covered by the options contract. This is 100 shares for one stock option contract unless adjusted for a special event, such as a stock split or a stock dividend.

Contrarian theory: When sentiment is measured, consensus reviewed, and expectations analyzed, the more people believe in one way, the more likely they are to be believing the wrong thing at the wrong time. Contrarian theory is not about buying low prices or cheap stocks. True contrary opinion is about buying low expectations. And, believe it or not, low expectations often accompany strong technicals and strong fundamentals. You would tend to be attracted to stocks on which expectations are low, so you would generally be avoiding the crowd; and if a stock or a sector were overly loved by the crowd, you would tend to avoid it- if the fundamentals and technicals support those conclusions.

Cover: Indicates the repurchase of previously sold contracts or shares, known as covering a short position. Short covering is synonymous with liquidating a short position, no longer expecting that stock to drop in value.

Covered call option writing: A short option position in which the seller (writer) owns the number of shares of the underlying stock represented by the option contracts sold.

Convexity: One of the benefits of buying options is convexity: when a stock drops 1 point, and a call option's initial delta of 50% causes a half-point loss in the option, the next one-point drop in a stock will have a lower delta on the call option (for example, 40% in this case), which only causes a 40-cent drop in the option price. This "positive curvature" helps reduce your option's price risk on each successive decline in the underlying shares, while the stockholder continues to lose the same 1 point on each successive drop in the stock. This positive curvature also works in your favor as the stock moves up, as a call option's delta will increase on each successive gain in the stock, allowing the call option holder greater upside participation with each successive gain in the underlying share price.

Covered writing: A form of option writing in which (using calls as an example) the writer owns a quantity of the underlying security equivalent to the number of shares represented by the option contracts written. It is less risky than outright long stock positions and is equivalent in its profit/loss profile to naked put writing.

Credit spread: A strategy by which the investor collects a credit upon initiating a spread. Bullish credit spreads typically involve selling an out of the money put and buying a further out of the money put for protection. Bearish credit spreads use out of the money calls in a similar manner.

A | B | C | D | E | F | G | H | I | J | K | L | M | N | O | P | Q | R | S | T | U | V | W | X | Y | Z |

Back to the Top

-D-

Day order: An order which, if not executed during the trading session the day it is entered, automatically expires at the end of the session. All orders are assumed to be day orders unless specified otherwise.

Day-trader: Stock or options traders (often active on the trading floor) who usually initiate and offset a position during a single trading session.

Debit spread: Investors can buy a call (put) and sell a farther out of the money call (put) to create a spread at an initial debit in the investor's account. This more conservative approach limits both the dollar risk and reward relative to a straight option purchase.

Deep discount broker: A broker offering stripped-down services in exchange for very low commission rates.

Deep in the money: An option is "deep in the money" when it is so far in the money that it is unlikely to go out of the money prior to expiration. It is an arbitrary term and can be used to describe different options by different people.

Deep out of the money: Used to describe an option that is unlikely to go into the money prior to expiration. An arbitrary term.

Delta (also neutral hedge ratio): The percentage of the price movement in the underlying stock that will be translated into price movement in a particular option series. For example, a delta of 50 percent indicates that the option will move up (down) by one half point for each 1 point rise (decline) in the underlying stock. Call options have positive delta; put options have negative delta. Deltas increase as the stock price rises and decrease as the stock price declines. The delta is also an approximation of the probability that an option will finish in the money.

Derivative security: A financial security whose value is derived in part from the value and characteristics of another security, the underlying security. Options are a derivative security.

Diagonal spread: Utilizes options with different expiration dates and different strike prices.

Discount broker: A broker whose commission rates are lower than the norm. Discount brokers usually provide a little in additional services such as investment research and/or advice.

Diversification: An investing or trading strategy in which positions are maintained in a variety of underlying stocks or stock options for the purpose of reducing risk and increasing bottom-line profits.

Dividend: When a company's stock pays some form of compensation to existing shareholders, this is known as a dividend. Dividends usually take the form of quarterly cash dividends, which attracts investors seeking regular income. Dividends can also be in the form of additional stock, or spin-offs of existing subsidiaries.

Double Top: A double top is said to be in place when a stock has made two sets of significant highs at a certain price level. Double tops are valid forecasting tools for potential downside risk in a stock, until their highs get taken out. Once that happens all downside forecasts are negated, and a significant rally can begin as this overhead resistance is no longer in place.

Downtrend: A process of successive downward price movements in a security over time.

