Options Glossary
398 options and derivatives terms in plain English. No account needed.
A
A type of corporate action that occurs when one company purchases a majority stake in another company. Acquisitions can be paid for in cash, stock, or a combination of the two.
A Time in Force designation that is similar to Fill-or-Kill (FOC). The difference being that All-or-None (AON) designated orders do not require an immediate fill, but instead remai
An option contract that may be exercised at any time between the date of purchase and the expiration date. Most exchange-traded options are American-style.
Simultaneously buying and selling similar assets with the intention of profiting from a market inefficiency.
The price at which a seller is offering to sell an option or stock.
The lowest available price to buy.
Asset classes are groups of assets with similar financial characteristics that are subject to similar laws and regulations. The three main financial asset classes are equities (sto
Being forced to fulfill the obligation of an option contract.
The receipt of an exercise notice by an option writer (seller) that obligates him to sell (in the case of a call) or purchase (in the case of a put) the underlying security at the
At-the-money (ATM) means the strike price of an option is right at (or near) the market price of the underlying security.
A procedure whereby the Options Clearing Corporation (OCC) attempts to protect the holders of certain in-the-money expiring options by automatically exercising the options on behal
To buy more of a security at a lower price, thereby reducing the holder's average cost. (Average Up: to buy more at a higher price.)
B
The difference between the bid and ask price of a security.
A term for a securities contract of any expiration month except the front month.
A term for a securities contract of any expiration month except the front month.
A spread in which more options are purchased than sold.
Relating to futures, a theory that involves the price of futures and the time to expiration. All else being equal, the theory suggests that as a futures contract approaches expirat
A type of money market instrument, banker’s acceptances are short-term debt instruments used by companies that are guaranteed by a commercial bank.
The term “basis” has several common uses related to trading. One popular usage refers to the cost of a security as it relates to tax reporting. Basis is also commonly used in the f
The term basis point in finance refers to a unit of measurement. One basis point is equivalent to 0.01%, or .0001. Basis points are often used when percentage differences less than
Refers to an asset, or group of assets, in which prices are declining or expected to decline.
A spread that profits from a drop in the price of the underlying security.
A pessimistic outlook on the price of an asset. Traders who believe that an asset price will depreciate over time are said to be bearish.
Beta measures how closely an individual stock tracks the movement of the broader market. Beta is often used to estimate the systematic risk of a security in comparison to the marke
Beta-weighting is a technique used to convert deltas from different financial instruments (stocks, options, etc...) into standard units. One purpose of beta-weighting is to allow f
The price at which a buyer is willing to buy an option or stock.
The strikes are widened close to 1 standard deviation out to take additional risk and can act as a potential substitute for selling strangles. Click here to learn more.
The strikes are widened close to 1 standard deviation out to take additional risk and can act as a potential substitute for selling strangles. Click here to learn more.
A butterfly strategy in which we select wider strikes to yield a higher probability of success during periods of high IV Rank. Click here to learn more.
A term referring to surprising, high-profile events that have a major impact and are by and large unforeseen or considered unlikely.
A mathematical model expanded and refined by Fischer Black and Myron Scholes that produces a theoretical estimate for the value of a European-style option. The model was originally
A term often used synonymously with fixed income security. Traditionally bonds are differentiated from other fixed income securities if they have maturities of one year or more.
A type of option arbitrage in which both a bull spread and a bear spread are established for a near-riskless position. One spread is established using put options and the other is
The price(s) at which a position generates neither a profit nor a loss.
Generally referring to an index, it indicates that the index is composed of a sufficient number of stocks or of stocks in a variety of industry groups. See also Narrow-Based.
A combination of a long call butterfly and a short OTM call vertical, or a long put butterfly and a short OTM put vertical, so one side is wider than the other. The short vertical
A person acting as agent in a securities transaction.
Refers to an asset, or group of assets, in which prices are rising or expected to rise.
A spread that profits from a rise in the price of the underlying security.
An optimistic outlook on the price of an asset. Traders who believe that an asset price will appreciate over time are said to be bullish.
A 3-strike price spread that profits from the underlying expiring at a specific price.
The simultaneous purchase of stock and sale of a covered call.
A contrarian trading approach that expresses a bullish (long) view when an asset price is declining.
The maximum amount of capital in your account available to make trades. Includes cash and margin.
C
An option trade that benefits from the passage of time, also called a time spread.
An option strategy in which a short-term option is sold and a longer-term option is bought, both having the same striking price. Either puts or calls may be used.
