ADR
American Depositary Receipts are certificates representing shares in a foreign corporation that a U.S. bank issues. The ADRs themselves can be traded on the U.S. stock market. They are a convenient means for U.S.investors to trade shares in non-U.S. companies.
All-or-none order (AON)
An option order that must be executed completely or not at all. An AON order may be either a day order or a GTC (good until cancel) order.
American-style option
An option that can be exercised at any time prior to its expiration date.
Arbitrage
A trading technique that involves the simultaneous purchase and sale of identical assets or of equivalent assets in two different markets with the intent of profiting by the price discrepancy.
Ask / Ask price
The price at which a seller is offering to sell an option or a stock. Also known as the Offer price.
Assignment
Notification by The Options Clearing Corporation to a clearing member that an owner of an option has exercised his or her rights there under. For equity and index options, assignments are made on a random basis by The Options Clearing Corporation.
At-The-Money
A term that describes an option with a strike price that is equal, or nearly equal, to the current market price of the underlying stock.
Averaging down
This refers to the practice of buying more of a stock or an option at a lower price than the original purchase so as to reduce the investor’s average purchase price.
Beta
A measure of how closely the movement of an individual stock tracks the movement of the entire stock market.
Bid / Bid Price
The price at which a buyer is willing to buy an option or a stock.
Broker
A person acting as an agent for making securities transactions. An ‘Account Executive’ or a ‘broker’ at a brokerage firm deals directly with customers. A ‘Floor Broker’ on the trading floor of an exchange actually executes someone else’s trading orders.
Bull (or bullish) spread
One of a variety of strategies involving two or more options (or options combined with an underlying stock position) that may potentially profit from a rise in the price of the underlying stock.
Bull spread (call)
The simultaneous purchase of one call option with a lower strike price and the writing of another call option with a higher strike price. Example: buying 1 ABC May 40 call, and writing 1 ABC May 45 call.
Bull spread (put)
The simultaneous writing of one put option with a higher strike price and the purchase of another put option with a lower strike price. Example: writing 1 XYZ May 60 put, and buying 1 XYZ May 55 put.
Bullish
An adjective describing the opinion that a stock, or the market in general, will rise in price - a positive or optimistic outlook.
Butterfly spread
A strategy involving three strike prices that has both limited risk and limited profit potential. A long call butterfly is established by: buying one call at the lowest strike price, writing two calls at the middle strike price, and buying one call at the highest strike price. A long put butterfly is established by: buying one put at the highest strike price, writing two puts at the middle strike price, and buying one put at the lowest strike price. For example, a long call butterfly might be: buying 1 XYZ May 55 call, writing 2 XYZ May 60 calls and buying 1 XYZ May 65 call.
Buy-write
A covered call position in which stock is purchased and an equivalent number of calls written at the same time. This position may be transacted as a combined order, with both sides (buying stock and writing calls) being executed simultaneously. Example: buying 500 shares XYZ stock, and writing 5 XYZ May 60 calls.
Calendar spread
An option strategy which generally involves the purchase of a farther-term option (call or put) and the writing of an equal number of nearer-term options of the same type and strike price. Example: buying 1 XYZ May 60 call (far-term portion of the spread) and writing 1 XYZ March 60 call (near-term portion of the spread).
Call option
An option contract that gives the owner the right to buy the underlying security at a specified price (its strike price) for a certain, fixed period of time (until its expiration). For the writer of a call option, the contract represents an obligation to sell the underlying stock if the option is assigned.
Cash settlement amount
The difference between the exercise price of the option being exercised and the exercise settlement value of the index on the day the index option is exercised.
Class of options
A term referring to all options of the same type “either calls or puts” covering the same underlying stock.
Closing price
The final price of a security at which a transaction was made.
Closing transaction
A reduction or an elimination of an open position by the appropriate offsetting purchase or sale. An existing long option position is closed by a selling transaction. An existing short option position is closed by a purchase transaction. This transaction will reduce the open interest for the specific option involved.
Collar
A protective strategy in which a written call and a long put are taken against a previously owned long stock position. The options may have the same strike price or different strike prices and the expiration months may or may not be the same. For example, if the investor previously purchased XYZ Corporation at $46 and it rose to $62, a ‘collar’ involving the purchase of a May 60 put and the writing of a May 65 call could be established as a way of protecting some of the unrealized profit in the XYZ Corporation stock position. The reverse - a long call combined with a written put - might also be used if the investor has previously established a short stock position in XYZ Corporation..