A | B | C | D | E | F | G | H | I | J | K | L | M | N | O | P | Q | R | S | T | U | V | W | X | Y | Z |

Back to the Top

-E-

Efficient Market Hypothesis: The EMH view of the markets believes that information is priced instantaneously into stock prices as soon as it is released to the public. The Weak form of EMH suggests that technical analysis adds no value to the markets, the Semi-Strong form of EMH suggests that fundamental analysis cannot provide an edge in investment selection, and the Strong form of EMH suggests that even insiders cannot make an above-average profit from their knowledge since it is alleged to be factored in to the share price. EMH assumes the markets are efficient and thus random in the direction of future prices.

Equity options: See Stock options.

European-style option: An option contract that can only be exercised on the expiration date.

Exchange: An association of persons who participate in the business of buying or selling securities. A forum or place where traders (members) gather to buy or sell economic goods.

Execution: The actual completion of a buy or sell order on the exchange floor.

Exercise: If the option holder wants to buy (in the case of a call) or sell (in the case of a put) the underlying security at the exercise price or, in the case of a cash-settled option, to receive the cash settlement amount, the option must be exercised. In order to exercise most options, option holders must give their broker exercise instructions meeting the firm's procedures prior to the firm's exercise cut-off time. Option sellers must be aware of this exercise risk when the option they sold goes deep into the money, and option sellers must make sure they have the capital available to cover any such potential exercise.

Exercise price: See Strike price.

Expectational Analysis^®: An investment analysis approach that takes into account and measures the beliefs of the investors and speculators relative to the prevailing technical trends and fundamental facts, in order to best gauge the future direction of stock prices.

Expiration cycle: A cycle related to the dates on which options on a particular underlying security expire. A stock option, other than LEAPS and long-term options, will be placed in one of three cycles, the January cycle (with options listed in the January, April, July or October cycle months), the February cycle (with options listed in the February, May, August or November cycle months) or the March cycle (with options listed in the March, June, September or December cycle months). At any point in time, an option will have contracts with four expiration dates outstanding, in the nearest two expiration months and in two longer-term cycle months.

Expiration date: The last day (in the case of American-style) or the only day (in the case of European-style) on which an option may be exercised. For stock options, this date is the third Friday of the expiration month; however, brokerage firms may set an earlier deadline for notification of an option buyer's (holder's) intention to exercise. If Friday is a holiday, the last trading day will be the preceding Thursday.

A | B | C | D | E | F | G | H | I | J | K | L | M | N | O | P | Q | R | S | T | U | V | W | X | Y | Z |

Back to the Top

-F-

Far out of the money: Used to describe an option that is unlikely to go into the money prior to expiration. An arbitrary term.

Fill: The price at which an order is executed.

Fill or kill order (FOK): A trading order that is canceled unless executed within a designated time period. Related: open order.

Flat price risk: Taking a position either long or short that does not involve spreading.

Float: Number of shares available for public trading.

Foreign currency option: An option that conveys the right to buy or sell a specified amount of foreign currency at a specified price within a specified time period

Forward price: The price at which a security is expected to be trading at a defined point in the future, as a function of the expected interest rate environment during that time period.

Free market price: The price established by buyers and sellers in the free market, with no restrictions placed on market participants. This price is a function of the level of demand versus the level of supply in the market at any time.

Full fungibility: A right of options ownership in which an options buyer is free to sell his or her contract at any time on an options exchange, up to and including its expiration date.

Full-service broker: A broker who provides investment research, information, and advice, as well as the services involved in purchasing and selling securities. Full-service brokers usually charge the highest commission rates.

Fundamental analysis: The study of specific factors, such as weather, wars, discoveries, and changes in government policy, which influence supply and demand and, consequently, prices in the market place.

Fundamental beta: The product of a statistical model to predict the fundamental risk of a security using not only price data but other market-related and financial data.

A | B | C | D | E | F | G | H | I | J | K | L | M | N | O | P | Q | R | S | T | U | V | W | X | Y | Z |

Back to the Top

-G-

Gamma: The ratio of a change in the option delta to a small change in the price of the asset on which the option is written.

Gap: A term used by technicians to describe a significant jump or drop in prices on the current opening price compared to the previous closing price. Significant gaps are usually related to market-moving news, which occurs overnight while a stock cannot be traded. Gaps are considered by technicians to be likely to be filled at a later date.

Good-til-canceled (GTC): A qualifier for any kind of order extending its life indefinitely; i.e., until filled or canceled.

