A
Account Value – Also known as “Total equity;” the total cash value of your trading account, found by subtracting the market value of any shorted stocks from the sum of the total market value of all securities and the total cash amount in your account.
American Stock Exchange (or Amex or AMEX) – One of the three biggest stock exchanges in the United States, alongside the New York Stock Exchange and Nasdaq. Amex was created 1842 in New York City, and trades a large selection of different index and equity options.
American Style Option – A financial contract which can be bought or sold at any point in time up until its expiration. Most equity options fall under this category.
Ask or Ask Price – Also known as “the offer.” The lowest price a seller would be willing to allow for purchase of a given stock or option at the time displayed.
At-the-money – A term used to describe an option or underlying instrument whose strike price and current market price are equivalent. A 75 call and a 75 put with a stock trading at $75 would both be at-the-money. .
Automated Clearing House (ACH) – A group of electronic interbank networks used to process sales or purchases through automation..
Automatic exercise – Protective measures instituted by the Options Clearing Corporation (OCC) which prevents customers from losing the intrinsic value of an option or of options they fail to remember to exercise, also known as Exercise by Exception.. The OCC automatically exercises all index options worth $0.01 or more, and any stock option with a minimum value of $0.25.
B
Bearish – the sentiment of a person who generally expects the market to decline.
Best Ask or Best Offer – The lowest available offer to sell a specific security at any point in time of every market maker in competition
Best Bid – The highest available offer to purchase a specific security at any point in time of every market maker in competition
Bid or Bid Price – The price at which a buyer would be willing to purchase a stock or options contract..
BOX – The Boston Options Exchange.
Broker Call Rate – The interest rate at which a bank will charge brokerages in order to provide the security positions of the brokerage's customers. Brokerages will generally charge above this amount if you borrow on margin, often about %1 point higher than the Federal Funds Fund Rate.
Bullish – the sentiment of a person who generally expects the market to rise.
Buy To Close – An order entered to close a short position. Generally used in futures/options investing to distinguish between establishing vs. closing a position.
Buy To Open – An order entered to establish a new long position. Generally used in futures/options investing to distinguish between establishing vs. closing a position.
Buy-write – see Covered Call.
C
CBOE – Chicago Board Options Exchange.
Call Option – An equity options contract which gives the buyer the choice to purchase a given amount of stock at a fixed rate only at the point of expiration for European Style options, or at any point in time before the expiration of the contract for American style options. The said fixed rate is called the “strike price.”
Cash Settlement – A process generally related to index options whereby option holders are given the intrinsic value of the options in cash at the point of expiration. This process contrasts with equity options which are exchanged through stock rather than cash at expiration, and sellers are responsible for the cash payment.
Chain – See option chain.
Class of Options – Calls or puts relating to the same underlying instrument.
Close – The duration at the end of a trading session in which orders are filled within a range of closely related prices. .
Closing Price – The rate of the final transaction of any given option contract at the close of the trading day. This can coincide with the settlement prices used by the OCC, but is not the same.
Closing Range – The spectrum of analogous rates where transactions take place upon a market close. Orders sold or bought may be filled at any price within this spectrum.
Closing Transaction – The point at which an option transaction is closed. For example, the options could expire or be exercised; or, a bought to close order or sold to close order is completed.
Contingent Orders – An order sent to the market only after a certain precondition or contingency is met.
Contract – A regulated trade instrument in futures markets which defines the amount and quality of a commodity for delivery at a given future date.
Cover – A method of closing an existing short position by buying an option.
Credit – A surge in account balance after a sale or deposit.
Cycle – The months of expiration in relation to a given set of options.
D
Day Order – An order to execute a Day Trade.
Day Trade – Any trade opened and closed on the same day.
Debit – A loss in account balance after a purchase or withdrawal..
Debit Spread (also Limit/Debit) – A trade resulting in Debit due to a higher cost of a long position than the revenues from the sale of short options. A bull put or bear call spread are examples of a Debit spread.
Delivery – To meet the demands of a contract when said contract has been assigned; for a call writer delivery occurs upon the transfer of the stock at the strike to the call holder at the given strike price in said contact. Delivery for a Put writer, on the other hand, results upon payment, by the writer, of the agreed price for the stock and subsequent acquisition of the shares.