An Option contract that gives the holder the right to buy the underlying security at a specified price for a certain, fixed period of time. See also Put.
An option that gives the holder the right to buy stock at a specific price.
A person who sells a call and receives a premium.
A class of marketable securities, capital market securities include common stocks, corporate bonds, and government bonds.
A stock index which is computed by adding the capitalization (float times price) of each individual stock in the index, and then dividing by the divisor. The stocks with the larges
A capped option is an option with an established profit cap or cap price. The cap price is equal to the option's strike price plus a cap interval for a call option or the strike pr
Total costs associated with owning stock, options or futures, such as interest payments or dividends.
In finance, cash (along with cash equivalents) is one of the principal asset classes. Cash (i.e. currency) includes foreign currency.
A regular brokerage account that requires customers to pay for securities within two days of purchase.
The total amount of money in a financial account.
In finance, cash equivalents (along with cash itself) are one of the principal asset classes. Cash equivalents are investment securities with short-term duration, high liquidity, a
The process by which the terms of an option contract are fulfilled through the payment or receipt in dollars of the amount by which the option is in-the-money as opposed to deliver
Referring to an option or future that is settled in cash when exercised or assigned. No physical entity, either stock or commodity, is received or delivered.
A type of security (typically an option or future) that employs a method of settling payment between the buyer and seller using cash, as opposed to the physical exchange/delivery o
The Cboe Options Exchange; the first national exchange to trade listed stock options.
The short strikes are closer to the ATM strike to collect more premium (45-50% the width of the strikes); this increases potential profit and ROC. Click here to learn more.
Option contracts of the same type (call or put) and Style (American, European or Capped) that cover the same underlying security.
Clearing houses act as intermediaries between counterparties (buyers and sellers) in financial transactions. In the securities industry, this structure is often referred to as cent
A transaction in which the purchaser's intention is to reduce or eliminate a short position in a given series of options.
A transaction in which the seller's intention is to reduce or eliminate a long position in a given series of options
A trade that reduced an investor's position. Closing buy transactions reduce short positions and closing sell transactions reduce long positions. See also Opening Transaction.
Financial assets against which loans are made.
Any position involving both put and call options that is not a straddle.
A combination of options positions that replicates owning the underlying stock.
A type of money market instrument, commercial paper is an unsecured, short-term debt security issued by corporations with maturities of 270 days or less.
A standardized contract calling for the delivery of a specified quantity of a commodity at a specified date in the future.
A type of equity, common stock is a class of ownership in a company. Common stock gives shareholders the right to elect the board of directors, to vote on company policies, and to
Relating to futures, a theory that involves the price of futures and the time to expiration. All else being equal, the theory suggests that as a futures contract approaches expirat
An order which can be executed only if another event occurs; i.e. "sell Oct 45 call 7.25 with stock 52 or lower".
The month in which a securities contract expires.
The amount of an underlying asset covered by an option contract. For equity options, the contract size is typically 100 shares per contract.
The week in which a securities contract expires.
Having a contrarian viewpoint means that you reject the opinion of the masses. This is where buying into strength, selling into weakness comes from - it is a contrarian way of thin
A riskless transaction in which the arbitrageur buys the underlying security, buys a put, and sells a call. The options have the same terms. See also Reversal Arbitrage.
A security that is convertible into another security. Generally, a convertible bond or convertible preferred stock is convertible into the underlying stock of the same corporation.
A strategy equivalent in risk to purchasing a put option where an investor sells stock short and buys a call.
A security that is convertible into another security. Generally, a convertible bond or convertible preferred stock is convertible into the underlying stock of the same corporation.
An event or process initiated by a company that affects securities it has issued.
Original price paid for a stock, plus any commissions or fees.
Limiting profitability on a trade to increase probability of success and reduce the cost of entering a trade.Click here to learn more.
A term referring to the periodic interest paid to investors of fixed income securities. Originated from early certificates of fixed income securities, which often came with detacha
The annual rate of interest paid on a fixed income security. For example, an investor holding a $1,000 bond paying interest annually with a coupon rate of 5% would receive $50 per
To close out an existing position.
A written option is considered to be covered if the writer also has an opposing market position on a share-for-share basis in the underlying security. That is, a short call is cove
A combination of a long stock position with a short call.
A strategy in which one sells call options while simultaneously owning an equivalent position in the underlying security or strategy in which one sells put options and simultaneous
A strategy in which one sells put options and simultaneously is short an equal number of shares of the underlying security.