A | B | C | D | E | F | G | H | I | J | K | L | M | N | O | P | Q | R | S | T | U | V | W | X | Y | Z |

Back to the Top

-H-

Handle: The whole-dollar price of a bid or offer is referred to as the handle (i.e. if a security is quoted at 101.10 bid and 101.11 offered, 101 is the handle). Traders are assumed to know the handle.

Hedge: A conservative strategy used to limit investment loss by effecting a transaction that offsets an existing position.

Hedge fund: A fund that may employ a variety of techniques to enhance returns, such as both buying and shorting stocks based on a valuation mode.

Hedged portfolio: A portfolio consisting of the long position in the stock, and the short position in the call option and long position in the put option, so as to be riskless and produce a return that equals the risk-free interest rate.

Holder: The buyer of an option.

Horizontal spread: The simultaneous purchase and sale of two options that differ only in their exercise date.

A | B | C | D | E | F | G | H | I | J | K | L | M | N | O | P | Q | R | S | T | U | V | W | X | Y | Z |

Back to the Top

-I-

Implied volatility: The assumption of the stock's volatility that helps determine the options price. Since all other factors in the options pricing model are assumed to be known, the implied volatility is calculated last as a plug factor after other options pricing components are computed.

Index: A statistical measure of the changes in a portfolio representing a market. The Standard & Poor's 500 is the most well-known index.

Index fund: An investment fund designed to match the returns on a stock market index.

Index option: An option whose underlying security is a stock index. This includes options on the overall market (such as the S&P 100 Index options) as well as options on narrower-based industry groups. Index options are cash settlement options.

Initial public offering (IPO): A company's first sale of stock to the public. Securities offered in an IPO are often, but not always, those of young, small companies seeking outside equity capital and a public market for their stock. Investors purchasing stock in IPO's generally must be prepared to accept very large risks for the possibility of large gains.

Institutional investors: Organizations that invest, including insurance companies, depository institutions, pension funds, investment companies, mutual funds, and endowment funds.

In the money: An option is in the money when it has intrinsic value. A call is in the money when the market price of the underlying stock is greater than the option's exercise price. A put is in the money when the market price of the underlying stock is lower than the option's exercise price.

Internet: An electronic means by which individuals can find virtually any information they desire, including information on stocks and options, via the World Wide Web.

Internet broker: A broker offering on-line trading over the World Wide Web. Commission rates are typically very competitive, in line with deep discount brokers.

Intraday commentary: Found at the SchaeffersResearch.com web site, this daily commentary reports on some of the most notable option and stock action for the day. This commentary is published every market trading day.

Intrinsic value: The difference between an in the money option strike price and the current market price of a share of the underlying security.

Irrational call option: The implied call imbedded in the MBS. It is identified as irrational because the call is sometimes not exercised when it is in the money (interest rates are below the threshold to refinance). It is sometimes exercised when not in the money (home sold without regard to the relative level of interest rates).

A | B | C | D | E | F | G | H | I | J | K | L | M | N | O | P | Q | R | S | T | U | V | W | X | Y | Z |

Back to the Top

-J-

A | B | C | D | E | F | G | H | I | J | K | L | M | N | O | P | Q | R | S | T | U | V | W | X | Y | Z |

Back to the Top

-K-

Kappa: See Vega.

A | B | C | D | E | F | G | H | I | J | K | L | M | N | O | P | Q | R | S | T | U | V | W | X | Y | Z |

Back to the Top

-L-

Lambda: The ratio of a change in the option price to a small change in the option volatility.

Last sale price: The price of a stock or option at the most recent transaction consummated.

Last trading day: The final day under an exchange's rules during which trading may take place in a particular options contract. Contracts outstanding at the end of the last trading day must be settled by delivery of the underlying financial instrument.

LEAPS: An acronym for Long-term Equity AnticiPation Securities. LEAPS are put or call options with expiration dates set as far as two years into the future. Like standard options, each LEAPS contract represents 100 shares of the underlying stock.

Leverage: The control of a larger sum of money with a smaller amount. By accepting the liability to purchase or deliver the total value of a futures contract, a smaller sum (margin) may be used as earnest money to guarantee performance. If prices move favorably, a large return on the margin can be earned from the leverage. Conversely, a loss can also be large, relative to the margin, due to the leverage.

Limit move: The increase or decrease of a futures price by the maximum amount allowed for any one trading session. Price limits are established by the exchanges, and approved by the CFTC. They vary depending on the futures contract.