Delivery Notice – A notice stating a clearing member's intentions to deliver a stated quantity of a commodity with regard to the settlement of a futures contract.
Delta – The total change in the theoretical price of an option after a one-unit move in the underlying. A one unit move for an option in the underlying can be defined as a $1 change in the stock’s total price. A deep in-the-money call option will usually have a delta at aproximately 100 (1 x 100 shares), while an at-the-money call option will have a delta of about 50, and a deep out-of-the-money call option will have a delta of approximately 0. In contrast, a put option will have negative deltas, though they will behave the same as call options.
Delta Neutral – The term used to describe a “Zero delta” or a trade which is neither long nor short. a Delta neutral trade has a theoretically limited risk and is therefore often used by traders to offset option positions with stock and secure their trades. process by which professional traders offset option positions with stock to create a position that has 0 deltas. A zero delta position, by definition, is neither long nor short. Therefore, the position theoretically has limited risk.
Derivative – A financial contract whose value is subordinated, or originates from another security, such as bonds or stocks. Mortgage-backed securities, Futures, and Options are the most frequently traded and most well known derivatives.
Discount – An option which trades below its intrinsic value is known as a Discounted Option.
Dow Jones Industrial Average (DJIA) – The oldest and most widely known price-weighted average index of the American Stock market, averaging the market flow of the 30 most significant stocks traded on the NYSA.
Downtick – When the most recent trade for a particular instrument occurs at a lower price than the trade immediately preceding it.
E
Early exercise – The right given from an American option that permits the holder to finish transaction before the point of exercise.
Earnings per Share – A company's gross earnings divided by the total number of shares outstanding.
Equity option – A contract that permits the holder to sell or purchase shares of a publicly traded stock at a fixed value..
European Option – A contract that can only be bought or sold at the expiration date.
Exchange-traded fund (ETF) – A fund of multiple securities grouped together which tracks trades and an index as a regular stock does.
Execution – See “Fill.”
Exercise – To implore the right related to a given option. The holder purchases a stock at a set price (strike price) from the option seller when exercising a call. The holder of a put option sells the stock to the option seller at the strike price.
Exercise Price – The set price defined by an option contract at which the holder is permitted to purchase or sell the underlying stock. Also known as the strike price.
Expiration Date – The date on which all rights related to a given option and the option itself terminate.
Extrinsic Value – Also known as time value. The amount by which the current price of an option exceeds its intrinsic value. The price of out-of-the-money and at-the-money options is made up exclusively extrinsic value.
F
Fair Value – When the theoretical value, as predicted by a formula such as the Black-Scholes formula, and the actual market price of a given option are equivalent.
Fast Market – A market characterized by a very quick change of the bids and offers, to the point where the differences between what is quoted and where a trade takes place in reality may be highly significant. Customers trading in a fast market often have their orders fail to fill when they might expect, and generally in such a situation the broker cannot be held responsible.
Fill – The process of completing an order to buy or sell securities. Once a trade is executed, it is reported by a Confirmation. Also known as a "Execution".
Fill Or Kill – An order that must either be cancelled or filled immediately.
Floor Broker – An agent on the trading floor who is responsible for executing the orders of customers.
Floor Trader – A person on the trading floor who sells or purchases contracts for his or her own self. The person acts as a market trader to this extent.
Fundamental Analysis – The evaluation of the allure of a given stock or contract using financial information available as far as it is associated to the current stock price. This can include profits, revenues, etc. Also, see technical analysis.
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G
Gamma – The Greek letter used to represent the derivative of an option delta, changing proportionally to the underlying price shift. Generally this is most helpful to professional traders who work with larger positions.
Good-Until-Cancelled (GTC) – A directive to execute a trade until the customer cancels the trade or it is completed. In contrast to a day order, a GTC order will remain open until cancelled or filled.
"The Greeks" – A term which defines the symbolic letters Delta, Gamma, Theta, Vega and Rho, used bt traders to analyze market risks.
H
Hedge – A trade which is executed to protect a pre-established position.
Historical Volatility – A calculation of the real change of stock price over a given period of time. This measurement can be used in an option pricing formula, such as the Black-Scholes formula, to determine if the option underperforms or overperforms its past (or historical) achievements. See Implied Volatility.