Collateral
Securities against which loans are made. If the value of the securities (relative to the loan) declines to an unacceptable level, this triggers a margin call. As such, the investor is asked to post additional collateral or the securities are sold to repay the loan.
Commission
The fee received by a broker for executing an investor’s transaction to buy or sell a security.
Contingency order
An order to execute a transaction in one security that depends on the price of another security. An example might be: ‘Sell the XYZ May 60 call at 2, contingent upon XYZ stock being at or below $59 1/2.’
Contract size
The amount of the underlying asset covered by the option contract. This is 100 shares for one equity option unless adjusted for a special event, such as a stock split or a stock dividend, or otherwise special by the listing exchange.
Covered call / Covered call writing
An option strategy in which a call option is written against an equivalent amount of long stock. Example: writing 2 XYZ May 60 calls while owning 200 shares or more of XYZ stock.
Covered option
An open short option position that is fully offset by a corresponding stock or option position. That is, a covered call could be offset by long stock or a long call, while a covered put could be offset by a long put or a short stock position. This insures that if the owner of the option exercises, the writer of the option will not have a problem fulfilling the delivery requirements.
Covered put / Covered cash-secured put
Cash secured put is an option strategy in which a put option is written against a sufficient amount of cash (or T-bills to pay for the stock purchase if the short option is assigned).
Credit
Money received in an account either from a deposit or a transaction that results in increasing the account’s cash balance.
Credit spread
A spread strategy that increases the account’s cash balance when it is established. A bull spread with puts and a bear spread with calls are examples of credit spreads.
Day order
A type of option order which instructs the broker to cancel any unfilled portion of the order at the close of trading on the day the order is first entered.
Day trade
A position (stock or option) that is opened and closed on the same day.
Debit
Money paid out from an account either from a withdrawal or a transaction that results in decreasing the cash balance.
Debit spread
A spread strategy that decreases the account’s cash balance when it is established. A bull spread with calls and a bear spread with puts are examples of debit spreads.
Delivery
The process of meeting the terms of a written option contract when notification of assignment has been received. In the case of a short equity call, the writer must deliver stock and in return receives cash for the stock sold. In the case of a short equity put, the writer pays cash and in return receives the stock.
Diagonal spread
A strategy involving the simultaneous purchase and writing of two options of the same type that have different strike prices and different expiration dates. Example: buying 1 May 60 call and writing 1 March 65 call.
Dividend Yield
The percentage return on a common stock due solely to dividends, expressed on an annual basis. For instance, if a stock pays a quarterly dividend of $0.25, and the stock can be purchased for $50, the dividend yield is calculated as: (0.25 * 4) / 50 = 2.0%
Discretion
Freedom given by an investor through his or her Account Executive to use judgment regarding the execution of an order. Discretion can be limited, as in the case of a limit order which gives the Floor Broker 1/8 or 1/4 point from the stated limit price to use his or her judgment in executing the order. Discretion can also be unlimited, as in the case of a market-not-held-order.
Early exercise
A feature of American-style options that allows the owner to exercise an option at any time prior to its expiration date.
Earnings Per Share (EPS)
EPS is the total annual after-tax earnings of a company divided by its average number of shares outstanding. For instance, if a company earns $10 million in a particular year and has an average of 4 million shares outstanding during a particular year, its EPS is $2.50 per share.
Equity
In a margin account, this is the difference between the securities owned and the margin loans owed. It is the amount the investor would keep after all positions have been closed and all margin loans paid off.
Equity option
An option on shares of an individual common stock or exchange traded fund.
European-style option
An option that can be exercised only during a specified period of time just prior to its expiration.
Ex-date / Ex-dividend date
The day before which an investor must have purchased the stock in order to receive the dividend. On the ex-dividend date, the previous day’s closing price is reduced by the amount of the dividend (rounded up to the nearest eighth) because purchasers of the stock on the ex-dividend date will not receive the dividend payment. This date is sometimes referred to simply as the ‘ex-date,’ and can apply to other situations; for example, splits and distributions. If you purchase a stock on the ex-date for a split or distribution you are not entitled to the split stock or that distribution. However, the opening price for the stock will have been reduced by an appropriate amount, as on the ex-dividend date. Weekly financial publications, such as Barron’s, often include a stock’s upcoming ‘ex-date’ as part of their stock tables.