Limit orders: A customer sets a limit on price or time of execution of a trade, or both; for example, a "buy limit" order is placed below the market price. A "sell limit" order is placed above the market price. A sell limit is executed only at the limit price or higher (better), while the buy limit is executed at the limit price or lower (better).

Limited risk: A concept often used to describe the option buyer's position. Because the option buyer's loss can be no greater than the premium he or she pays for the option, his or her risk of loss is limited.

Limited risk spread: A bull spread in a market where the price difference between the two contract months covers the full carrying charges. The risk is limited because the probability of the distant month price moving to a premium greater than full carrying charges is minimal.

Liquid or liquidity: The ease with which a purchase or sale can be made without disrupting existing market prices.

Listed options: Options traded on one or more of the option exchanges. Unlike over the counter or unlisted options, which must be exercised to have any value, listed options are fully fungible and have an active secondary market on the options exchanges. Most traders in listed options close their positions in this secondary market prior to exercise.

Long position: A position wherein a person's interest in a particular series of options is as a net holder (i.e., the number of contracts bought exceeds the number of contracts sold). Also, an investor is "long" when taking ownership of a stock. The investor is looking for the stock to appreciate in value.

Longer-term option: Long-term options are available in two types, calls and puts, with expiration dates up to three years in the future.

A | B | C | D | E | F | G | H | I | J | K | L | M | N | O | P | Q | R | S | T | U | V | W | X | Y | Z |

Back to the Top

-M-

Margin call: A call from the clearinghouse to a clearing member (variation margin call), or from a broker to a customer (maintenance margin call), to add funds to their margin account to cover an adverse price movement. The added margin assures the brokerage firm and the clearinghouse that the customer can purchase or deliver the entire contract or security, if necessary.

Margin requirement (for options): The amount an uncovered (naked) option seller (writer) is required to deposit and maintain to cover his or her daily position valuation and reasonably foreseeable intraday price changes.

Market maker: Those who maintain the best bid and asked prices on the option floors of the Chicago Board of Options Exchange and the Pacific Stock Exchange. Market makers can compete with each other on the same underlying security's option pricing to provide the best bid and asked prices at any time.

Market order: An order to buy or sell futures or futures options contracts as soon as possible at the best available price. Time is of primary importance.

Market timing: The process of buying and selling securities based on indicators that predict meaningful swings in the price of the market or individual securities, targeting better results than the buy-and-hold approach.

Maturity date: See Expiration date.

Modeling: The process of creating a depiction of reality, such as a graph, picture, or mathematical representation.

Money management principles: The principles involved in creating a plan to manage losses as well as gains, to withstand market fluctuations.

Money market fund: A mutual fund that invests only in short term securities, such as bankers' acceptances, commercial paper, repurchase agreements and government bills. The net asset value per share is maintained at $1.00. Such funds are not federally insured, although the portfolio may consist of guaranteed securities and/or the fund may have private insurance protection.

Moving average: An average of prices for a specified number of days. If it is a three (3) day moving average, for example, the first three days' prices are averaged (1,2,3), followed by the next three days' average price (2,3,4), and so on. Moving averages are used by technicians to spot changes in trends.

Multiply listed options: Options on the same underlying security traded on more than one options exchange.

A | B | C | D | E | F | G | H | I | J | K | L | M | N | O | P | Q | R | S | T | U | V | W | X | Y | Z |

Back to the Top

-N-

Naked call writing: See Uncovered call options.

Naked put writing: See Uncovered put options.

NASDAQ: National Association of Securities Dealers Automatic Quotation system. An electronic quotation system that provides price quotations to market participants about the more actively traded common stock issues in the OTC market. About 4,000 common stock issues are included in the NASDAQ system.

Neutral hedge ratio: See Delta.

Neutral spread: An option spread created to profit from little net price movement of the underlying stock in either direction. Neutral spreads are most often calendar spreads. See also option spread, calendar spread.

New York Stock Exchange (NYSE): Also known as the Big Board. More than 2,000 common and preferred stocks are traded. The exchange is the oldest in the United States, founded in 1792, and the largest.

No-load mutual fund: An open-end investment company, shares of which are sold without a sales charge. There can be other distribution charges however, such as Article 12B-1 fees. A true "no load" fund will have neither a sales charge nor a distribution fee.

Nominal price (or nominal quotation): The price quotation calculated for futures or options for a period during which no actual trading occurred. These quotations are usually calculated by averaging the bid and asked prices.

