American-Style Options -
A type of stock option contract that can be exercised at any point in time on, or prior to, the scheduled expiration date.
Arbitrage -
Arbitrage is known as the simultaneous purchasing and selling of any kind of financial vehicle, such as stocks or options. The goal of arbitrage is to generate profits without assuming any risk.
Assignment -
Assignment is a process wherein the seller of an option contract has to fulfill his or her obligation to buy or sell the underlying asset to the purchaser of the said option contract.
At-The-Money -
At-The-Money is a term that is used to describe the point at which an option contract's strike price is the same as the underlying asset price. (See also: In-The-Money, Deep-In-The-Money, Near-The-Money, Out-Of-The-Money and Way-Out-Of-The-Money).
Automatic Exercise -
Automatic exercise occurs when "in-the-money" option contract's are expiring and the Options Clearing Corporation (OCC) exercises the contracts for the party holding them.
Binaries -
There are two types of binary options. The first type is called the cash-or-nothing. The second types is called the asset-or-nothing. The cash-or-nothing binary pays either a fixed dollar amount, if at expiration, the option contract is in-the-money or pays absolutly nothing if the option expires out-of-the-money. The asset-or-nothing pays how much the underlying asset is actually worth at expiration, if expiring in-the-money and nothing otherwise. [top]
Black-Scholes Option Pricing Model -
The Black-scholes model for option pricing is a formula that calculates a theoretical fair value for equity options.
Break-Even-Point (BEP) -
The Break-Even is a point at which no money has been made or lost. It is the price of the underlying asset, in which the trader or investor is said to "break-even".[top]
Buy To Open (See also- Sell to close) -
An option order type in which a trader or investor specifies their entry price.
Buy To Close (See also- Sell to open) -
An option order type in which a trader or investor whom is currently short an option contract, specifies a price to close their option position.[top]
(CBOE)Chicago Board Options Exchange -
The first and largest exchange for trading stock option contracts. The exchange was created in 1973 by the (CBOT) Chicago Board of Trade.
Class -
A class of options are all of the put and call option contracts that derive from the same asset. [top]
Clearing Houses -
An option clearing house handles various actions related to security exchanges. Some of the services they perform are the settelment of transactions and clearing.
(CME) Chicago Mercantile Exchange -
A Chicago based trading exchange that was established in 1898. Stocks, interest rates and commodities, among others, are instruments traded on the Chicago Mercantile Exchange.[top]
Debit Spreads -
An option strategy in which two option contracts are involved. One contract is purchased and another is sold at the same time, creating a net debit on the overall option position.(see also: Credit spread)
Delta -
Every time the underlying stock price changes, the option price changes as well. The delta of an option shows this relationship. For every point the stock moves, up or down, the delta figures how much the options price will change as a result. The delta of an option is one of the stock option Greeks. (see also: Black-Scholes option pricing model). [top]
Delta Neutral -
A position that is delta neutral means that the trader establishes the spread so that delta of the entire position is equal to zero.
Derivatives -
There are many kinds of derivatives. A derivative is called such, because the value derives from something else. For example, stock options are a type of derivative because the value of the stock option is directly related to the value of the underlying stock price. Without the stock, there would be no stock option. The same goes for other types of derivatives, such as interest rate options and foreign exchange options.[top]
Diagonal option strategies -
A diagonal spread is created by writing (selling) a shorter term option contract, while purchasing a longer term one as well, at a different strike price. Some traders use diagonals to take advantage of the accelerated time decay (theta) regarding options that are nearing expiration. Stock options that are about to expire lose value more quickly than longer term options. Over time, this can lead to a successful position.