Holder – The person who currently owns calls, puts or stock.
I
ISE (International Stock Exchange) – A wholly electronic exchange, launched in 2000, which provides investors with greatly increased liquidity and hence also the ability to trade at a far faster pace than ever before possible trading through an Exchange Floor.
Implied Volatility – The estimated change of stock price in reference to the current option value..
Index – An entity which monitors the performance of a collection of stocks. An index’s change therefore denotes the total change of every stock which it measures. One of the most important indices generally followed and analyzed by traders is the S&P 100, which tracks the performance of the 100 largest companies world-wide.
Index Option – An option derived from an Index as opposed to a single stock. Buying or selling the collection of stocks which comprise the index is burdening and therefore Index options are generally cash-settled.
Individual Account – an Account owned by a specific person under their legal name only. Upon the owner’s passing the account is generally assumed by his or her estate.
Individual Retirement Account (IRA) – A tax-deferred retirement account in which deposits can be invested in multiple different securities, generally established with a financial institution. For other types of IRAs, see Keogh plan, Simplified Employee Pension (SEP) plan, 401(k), Roth, or Rollover IRA.
In-the-Money – An option whose strike price is below (in the case of a call) or above (in the case of a put) the current market price of the underlying stock.
Intrinsic Value – The amount of an option’s price which can be accounted for by the amount the option is in-the-money. For example, with the stock at $74, a 70 call trading at 5.25 has $4 of intrinsic value (74-70) and 1.25 of extrinsic or time value (5.25 – 4).
L
Last Trading Day (LTD) – The final day in which trading may occur for a particular delivery month. After the last trading day, any remaining commitment must be settled for delivery.
LEAPS® – Long-term Equity Anticipation Securities, or LEAPS®, are long standing options (both stock and/or index) which expire at over 9 months. LEAPS function like other options, but allow for investors to gain immensely from equity appreciations, while risking a smaller amount of money than they would risk upon buying a stock.
Leg – Part of a larger position consisting of multiple options. By legging into a spread, a trader does part of the spread at one price and hopes the market will move so the rest of the spread can be completed at a better price.
Leverage – An attribute of options which amplifies the magnitude in a price shift of the underlying stock. A 5% increase in the stock would correlate to a 50% increase in the overlying option position.
Limit Order – To execute a transaction for a pre-defined amount of shares at a given price or above the price in certain circumstances. These orders will guarantee a price but, still, do not guarantee an execution.
Liquid Market – A high volume trading environment in which traders can gain from narrow bid-ask spreads. Large orders can be executed without large impact on the Market price in a Liquid Market.
Liquidity – The time-based capacity to which a security can be sold at an equitable price and converted to cash measure of how quickly a security can be sold at a fair price and converted to cash. An illiquid security is one that trades in low volumes, such that if you were to, for example, have a large amount of shares of a stock which does not trade often, you may be unable to sell your position.
Listed Option – An exchange traded put or call contract issued by the OCC with standardized strike prices and expiration dates.
Long Position – 1) A position that results from an initial purchase of stock or options—i.e., long calls, long puts, long stock 2) a position in which the holder expects to benefit from an increase in the price of the underlying—e.g., long stock, long call, short put.
M
Maintenance Margin – A set amount of money which must remain in the account of a customer for any position or all positions in order to continue trades. Generally the sum is smaller than the initial margin, and a drop below the required amount of money necessitates a deposit back to initial margin levels.
Margin – The amount of collateral or equity required to borrow money for the purpose of investment. Traders who buy on margin borrow a percentage of the purchase price from their brokerage firm.
Margin Call – A brokerage firm's demand that a customer deposit enough money or securities to bring a margin account back up to the minimum maintenance amount.
Margin Equity Percentage – A calculation of the net value of a person's securities correlated to the amount of money borrowed. A negative margin balance does not necessarily indicate borrowed funds.
Market Maker – A floor trader who provides two-sided markets (bid-ask) and takes the trade which the customer does not select. Market makers can increase the liquidity of the market in this regard, and may either represent a proprietary trading firm or trade for their own accounts.
Market-Not-Held-Order – A customer-issued order which permits the floor broker to trade according to his or her best judgement.