Nova/Ursa Ratio: The RYDEX funds in Rockville, Maryland offer the bullish Nova fund (which mirrors the performance of the S&P 500 Index) and the bearish Ursa fund, which moves exactly inverse to the S&P 500 Index. When too many dollars pour into the bearishly-oriented Ursa fund, relative to the dollars in the Nova fund, you see a very low ratio that suggests the mood is pessimistic and the market is near a bottom. Too many dollars in the bullishly-oriented Nova fund will signal risk of a market correction or consolidation, as the buying power is close to being exhausted.

A | B | C | D | E | F | G | H | I | J | K | L | M | N | O | P | Q | R | S | T | U | V | W | X | Y | Z |

Back to the Top

-O-

OEX: OEX is the options ticker symbol for the Standard & Poor's 100 Index. This index measures the overall change in the value of 100 stocks of the large U.S. companies.

Offering price (also asked price): The lowest price any potential seller is willing to accept for a particular option.

On the money (also at the money): An option is on the money when the underlying stock sells at the same price as the exercise price of the option.

Open (good-til-canceled) order: An individual investor can place an order to buy or sell a security. That open order stays active until it is executed or until an option expires, or until the investor cancels it.

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

Open trade equity: The gain or loss on open positions that has not been realized.

Opening price: The price of a stock or option at the first transaction of the day.

Opening purchase: A transaction in which an investor becomes the holder of an option.

Opening sale: A transaction in which an investor becomes the writer of an option.

Opportunity cost: A factor in the pricing of an option, as a function of the prevailing level of interest rates.

Option: A contract that entitles the holder to buy or sell a number of shares (usually 100) of a particular common stock at a predetermined price (see striking price) on or before a fixed expiration date.

Option Pricing Model: The conventional method to assess option prices is the option pricing model. This model incorporates six factors into its pricing assumptions: the underlying security price, the striking price, the time until expiration, any dividends to be paid, the level of interest rates, and the volatility of the stock. This model assumes that stock price movement is random with no directional bias except for a slight upward bias related to carrying costs.

Option spread: A position that results from two different options on the same security. See bullish spread, bearish spread, credit spread, debit spread, neutral spread.

Option writing: The result of selling options in an opening transaction. See covered writing, naked writing.

Options Clearing Corporation, The: (OCC) The issuer of all options contracts traded on the Amex/NASDAQ, Chicago Board Options Exchange, Pacific Stock Exchange, and Philadelphia Stock Exchange.

Options contract: A contract that, in exchange for the option price, gives the option buyer the right, but not the obligation, to buy (or sell) a financial asset at the exercise price from (or to) the option seller within a specified time period, or on a specified date (expiration date).

Options exchange: Any or all of the following markets where options contracts are traded: Amex/NASDAQ, Chicago Board of Options Exchange, Pacific Stock Exchange, Philadelphia Stock Exchange.

Options price: Also called the option premium, the price paid by the buyer of the options contract for the right to buy or sell a security at a specified price in the future.

Options pricing model: The conventional method to assess options prices is the options pricing model. This model incorporates six factors into its pricing assumptions: the underlying security price, the striking price, the time until expiration, any dividends to be paid, the level of interest rates, and the volatility of the stock. This model assumes that stock price movement is random with no directional bias except for a slight upward bias related to carrying costs.

Options specialized broker: A broker that focuses on options trading and options strategies. Often such firms will have one or more Registered Options Principals on staff. Provides in-depth services related to assessing different options strategies.

Options spread: A position that results from the purchase of an option and the simultaneous sale (or write) of a different option n the same security. See also bullish spread, bearish spread, credit spread, debit spread, neutral spread.

Options writing: The result of selling options in an opening transaction. See also covered writing.

Order: An instruction to purchase or sell an option, first transmitted to a broker office, and then submitted to the exchange floor for execution.

Oscillators: Indicators of the movement of a stock's price relative to an assumed cycle of highs and low.

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.

Overbought/oversold: A condition in which a stock has reached the top of its cycle (overbought) and is now likely to turn down, or has declined to the point where the selling is over (oversold) and buyers will likely step in and push the stock higher.

A | B | C | D | E | F | G | H | I | J | K | L | M | N | O | P | Q | R | S | T | U | V | W | X | Y | Z |

Back to the Top

-P-

Pacific Stock Exchange: One of four U.S. Exchanges that trade options. The other three are the Amex/NASDAQ, the Chicago Board Options Exchange, and the Philadelphia Stock Exchange.