An option strategy in which one call and one put with the same strike price and expiration are written against 100 shares of the underlying stock. In actuality, this is not a "cove
The term used to describe the strategy in which an investor owns the underlying security and also writes a straddle on that security. This is not really a covered position.
Money received in an account. A credit transaction is one in which the net sale proceeds are larger than the net buy proceeds (cost), thereby bringing money into the account. See a
A term that indicates cash will be credited to your trading account when executing a spread. Spreads may also be done for even (no cash is exchanged), or for a debit (cash is debit
The expiration dates (months) applicable to various classes of options.
D
A Time in Force designation - Day Orders expire after the market closes on the day they are entered.
A trade that is opened and closed in the same trading session.
Traditionally a person that attempts to profit on intraday movements in stocks through long and short positions. Day traders typically do not hold positions overnight.
The number of days until an option or futures contract expires. Click here to learn more.
An expense, or money paid out from an account. A debit transaction is one in which the net cost is greater than the net sale proceeds. See also Credit.
A term that indicates cash will be debited from your trading account when executing a spread. Spreads may also be done for even (no cash is exchanged), or for a credit (cash is cre
A term used to describe how the theoretical value of an option erodes with the passage of time. May also be referred to as “time decay.” Decay is quantified by the Greek - theta.
The date when details of a dividend (timing and amount) are announced to the public.
A retirement plan that calculates employee benefits using a formula that accounts for length of service and salary history. Defined benefit plans include traditional “pension plans
A retirement plan in which a certain amount (or percentage) is set aside each year by a company for the benefit of each employee.
To take securities from an individual or firm and transfer them to another individual or firm. A call writer who is assigned must deliver stock to the call holder who exercised. A
The process of satisfying an equity call assignment or an equity put exercise. In either case, stock is delivered. For futures, the process of transferring the physical commodity f
One of the Greeks, delta measures the rate of change in an option’s theoretical value for a $1 change in the price of the underlying security.
Delta neutral refers to a trading approach/strategy wherein the delta exposure (directional bias) of an options position is reduced through an offsetting position in the underlying
A ratio spread that is established as a neutral position by utilizing the deltas of the options involved. The neutral ratio is determined by dividing the delta of the purchased opt
A corporation that will hold securities for member institutions. Generally used by option writers, the DTC facilitates and guarantees delivery of underlying securities if assignmen
A class of marketable securities, derivatives have a price that is dependent upon (or derived from) an underlying asset. Examples of derivatives include options, futures, and warra
A financial security whose value is determined in part from the value and characteristics of another security, the underlying security.
Any spread in which the purchased options have a longer maturity than do the written options as well as having different striking prices. Typical types of diagonal spreads are diag
An option is trading at a discount if it is trading for less than its intrinsic value. A future is trading at a discount if it is trading at a price less than the cash price of its
A riskless arbitrage in which a discount option is purchased and an opposite position is taken in the underlying security. The arbitrageur may either buy a call at a discount and s
Leeway given by an investor to his/her account executive regarding certain aspects of order execution.
A dividend is a payment made by a company to its shareholders, typically as a distribution of profits. Dividends are set by a company’s Board of Directors, and may be issued as cas
The total annual dividend divided by the price of the stock
A mathematical quantity used to compute an index. It is initially an arbitrary number that reduces the index value to a small, workable number. Thereafter, the divisor is adjusted
Generally used in connection with covered call writing, this is the cushion against loss, in case of a price decline by the underlying security, that is afforded by the written cal
A term referring to the underperformance typically observed in financial instruments that attempt to replicate the returns of other products. Drag, or underperformance, typically a
The term “duration” has several common uses related to trading. In options trading, duration refers to the period of time between initiation of a trade and the expiration of the co
For option strategies, describing analyses made during the course of changing security prices and during the passage of time. This is as opposed to an analysis made at expiration o
E
A feature of American-Style options that allows the owner to exercise at any time prior to expiration.
The exercise or assignment of an option contract before its expiration date.
Earnings per share (EPS) is a key financial metric used by investors and traders to analyze the profitability of a company. EPS is commonly defined as the portion of a company’s pr
In finance, equity is one of the principal asset classes. Equity securities (i.e. common stocks) represent ownership interest in a company.
Options on shares of an individual common stock. See also Non-Equity Option.
A receipt issued by a bank in order to verify that a customer (who has written a call) in fact owns the stock and therefore the call is considered covered.
An exchange-traded fund, a basket of stocks meant to track an index or sector.