Exchange Traded Fund (ETF)
A security that tracks an index, a commodity or a basket of stocks like an index fund, but trades as a single stock on an exchange. ETFs offer the diversification benefits of a mutual fund but can be traded at any time during the day, as opposed to mutual funds, which can only be bought or sold at closing prices. The most widely traded ETF is the Nasdaq 100 Tracking Basket, which trades under the symbol QQQQ and approximates the performance of the Nasdaq 100 Index.
Exercise
To invoke the rights granted to the owner of an option contract. In the case of a call, the option owner buys the underlying stock. In the case of a put, the option owner sells the underlying stock.
Exercise price
The price at which the owner of an option can purchase (call) or sell (put) the underlying stock. Used interchangeably with striking price, strike, or exercise price.
Expiration date
The date on which an option and the right to exercise it cease to exist.
Expiration Friday
The last business day prior to the option’s expiration date during which purchases and sales of options can be made. For equity options, this is generally the third Friday of the expiration month. Note: If the third Friday of the month is an exchange holiday, the last trading day will be the Thursday immediately preceding the third Friday.
Expiration month
The month during which the expiration date occurs.
Fill-or-kill order (FOK)
A type of option order which requires that the order be executed completely or not at all. A fill-or-kill order is similar to an all-or-none (AON) order. The difference is that if the order cannot be completely executed (i.e., filled in its entirety) as soon as it is announced in the trading crowd, it is to be ‘killed’ (i.e., cancelled) immediately. Unlike an AON order, a FOK order cannot be used as part of a GTC order.
Floor broker
A trader on an exchange floor who executes trading orders for other people
Floor trader
An exchange member on the trading floor who buys and sells for his or her own account
Fundamental analysis
A method of predicting stock prices based on the study of earnings, sales, dividends, and so on.
Good-’til-cancelled (GTC) order
A type of limit order that remains in effect until it is either executed (filled) or cancelled, as opposed to a day order, which expires if not executed by the end of the trading day. A GTC option order is an order which if not executed will be automatically cancelled at the option’s expiration
Hedge / Hedged position
A position established with the specific intent of protecting an existing position. For example, an owner of common stock may buy a put option to hedge against a possible stock price decline
Historic volatility
A measure of actual stock price changes over a specific period of time.
Immediate-or-cancel order (IOC)
A type of option order which gives the trading crowd one opportunity to take the other side of the trade. After being announced, the order will be either partially or totally filled with any remaining balance immediately cancelled. An IOC order, which can be considered a type of day order, cannot be used as part of a GTC order since it will be cancelled shortly after being entered. The difference between fill-or-kill (FOK) orders and IOC orders is that a IOC order may be partially executed
Implied volatility
The volatility percentage that produces the ‘best fit’ for all underlying option prices on that underlying stock.
In-the-money option
An adjective used to describe an option with intrinsic value. A call option is in the money if the stock price is above the strike price. A put option is in the money if the stock price is below the strike price
Index
A compilation of several stock prices into a single number. Example: the S&P 100 Index
Index option
An option whose underlying interest is an index. Generally, index options are cash-settled
Intrinsic value
The in-the-money portion of an option’s price. See also In-the-money option
Last trading day
The last business day prior to the option’s expiration date during which purchases and sales of options can be made. For equity options, this is generally the third Friday of the expiration month. Note: If the third Friday of the month is an exchange holiday, the last trading day will be the Thursday immediately preceding the third Friday
LEAPS (Long-term Equity Anticipation Securities also known as long-dated options)
In English, this means calls and puts with an expiration as long as thirty-nine months. Currently, equity LEAPS have two series at any time with January expiration.
Limit order
A trading order placed with a broker to buy or sell stock or options at a specific price.
Long option position
The position of an option purchaser (owner) which represents the right to either buy stock (in the case of a call) or to sell stock (in the case of a put) at a specified price (the strike price) at or before some date in the future (the expiration date). It results from an opening purchase transaction - e.g., long call or long put.
Long stock position
A position in which an investor has purchased and owns stock
Margin / Margin requirement
The minimum equity required to support an investment position. To buy on margin refers to borrowing part of the purchase price of a security from a brokerage firm.