Philadelphia Stock Exchange: One of four U.S. Exchanges that trade options. The other three are the Amex/NASDAQ, the Chicago Board Options Exchange, and the Pacific Stock Exchange.

Position: Established when an investor makes an opening purchase or sale of an option, or establishes an option spread.

Premium: The price of an option contract, determined in the competitive marketplace, that the buyer (holder) of the option pays to the option seller (writer) for the rights conveyed by the option contract.

Put: An option contract that gives the buyer (holder) the right to sell, and places on the writer the obligation to buy a specified number of shares of the underlying stock at the given strike price on or before the expiration date of the contract.

Put/Call ratio: The number of puts traded each day divided by the number of calls traded each day. Near market lows, the put/call ratio will rise as options traders become excessively worried about downside risk and seek to hedge their portfolios with puts, or speculate on further downside activity. Near market peaks, interest in calls heats up to form a low put/call ratio. The put/call ratio is thus a contrary indicator when it reaches past extreme highs or lows.

Put Writing: Put writers typically sell puts below the market, as an effort to either acquire a stock at a price below current market prices, or get paid while they wait by pocketing the option premiums they received when the put options expire worthless. Put writers should like the stocks they sell the puts on, as they are incurring the obligation to buy the stock at a certain price up until that option's expiration.

A | B | C | D | E | F | G | H | I | J | K | L | M | N | O | P | Q | R | S | T | U | V | W | X | Y | Z |

Back to the Top

-Q-

A | B | C | D | E | F | G | H | I | J | K | L | M | N | O | P | Q | R | S | T | U | V | W | X | Y | Z |

Back to the Top

-R-

Registered options principal: A broker who has passed the NASD Series 4 exam, providing in-depth knowledge related to options.

Regression Channels: A best-fit trend line through a given set of data points for a stock, with upper and lower channels that seek to contain the bulk of the price action in that stock's trend. Schaeffer's Investment Research seeks to find accelerations outside of these regression channels, and leverage such accelerations with options purchases.

Relative Strength Index (RSI): Developed by Welles Wilder, RSI is one of the most popular oscillators used by traders to measure the oversold or overbought nature of a security. Values will range from 0 to100 depending upon how much up movement occurs relative to down movement. An indicator reading approaching 0 denotes an oversold condition while a reading approaching 100 denotes an overbought condition in the shares. Traditionally, values under 20 and over 80 mark the starting points for the zones where oversold and overbought conditions begin to be felt. When stocks approach these zones you should heighten your awareness and look towards a possible reversal in the stock's trend.

Resistance: A stock that tends to find significant selling pressure at a certain price level is said to have overhead resistance at that price level. Technical indicators like moving averages can also provide resistance as downtrending stocks rally up to touch these trendlines and spark new sellers at such resistance points.

Return if called: The percentage gain that a covered writer would achieve if the underlying stock is called away (see called away). The components of this return are the original option premium plus any dividends plus any appreciation to the striking price. This is the maximum return achievable by a covered writer (see covered call option writing).

Rho: The sensitivity of the option to a change in interest rates. Normally this is expressed for a one-percent change in interest rates.

Risk/Reward management: The complete trading approach developed by The Option Advisor. It results in risk being reduced and reward (or profits) being increased, thereby maximizing the target risk/reward ratio.

Rolling out: Substituting a call option of the same class and striking price, but with a later expiration.

Rolling up: Substituting a call option of the same class and expiration, but with a higher striking price (a lower striking price in the case of puts).

A | B | C | D | E | F | G | H | I | J | K | L | M | N | O | P | Q | R | S | T | U | V | W | X | Y | Z |

Back to the Top

-S-

Sentiment: The sum total of all bullish and bearish outlooks among all market participants on a particular stock, index or market.

Sentiment analysis: The analysis of the opinions of a crowd of investors, seeking to find extremes in the crowd's consensus opinion. When most investors expect a certain outcome in the markets, that expectation is likely to have already been factored into market prices. Schaeffer's Investment Research measures sentiment among options traders, mutual fund traders and various other sentiment surveys.

Sentiment surveys: Polls which seek to measure the percentage of investors who are bullish, bearish, or neutral on various financial markets. Sentiment surveys related to the stock market include Investors Intelligence, Consensus Inc., the American Association of Individual Investors and Market Vane.