Market Order – A customer-issued order that is to be executed at the prevailing market price as timely as is possible.
N
Naked Option – An option in which the seller does not own any, or enough, shares of the trading position for protection against unwanted price movements. A price move of an unowned underlying security against the trader would require the trader to purchase the shares no matter how high they become.
Nasdaq (National Association of Securities Dealers Automated Quotations) – A worldwide, computerized marketplace displaying up-to-the-second price quotations for over the counter securities and trades. Also the benchmark index for American stocks in technology.
National Association of Securities Dealers (NASD) – The biggest self-regulatory securities based industrial organization in the United States. NASD establishes rules and conducts regulatory reviews of the financial transactions of members through its subsidiaries NASD Regulation, Inc.; and the NASDAQ Stock Market, Inc.
National Best Bid or Offer (NBBO) – the SEC-regulated condition requiring brokers to make every effort to offer customers the best available ask and bid prices.
New York Stock Exchange (NYSE) – The largest stock exchange in the world as far as market capitalization is concerned, and the largest and longest standing stock exchange in the United States. The NYSE is currently owned by the Intercontinental Exchange, the largest financial publisher in the US..
Non-equity Option – An option that has an underlying security other than stock—e.g., futures, commodities.
O
One Cancels Other (OCO) – A qualifier used when multiple orders are entered and the execution of one order cancels a second or alternate order. For example, with OCO you can place two orders linked to each other, allowing you to place a stop loss order on the same option.
One Triggers Other (OTO) – An optionsXpress qualifier used when multiple stock or option orders are entered and the execution of one order submits a second or alternate order.
Opening Range – A set of contiguous prices within which transactions occur during market opening. Transactions of orders may be filled within any point of the range.
Opening Transaction – A trade which produces adds to an existing position or produces a new one.
Open Interest – The number of either long or short contracts, traded on a given option, that have not been offset by a closing transaction. A closing transaction lowers open interest while an opening transaction increases open interest.
Open Outcry – The pit-trading environment in which market makers compete for trades.
Option – A contract that grants the holder the right to either sell or purchase a given security at a set price for a specific period of time. The seller, on the other hand, has an obligation to fufill the contract’s terms if the buyer were to exercise the option.
Option Buying Power – A numerical symbol computed by subtracting any requirements or pending purchases from total account equity.
Option Chain – A way of quoting options prices through a list of all of the options for a given security, including the various strike prices, expiration dates, and whether they are calls or puts.
Option Period – The period between the establishment of an option and the option’s expiration.
Option Clearing Corporation (OCC) – The largest Clearing house in the United States, responsible for publication and regulation of all exchange-traded options. The OCC serves as a middle-man for buyers and sellers, and guarantees all options contracts are executed and respected by their terms.
Option Writer – The person selling an option during the opening transaction, establishing the obligation to conform to and satisfy the terms of the contract when assigned.
Out-of-the-Money – The term used to describe an option whose strike price is either above or below the current market price of the underlying security, depending on whether the option is a call or a put, respectively. Such an option would therefore have no intrinsic monetary value, and its value would be wholly extrinsic or dependent on time..
Over the counter (OTC) – A regionally dispersed market in which securities transactions are conducted via telephone and computer networks. This market is very risky and has a limited amount of equity.
P
Pacific Exchange (PCX) – A regional exchange which trades options and equities located in San Francisco, with a major branch in Los Angeles.
Parity – The term used to describe an in-the-money option whose price and intrinsic value are equal. For a stock trading at $50, a 40 call trading at $10 would be trading at parity because of the fact that the price does not include any time or extrinsic value. On the other hand, the same trade with a value of 10.25 has a .25 of time value, and is therefore not trading at parity.
Price-to-earnings ratio (P/E) – The share price of a stock, divided by its per-share earnings over the past year.
P/E (Forward) – Price/earnings ratio, using earnings estimates for the next four quarters.
PEG Ratio – A stock's price/earnings ratio divided by its year-over-year earnings growth rate.
Pending Purchases – The current market value for all a trader’s open orders based on real-time data, including OCO orders, and excluding open contingent orders.