Mark-to-market
An accounting process by which the price of securities held in an account are valued each day to reflect the closing price, or market quote if the last sale is outside of the market quote. The result of this process is that the equity in an account is updated daily to properly reflect current security prices
Market Order
An order to buy or sell a security at its market price as soon as possible. For instance, if you submit an order to buy 100 shares of IBM at MARKET, if there are 100 shares offered at the ASK price at $80.50, you will be filled at that price or better
Market-maker
An exchange member on the trading floor who buys and sells options for his or her own account and who has the responsibility of making bids and offers and maintaining a fair and orderly market. See also Specialist / specialist group / specialist system
Market-on-close order (MOC)
A type of option order which requires that an order be executed at or near the close of trading on the day the order is entered. A MOC order, which can be considered a type of day order, cannot be used as part of a GTC order
Married put strategy
The simultaneous purchase of stock and put options representing an equivalent number of shares. This is a limited risk strategy during the life of the puts because the stock can always be sold for at least the strike price of the purchased puts
Naked Uncovered option
A short option position that is not fully collateralized if notification of assignment is received. A short call position is uncovered if the writer does not have a long stock or long call position. A short put position is uncovered if the writer is not short stock or long another put
Offer / Offer price
In the options business this means the same as ask / ask price, or the price at which a seller is offering to sell an option or a stock.
Open interest
The total number of outstanding option contracts on a given series or for a given underlying stock.
Open outcry
The trading method by which competing market makers and Floor Brokers representing public orders make bids and offers on the trading floor.
Opening transaction
An addition to, or creation of, a trading position. An opening purchase transaction adds long options to an investor’s total position, and an opening sale transaction adds short options. An opening option transaction increases that option’s open interest.
Option
A contract that gives the owner the right, but not the obligation, to buy or sell a particular asset (the underlying stock) at a fixed price (the strike price) for a specific period of time (until expiration). The contract also obligates the writer to meet the terms of delivery if the contract right is exercised by the owner.
Option pricing model
The first widely-used model for option pricing is the Black Scholes. This formula can be used to calculate a theoretical value for an option using current stock prices, expected dividends, the option’s strike price, expected interest rates, time to expiration and expected stock volatility. While the Black-Scholes model does not perfectly describe real-world options markets, it is still often used in the valuation and trading of options.
Option writer
The seller of an option contract who is obligated to meet the terms of delivery if the option owner exercises his or her right. This seller has made an opening sale transaction and has not yet closed that position.
Options Clearing Corporation
A registered clearing agency whose shares are owned by the exchanges that trade listed equity options, OCC is an intermediary between option buyers and sellers. OCC issues and guarantees all listed option contracts.
Out-of-the-money
An adjective used to describe an option that has no intrinsic value, i.e., all of its value consists of time value. A call option is out of the money if the stock price is below its strike price. A put option is out of the money if the stock price is above its strike price.
Parity
A term used to describe an option contract’s total premium when that premium is the same amount as its intrinsic value. For example, when an option’s theoretical value is equal to its intrinsic value, it is said to be ‘worth parity.’ When an option is trading for only its intrinsic value, it is said to be “trading for parity”.] Parity may be measured against the stock’s last sale, bid, or offer.
Payoff diagram
A chart of the profits and losses for a particular options strategy prepared in advance of the execution of the strategy. The diagram is plot of expected profit or loss against the price of the underlying security
P/E Ratio
The P/E ratio, commonly used as a measure of common stock value, is calculated by dividing a stock’scurrent price by its annual earnings per share. For instance, if a stock is trading at $100 and its annual EPS are $5, its P/E ratio is 20. Investors often compare the P/E ratio of individual stocks to the P/E ratio of a stock index, such as the S&P 500, to determine whether a stock is over- or under-valued. The inverse of this figure is known as a stock’s earnings yield, which in this case would be 5.0%
Physical delivery option
An option whose underlying entity is a physical good or commodity, like a common stock or a foreign currency. When that option is exercised by its owner, there is delivery of that physical good or commodity from one brokerage or trading account to another
Put option
An option contract that gives the owner the right to sell the underlying stock at a specified price (its strike price) for a certain, fixed period of time (until its expiration). For the writer of a put option, the contract represents an obligation to buy the underlying stock from the option owner if the option is assigned
Round Lot
The usual increment for trading stock, 100 shares.
SEC
The Securities and Exchange Commission. The SEC is an agency of the federal government which is in charge of monitoring and regulating the securities industry.
Securities Exchange
Marketplace where investors’ representatives trade listed securities
Secured put / Cash-secured put
An option strategy in which a put option is written against a sufficient amount of cash (or T-bills) to pay for the stock purchase if the short option is assigned
Settlement
The process by which the underlying stock is transferred from one brokerage account to another when equity option contracts are exercised by their owners and the inherent obligations assigned to option writers
Settlement price
The official price at the end of a trading session. This price is established by The Options Clearing Corporation and is used to determine changes in account equity, margin requirements and for other purposes.