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

Short interest: The number of shares that bearish traders and investors have sold short is known as the stock's short interest. Short interest signals potential future buying power, as the shares must eventually be repurchased.

Short interest ratio: The short interest ratio is one of the oldest and most popular measures of market sentiment. The ratio is derived from the action of investors who have borrowed stock and sold stock "short", betting that the stock's price will decline and that they will be able to buy the shares back at a lower price for repayment to the lender at a later date. As an indicator short interest shows the degree of negative sentiment among investors of a particular stock. The short interest ratio is the number of days it would take to cover the short interest if trading continued at the average daily volume for the month.

Short-life option: An option contract having from several weeks to a few months until expiration.

Short position: A position wherein a person's interest in a particular series of options is as a net seller (writer) (i.e., the number of contracts sold exceeds the number of contracts bought). Also, an investor is in a short position when the investor sells a stock that he or she does not own. The investor is looking for the stock to drop in price so that he or she can buy it lower than what it was sold for and make a profit on the difference.

Short seller: An individual who is betting on a security's price dropping by selling that security short. In such cases, the individual borrows the stock first (usually from a brokerage firm) in order to sell it. The hope is to buy the security back later at a lower price, in order to collect a profit relative to the higher initial selling price.

Short squeeze: When short sellers starts to feel pressure from a rising stock, which is causing them losses as the stock continues to rise. This squeeze is considered to place pressure on the shorts to force them to buy back their bearish short positions in order to limit their losses. Short squeezes often result in dramatic share price gains in relatively short periods of time.

Slippage: Cost to investors that results from buying at the asked price and selling at the bid price.

SPDR ("Spyders"): Standard & Poor's Depository Receipts are instruments that trade like a stock, which allow investors to mirror the performance of the S&P 500 Index (SPX). If the SPX is at 1200, the SPDRs will trade at 120.

Spread: See Bullish Spread, Bearish Spread, Credit Spread, or Debit Spread.

Specialist: Those who provide the best bid and asked prices on the options floors of the American Stock Exchange and the Philadelphia Stock Exchange. Specialists typically do not compete with each other, but rather focus on certain underlying stocks' options.

Standard & Poor's 100 Index (S&P 100): This index, also known by its options ticker symbol OEX, measures the overall change in the value of 100 stocks of the largest U.S. companies. (The breakdown between industrial, transportation, utilities and financial firms fluctuates depending on the market.)

Standard & Poor's 500 Index (S&P 500): This index, also known by its options ticker symbol SPX, measures the overall change in the value of the 500 stocks of the largest firms in the U.S. (The breakdown between industrial, transportation, utilities and financial firms fluctuates depending on the market.)

Stock options: Options to buy or sell a stock based on the value of the underlying shares of a stock.

Stock split: The creation of a lower share price with additional shares of stock. In a 2-for-1 stock split, if you own 100 shares of stock at a price of 80 before the split, you will own 200 shares of stock at a price of 40 after the stock split. While stock splits don't change the value of the stock by themselves, investors tend to like companies which split their stock, as these tend to be growth oriented companies whose shares prices have done well historically.

Stop loss: A price threshold which when reached triggers the exit of a position. Many stock traders will place a stop loss some 8-10% below the initial price paid, while option traders often need a wider stop loss threshold of 25% or even 50% to account for the more volatile fluctuations in the options market. A stop loss order can be placed in the market in advance of that level getting reached, or it can be monitored by a trader as a mental stop loss level which would trigger action to enter a sell order to exit the position.

Stop-Limit order: A contingency order that can be placed to trigger an entry or exit if a stock trades at a certain price. If a stock is at 100, you can place a stop-limit order to buy if the stock reaches 101, and this order requires that on a trade of 101, you must then be able to get into the trade at 101 and no higher. This approach can work well as an entry signal on breakouts while knowing what price you will receive if you can enter the position, but it is not recommended for exit orders, as a stock could drop below your stop limit price and never allow you to exit if it keeps plunging.

Straddle: The purchase or sale of an equivalent number of puts and calls on a given underlying stock with the same exercise prices and expiration date. The straddle purchaser seeks to profit from relatively large movements in the price of the underlying stock, regardless of direction.

Strangle: The purchase or sale of an equivalent number of puts and calls on a given underlying stock with the same expiration date but different exercise prices. The strangle purchaser seeks to profit from relatively large movements in the price of the underlying stock, regardless of direction.