Philadelphia Stock Exchange (PHLX) – The oldest stock exchange in the United States, founded in 1790, which trades stocks, equity options, and index options as well as currencies.
Pin Risk – When an underlying security settles at the option's strike price, generating risk as short options holders are unaware as to whether or not they will be assigned.
Pit – The area of an exchange in which traders convene to conduct transactions for specific contracts.
Portfolio – The collection of all securities held by either an individual, institution or mutual fund.
Position – The total open long and short contracts in a given account.
Position Limits – the number of options contracts or deltas set by an exchange that an individual trader cannot go over, whose specific limitations differ by option type and exchange.
Premium – 1) the limit of which an option value can exceed its intrinsic value. 2) the net value of an option including both intrinsic and extrinsic or time value.
Primary Market – The exchange which handles the highest amount of volume in cases where a single contract is traded on multiple exchanges.
Put/Call ratio – The ratio of put options trading volume to call options trading volume, used to estimate investor attitude.
Put Option – A contract which gives the holder the right to sell a stock at a given value within a specific time frame. The seller or write is required to purchase the stock at the strike price if the option is assigned.
R
Range – The scope of prices from an upper to a lower limit recorded during a particular trading session or length of time.
Realized Profit & Losses – The profit or loss that results from closing a position.
Repair Strategy – An options or stock approach geared toward compensating a trader for a losing long stock position. The approach is executed by purchasing an in-the-money call and selling two out-of-the-money calls, generating a credit which lowers the break-even point of the security thereby compensating for part of the unrealized loss.
Resistance – A level of a particular trading range that a stock has reached multiple times, but not cracked, due to an increase in the selling pressure of the level price. l at the top of a trading range that a stock has reached on several occasions but has not penetrated due to increased selling pressure at that price. This concept is instrumental in technical analysis.
RHO(rho) – The Greek letter symbolizing the predicted change in a particular option’s price given a 1% change in interest rates. .
Rolling – A trading approach where a person closes one position while subsequently opening a new position at a separate strike or expiration.
S
Scalper – A floor trader who profits from the spread between the bid and the offer as well as from short-term price fluctuations.
SEC (Securities and Exchange Commission) – The federal agency which supervises protecting investors and preserving the stability of the securities markets.
Securities – Any kind of financial asset that can be traded, such as shares of stock or bonds.
Sell To Close – An order entered to close a long position. Generally used in futures/options investing to distinguish between establishing vs. closing a position. Consequently, a "buy to open" order is always used to open a long position.
Sell To Open – An order entered to establish a new short position. Generally used in futures/options investing to distinguish between establishing vs. closing a position. Consequently, a "buy to close" order is always used to close a short position.
Series of Options – Calls and puts based on the same underlying stock with the same strike and expiration.
Settlement Price – The price established by the Options Clearing Corporation at the end of the trading day as a standard to value the securities in individual trading accounts or in the morning in the case of some European Options. The settlement price is based on the opening prices of all the stocks in a particular Index. These figures are then used to find the settlement price.
Short Position – An option or stock position that will profit from a decrease in the price of the underlying (e.g., short stock, short call, long put).
Short Stock Position – A position initiated by selling stock in an opening transaction with the goal of buying it later at a lower price (i.e., sell high, buy low). To accomplish this, the stock must be borrowed from a broker-dealer before it can be sold.
Side – A side considers the buy and sell actions of a trade as separate events. Each matched trade, and each contract, has two sides – the buyer side and the seller side. Taken together, these two sides equal one round turn. Measuring matched trade volume "per side" counts volume on each side of the trade.
SIPC – See Securities Investor Protection Corporation
Spread – 1) the difference between the bid and the offer (e.g., if the bid-ask is 5- 5.30, the spread is $0.30). 2) a limited risk, limited reward strategy established by combining options that would, if separate, profit from opposite moves in the price of the underlying.
Spread Stop Order – A contingency order to buy or sell an option spread when the market reaches a particular level. When the price reaches that level specified in the stop order, the stop order triggers a sell/buy to close/open the spread at the customer's predetermined price (Limit or Market).
Standard & Poor's 500 Index – An index of 500 of the biggest publicly traded companies in the United States. The S&P 500 is generally thought of as the best measurement of the overall U.S. stock market.