Short option position
The position of an option writer which represents an obligation on the part of the option’s writer to meet the terms of the option if it is exercised by its owner. The writer can terminate this obligation by buying back (cover or close) the position with a closing purchase transaction
Short stock position
A strategy that profits from a stock price decline. It is initiated by borrowing stock from a broker-dealer and selling it in the open market. This strategy is closed (covered) at a later date by buying back the stock and returning it to the lending broker-dealer
Spread / Spread order
A position consisting of two parts, each of which alone would profit from opposite directional price moves. As orders, these opposite parts are entered and executed simultaneously in the hope of (1) limiting risk, or (2) benefiting from a change of price relationship between the two parts
Standard deviation
A statistical measure of price fluctuation. One use of the standard deviation is to measure how stock price movements are distributed about the mean.
Stock split
An increase in the number of outstanding shares by a corporation, through the issuance of a set number of shares to a shareholder for a set number of shares that the shareholder already owns. For example, a corporation might declare a ‘2-for-1 stock split.’ This means that for every share of stock an investor owns, he/she will be given another, thus owning 2 shares instead of 1. There will be a corresponding reduction in equity value per share. In this case, the new shares (post-split) will be worth one-half their previous value but the investor will own twice as many shares.
Stop order
A type of contingency order, often erroneously known as a ’stop-loss’ order, placed with a broker that becomes a market order when the stock trades, or is bid or offered, at or through a specified price.
Stop-limit order
A type of contingency order placed with a broker that becomes a limit order when the stock trades, or is bid or offered, at or through a specific price
Straddle
A trading position involving puts and calls on a one-to-one basis in which the puts and calls have the same strike price, expiration, and underlying stock. A long straddle is when both options are owned and a short straddle is when both options are written. Example: a long straddle might be buying 1 XYZ May 60 call, and buying 1 XYZ May 60 put.
Strike / Strike price
The price at which the owner of an option can purchase (call) or sell (put) the underlying stock. Used interchangeably with striking price, strike, or exercise price.
Strike price interval
The normal price differential between option strike prices. Equity options generally have $2.50 strike price intervals (if the underlying stock price is below $25), $5.00 intervals (from $25 to $200), and $10 intervals (above $200). LEAPS generally start with one at-the-money, one in-the-money, and one out-of-the-money strike price. The latter two are usually set 20%-25% away from the former
Support
A term used in technical analysis to describe a price area at which falling prices are expected to stop or meet increased buying activity. This analysis is based on previous price behavior of the stock
Technical analysis
A method of predicting future stock price movements based on the study of historical market data such as (among others) the prices themselves, trading volume, open interest, the relation of advancing issues to declining issues, and short selling volume
Theoretical value
The estimated value of an option derived from a mathematical model. See also Model and Black-Scholes formula
Time value
The part of an option’s total price that exceeds its intrinsic value. The price of an out-of-the-money option consists entirely of time value.
Trade confirmation
A written or electronic statement from a broker verifying execution of an investor’s order.
Transaction costs
All of the charges associated with executing a trade and maintaining a position. These include brokerage commissions, fees for exercise and/or assignment, exchange fees, SEC fees, and margin interest.
Uncovered call option writing
A short call option position in which the writer does not own an equivalent position in the underlying security represented by his option contracts.
Uncovered put option writing
A short put option position, in which the writer does not have a corresponding short position in the underlying security or has not deposited, in a cash account, cash or cash equivalents equal to the exercise value of the put.
Underlying security
The security subject to being purchased or sold upon exercise of the option contract.
Vertical spread
Most commonly used to describe the purchase of one option and writing of another where both are of the same type and of same expiration month, but have different strike prices. Example: buying 1 XYZ May 60 call and writing 1 XYZ May 65 call.
Volatility
A measure of stock price fluctuation. Mathematically, volatility is the annualized standard deviation of a stock’s daily price changes.
Write / Writer
To sell an option that is not owned through an opening sale transaction. While this position remains open, the writer is subject to fulfilling the obligations of that option contract; i.e., to sell stock (in the case of a call) or buy stock (in the case of a put) if that option is assigned. An investor who so sells an option is called the writer, regardless of whether the option is covered or uncovered.