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

A | B | C | D | E | F | G | H | I | J | K | L | M | N | O | P | Q | R | S | T | U | V | W | X | Y | Z |

Back to the Top

-T-

Target exit point: The predetermined price at which options holdings would be sold at a lucrative, yet achievable profit. It is a key component of The Option Advisor's overall strategy of risk/reward management.

Technical analysis: Examination of moving averages, standard deviation bands, and other price and volume indicators to identify stocks in trending situations or in trading ranges and to predict future stock prices.

Theoretical value: An estimated value of an option derived from a mathematical model.

Theta: Represents the loss in value an option will experience due to the passage of time. Theta is usually expressed on a per day basis. For example, if an option has a theta of -0.25, the option will lose about $0.25 a day, provided the underlying stock price and volatility hold constant.

Tick: Each trade in a security can be considered a tick- if the latest tick is up from the prior tick, it is considered an "uptick", and if the latest tick is lower than the prior tick, it is called a "downtick".

Time decay: The nonlinear loss of value of an option over time when all other factors are constant.

Time premium or time value: The difference between the total cost of an option and its intrinsic value.

Time spread: See Calendar spread.

Time value: The portion of the premium that is attributable to the amount of time remaining until the expiration of the option contract and to the fact that the underlying components that determine the value of the option may change during that time. Time value is generally equal to the difference between the premium and the intrinsic value.

Time stop: Closing a position if it has not moved in your favor within a predetermined period of time. A time stop is especially useful to option traders, as an options position that is not making any net progress can lose value even though the underlying stock has not lost value. A time stop seeks to minimize this risk if the position is not moving in your favor fairly quickly.

Trader's lunch break: See Intraday commentary.

Trading Capital - The portion of your overall investment portfolio dedicated to a particular trading strategy. Further, only a fraction of your total trading capital should be committed to any one trade or transaction. (See Money Management Principles ).

Trading floor: The location at the options exchange where the contracts are actually bought and sold.

Truncated risk: The ability of an investment to resist additional loss. Truncated risk is of particular relevance to options. For example, one cannot lose more than the premium paid for an option. Profits, however, are theoretically unlimited on an option purchase and are equal to the intrinsic value of the option less the premium paid (assuming there is no longer any time value remaining).

Two-dimensional diversification: An option trading strategy developed by The Option Advisor consisting of purchasing calls and puts to obtain diversification to minimize the impact of overall market movements.

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

A | B | C | D | E | F | G | H | I | J | K | L | M | N | O | P | Q | R | S | T | U | V | W | X | Y | Z |

Back to the Top

-U-

Uncovered call options: A short call option in which the seller (writer) does not own the shares of underlying stock represented by his or her options contracts.

Uncovered put options: A short put option in which the seller (writer) does not have a corresponding short stock position or has not deposited in a cash account cash or cash equivalents to cover the potential exercise of the put.

A | B | C | D | E | F | G | H | I | J | K | L | M | N | O | P | Q | R | S | T | U | V | W | X | Y | Z |

Back to the Top

-V-

Vega: The change in an option's price based on the change in its implied volatility expressed in dollar terms. For example, if stock XYZ has an option with a vega of 0.25, the option's price will change by $0.25 for each one percentage point change in the option's implied volatility.

VIX: The Volatility Index (VIX) is a widely-viewed measurement of volatility expectations. Since the VIX reverses from extreme directions, it's a good tool to help determine likely future market directions.

Volatility: The propensity of the market price of the underlying security to change in either direction.

Volume: For options, the number of contracts that have been traded within a specific time period, usually a day or a week.

A | B | C | D | E | F | G | H | I | J | K | L | M | N | O | P | Q | R | S | T | U | V | W | X | Y | Z |

Back to the Top

-W-

Wasting asset: An asset that has a limited life and tends to decrease in value over time (all other factors being held constant). Options are wasting assets.

Writer: The seller who initiates a short options position.

A | B | C | D | E | F | G | H | I | J | K | L | M | N | O | P | Q | R | S | T | U | V | W | X | Y | Z |

Back to the Top

-X-

A | B | C | D | E | F | G | H | I | J | K | L | M | N | O | P | Q | R | S | T | U | V | W | X | Y | Z |

Back to the Top

-Y-

A | B | C | D | E | F | G | H | I | J | K | L | M | N | O | P | Q | R | S | T | U | V | W | X | Y | Z |

Back to the Top

-Z-

A | B | C | D | E | F | G | H | I | J | K | L | M | N | O | P | Q | R | S | T | U | V | W | X | Y | Z |

Back to the Top