Static Return – The return that an investor would make on a particular position if the underlying were unchanged in price at the expiration of the options in the position.
Stop-Limit Order – Like a stop order, this order will be triggered by a move up or down to a particular price level. Once that level is reached, the order becomes a limit order, which must be executed at a specific price. In contrast, a regular stop order will be executed at the market price rather than at a specified price.
Stop Order – A contingency order to buy or sell a stock when the market reaches a particular level. When the price reaches that level specified in the stop order, the stop order becomes a market order and is executed at the best possible price.
Strike Price – Also known as Exercise Price. The price, specified by the option contract, at which the holder can buy or sell the underlying stock.
Strike Price Interval – The standard price difference between consecutive options. For stocks over $25, the strikes generally occur at $5 intervals (e.g., 30,35,40). Stocks below $25 have options that trade at $2.50 intervals.
Support – In a period of falling prices, the support level is a price below which the stock tends not to trade because of the reemergence of buyers. For example, a stock that has fallen near $27 on several occasions only to reverse the trend and increase in price is said to have support at $27.
Symbol – Ticker symbol.
T
Theoretical Value – The fair value of an option as predicted by a mathematical formula such as Black-Scholes. This takes into account the following factors: strike price, the current price of the underlying, interest rates, time remaining until expiration, dividends (if any), and volatility.
Theta – The Greek letter representing the change in an option's value given a one-unit (day) change in time.
Tick – The smallest increment an option, stock, or commodity price can change.
Time Decay – Also known as Decay. The theoretical, time dependent decrease in the total monetary value of an option. The change in the option’s value over time is represented by the constant “theta,” a greek letter, and is exponential, meaning that as more time passes the decrease in the value of the option grows larger.
Time Value – Also known as extrinsic value. The amount by which the current price of an option exceeds its intrinsic value. The price of out-of-the-money and at-the-money options is made up exclusively of extrinsic value .
Total Money Markets & Cash – Defined as the net sum of your balances held in cash, margin, and money market funds. This does not include your mutual funds balances. Cash/Margin/Money Market sweep movements update daily before the market opens.
Trading Level – Your trading level has been determined based on your trading experience, income level, age and overall knowledge of options. The list below outlines the various trades permitted at each trading level.
|
-1 |
Trading Disabled |
|
0 |
Buy Stocks/Bonds/ Mutual Funds |
|
1 |
Covered Calls / Sell Stock Short |
|
2 |
Buy Calls and Puts / Cash Secured Put Writing |
|
3 |
Debit Spreads (purchase a spread) |
|
4 |
Credit Spreads / Equity Put Writing (sell a spread) |
|
5 |
Naked Equity Call Writing / Naked Index Put & Call Option Writing |
Trailing Stop – A "trailing stop" order is a stop order that moves along with a favorable movement in a security. Trailing sell stop orders will move upward a defined distance as long as the security moves upward. Trailing buy stop orders will move downward a defined distance as long as the security moves downward.
Trailing (Stop) Trigger – The price at which a trailing stop will activate.
Contingent Trigger – On entry of the order the customer can choose bid, ask or last. If last is chosen, it will only be used if it is in between the consolidated bid and ask.
Transaction Costs – The fees related to initiating and maintaining a position. These include commissions, margin fees, and exchange fees.
U
Uncovered Option – Also known as a naked option. A short position, not protected by offsetting options, in which the writer of the options lacks the stock or collateral that would be required upon assignment. For example, a naked call writer doesn't own the stock that would have to be sold at the strike price if the calls were exercised. Similarly, a naked put writer doesn't have the full amount in the account to buy the underlying shares at the strike price in the event of an exercise. For obvious reasons, naked option writing is a risky strategy.
Underlying Security – The stock, commodity, or other financial instrument on which an option contract is based.
Uptick – When the most recent trade for a particular instrument occurs at a higher price than the trade immediately preceding it.
V
Vega – The Greek letter representing the change in an option's theoretical value given a 1% change in the volatility of the underlying.
Volatility – The mathematical measure of stock price fluctuation over a period of time. See Implied Volatility.
W
Write – To sell an option in an opening transaction.
Writer – a person who has sold an option in an opening transaction and is now short a contract that may or may not be offset by stock or other options.
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