Directional Trading -
There are many ways to trade financial instruments. There are strategies that take into account volatility (e.g.: strangles and straddles), time decay (e.g.: calendar spreads), and others that focus on direction alone (e.g.: long puts and calls). Any time a trader or investor's primary concern is whether or not the underlying asset is going up or down, she or he is said to be trading direction.[top]
Early Exercise -
When an option contract is exercised before it's official expiation date, it is said to have been exercised early. Early exercise of an option contract can be due to the involuntary assignment of the option contract, resulting in the buying or selling of the underlying security.
Equity Options -
Equity options are synonymous with stock options.[top]
European Style Options -
European Style options differ from American style options in that they can only be exercised at expiration. No early exercise means that there can be early assignmentl, unlike American style options.
Exchanges -
Exchanges are where financial instruments such as stocks, options and other assets are bought, sold and traded.[top]
Exercise -
An exercise occurs when a buyer or seller of options uses his or her rights to exit their current option position. he or she is said to be exercising their right to buy or sell the underlying asset.
Exercise Price -
The exercise price is the price at which the underlying asset may be purchased or sold. [top]
Expiration Date -
The Saturday after the third Friday of the month is when equity options expire. This day is also known as expiration Friday. Equity option contracts expire at different times. The day that a particular contract expires is known as that option contract's expiration date.
Extrinsic value (see also: Intrinsic value) -
Any value other than the true (intrinsic) value of an option contract is referred to as extrinsic value. Time value, measured through the Greek theta, is a part of an option contract's extrinsic value. As options come closer to expiration, they lose their extrinsic value at a steady pace. At expiration, an option contract is only worth it's intrinsic value. It is also worth noting that prior to expiration, implied volatility (measured through the Greek Vega) also has an effect on the extrinsic value of a stock option contract. [top]
Fair Value -
The theoretical value that option pricing formulas, such as the Black-Scholes and the binomial option pricing model (created by Cox, Ross and Rubenstein), calculate.
Futures -
Futures are contracts in which both parties are obligated to perform the act of buying or selling a commodity, at a specific price, and on a specified date in the future.[top]
Fill (see also: partial fill) -
When a stock or option order has been completed, the order is said to be filled.
Gamma -
Gamma is a value that derives from the amount that the delta of the option changes for every one dollar move in the underlying stock. While the delta tells you how much the option price will change for every one point move in the stock price, the Gamma tells you how the delta will respond to stock fluctuations.[top]
Greeks(See also Black-Scholes) -
The Greeks are sensitivities that aid in managing risk. They are as follows: delta, vega, theta, gamma and rho.
Historical Volatility -
Historical volatility is an average of the price action on a particular stock, for a given time frame. For example, this may be the average volatility for the past 30 days of trading.[top]
Horizontal Option Strategies -
Any time in which the legs of a spread have different expiration dates, but the same strike price, the strategy is known as a horizontal spread. A calendar spread, or time spread, is an example of a horizontal option strategy. Many traders will implement this type of strategy to take advantage of the increased time decay that is inherent in option contracts nearing expiration.
Implied Volatility -
Implied volatility (IV) is derived from the current prices in the options market, attempting to determine what the future volatility of the underlying asset might be.[top]
In-The-Money -
In-The-Money is a term that is used to describe the point at which the underlying asset is above or below the option contract's strike price, depending if the said option contract is a put or a call (In-the-money for a put: below strike the put's strike; In-the-money for a call: above the call's strike). Therefore, the option has true value (intrinsic value). (See also: At-The-Money, Deep-In-The-Money, Near-The-Money, Out-Of-The-Money and Way-Out-Of-The-Money).
Intrinsic Value -
Intrinsic value is the actual or true value of an option contract. When an option contract expires, the extrinsic value, which includes time and volatility, are gone. All that is left at expiration is the actual value of the option contract. The current price of the underlying stock, minus the strike price of the option, gives you the intrinsic value of the option contract. If you get a negative number, the option is said to have no intrinsic value.[top]
LEAPS -
LEAPS is an acronym that stand for Long term Equity Anticipation Securities. Stock options that have expiration dates that are years into the future are known as LEAPS.
Leg -
All of the collective parts of a spread are known as the legs of the spread. For example, a bull call spread has two legs; A butterfly strategy has four legs. Many traders will perform an action called legging into a position. This means that a trader or investor establishes each component that makes up the entire strategy at separate times.[top]
Legging In -
Legging into a postion is essentially the act of establishing each leg of the stock or option strategy at different times, in order to achieve a best average price.
Legging Out -
Legging out of a postion is the act of exiting each leg of an option spread at different times. [top]
Long position-
To be long a stock or option position means that you are a buyer. This is opposite of being short, which means that you are a seller of the asset.
Moneyness of an option-
A term used in relation to whether an option is in-the-money, near-the-money, at-the-money, out-of-the-money, way-out-of-the-money, or deep-in-the-money. [top]
Naked strategies -
When a trader is naked an option contract, he or she is said to be uncovered and have unlimited risk on the trade. A naked strategy leaves the trader without protection in the event that the trade goes against him or her. An example would be writing (selling) put option contracts (e.g.:The Short put option strategy).
Neutral Strategies -
A neutral option strategy is one in which a trader is neither bullish nor bearish regarding his or her view of the underlying asset.[top]
Near-The-Money -
Near-the-money is a term that describes a point at which the underlying asset is very colse to the option's strike price.
Open Interest -
The number of open option contracts in the market.[top]
Option -
An option is a financial conract between a buyer and seller of the contract. It is important to note that with stock options, buyers have rights and seller have obligations. Whereas, with futures, both parties of the contract are obligated to perform specific duties.
Option Chains -
An option chain displays the quotes for option contracts.[top]
Options Clearing Corporation -
The Options Clearing Corporation makes certain that all listed options are cleared, and that all of the parties involved fulfill their obligations, as stated in the terms of the option's contract.
Out-Of-The-Money -
Out-Of-The-Money is a term that is used to describe the point at which the underlying asset is above or below the option contract's strike price and has no intrinsic value. This is different if the option contract is either put or a call (Out-the-money for a put: The underlying is above the put's strike price; Out-Of-the-money for a call: The underlying is below the call's strike). (See also: Deep-In-The-Money, Near-The-Money, At-The-Money, In-The-Money and Way-Out-Of-The-Money).[top]
Option pricing model -
An option pricing model calculates the theoretical value for stock options. (see also: The Black-Scholes model for pricing options; the binomial option pricing model, created by Cox, Ross, and Rubenstein).
Rho -
Rho is a Greek that measures the amount an option's price will change related to movements in interest rates.[top]
Risk -
The amount of capital that can be lost on a particular trade or investment.
Rolling -
Rolling is reffering to a trader closing out an option position and opening another one of the same type and class, but with a different expiration date.[top]
Series -
A series are set of option contracts that share the same underlying, strike price and expiration date.
Sell-to-close -
An option order type in which a trader or investor whom is currently long an option contract, specifies a price to close their option position.[top]
Sell-to-open -
An option order type in which a trader or investor specifies a price to open a short option position.
Spread -
A spread is an option strategy that has more than one option position open on the same underlying asset, thus reducing the risk on the trade.[top]
Strike Price -
The strike is the price a stock option contract may be purchased or sold.
Theoretical Value -
The theoretical value of an option contract is it's fair value, figured by an option pricing model like the Black-Scholes formula.[top]
Theta -
The amount of premium that an option price loses for every day that passes, is measured through the Greek theta.
Time Spread -
Also known as a calendar spread.[top]
Time Value -
The amount of an option's premium, related to the time left until expiration. Time value is a part of an option contract's extrinsic value.
Vega -
An option's vega is the measurement of the relationship between the volatility of the underlying stock price and it's corresponding options. Options on less volatile stocks have a lower vega than more volatile stocks.[top]
Vertical Spread -
An option spread strategy in which both leg's of the position have the same expiration dates, but have different strike prices.