A feature of an option that stipulates that the option may only be exercised at its expiration. Therefore, there can be no early assignment with this type of option.
A type of option contract that can be exercised only on its expiration date, not before. (Note: It is important to confirm and understand all pertinent contract details prior to tr
An option contract that may be exercised only during a specified period of time just prior to its expiration.
The process whereby a stock's price is reduced when a dividend is paid. The ex-dividend date (ex-date) is the date on which the price reduction takes place. Investors who own stock
The date investors buying the stock will no longer receive the dividend. Because stock trades take two days to clear, the ex-dividend date usually falls one day prior to the record
A type of indirect investment, exchange-traded funds (ETFs) are professionally managed investment vehicles that contain pooled money from individual investors. ETFs are often built
Exchange-traded notes (ETNs) are unsecured, unsubordinated debt securities that are issued by an underwriting bank. ETNs are typically designed to provide investors with the return
In trading, exercise refers to the option owner invoking his/her right specified in the contract. For call owners, exercising means the underlying stock is purchased at the strike
The limit on the number of contracts which a holder can exercise in a fixed period of time. Set by the appropriate option exchange, it is designed to prevent an investor or group o
The price at which the option holder may buy or sell the underlying security, as defined in the terms of his option contract. It is the price at which the call holder may exercise
The difference between the exercise price of the option and the exercise settlement value of the index on the day an exercise notice is tendered, multiplied by the index multiplier
A type of option contract that is non-standard as compared to American-Style and European-Style options. Due to their complexity and customization, Exotic Options often trade over-
The amount that a stock is predicted to increase or decrease from its current price, based on the current level of implied volatility for binary events.Click here to learn more.
A rather complex mathematical analysis involving statistical distribution of stock prices, it is the return which an investor might expect to make on an investment if he were to ma
The date at which an option stops trading, and all contracts are exercised or become worthless.
An expiration cycle relates to the dates on which options on a particular underlying security expire. A given option, other than LEAPS®, will be assigned to one of three cycles, th
The day on which an option contract becomes void. For stock options expiring prior to February 15, 2015, this date is the Saturday immediately following the third Friday of the exp
The time of day by which all exercise notices must be received on the expiration date. Technically, the expiration time is currently 5:00PM on the expiration date, but public holde
Together, extrinsic value and intrinsic value make up the two parts of an option’s total value. Extrinsic value, also referred to as “time value” or “risk premium,” is everything t
F
The stated value of a financial instrument at the time it is issued. For stocks, the face value is the original value shown on the stock certificate. For bonds, it is the amount pa
The process of providing a market for a security. Normally, this refers to bids and offers made for large blocks of securities, such as those traded by institutions. Listed options
Normally, a term used to describe the worth of an option or futures contract as determined by a mathematical model. Also sometimes used to indicate intrinsic value. See also Intrin
A Time in Force designation that is similar to Immediate or Cancel (IOC). The difference being that Fill-or-Kill (FOK) designated orders cannot be partially filled. FOK orders are
In finance, fixed income debt is one of the principal asset classes. Fixed income securities (i.e. bonds) are debt instruments that represent loans made by companies or governments
The term “flat” has several common uses related to trading. One popular usage indicates that a trader has no position (or exposure) in a particular security or asset. “Flat” can al
Exchange traded equity or index options in which the investor can specify some terms of the contract, such as exercise price, expiration date, exercise type, and settlement calcula
Refers to all the shares in a company that may be owned and traded by the public. Does not include restricted stock. The float and restricted stock in a company together equate to
A trader on an exchange floor who executes orders for other people.
A trader on an exchange floor who executes orders for his/her own account.
The Federal Open Market Committee (FOMC) is a committee within the Federal Reserve System that is charged under US law with overseeing the nation’s open market operations. The FOMC
A term for a securities contract with monthly expiration that is closest to the current date.
An investing/trading methodology that estimates a security’s fair value using relevant quantitative and qualitative information. The goal of this approach is to compare the result
A measurement of the magnitude of daily movement in the price of an underlying over a future period of time. Unlike historical volatility, future volatility is unknown. However, ma
A type of derivative, futures contracts require buyers and sellers to trade an asset at a specified price on a predetermined future date. The two participating parties agree to buy
A standardized contract calling for the delivery of a specified quantity of a commodity at a specified date in the future.
A type of option in which the underlying asset is futures. Futures options expire into long/short futures contracts.Click here to learn more.
G
One of the Greeks, gamma measures the rate of change in an option’s delta for a $1 change in the price of the underlying.
A synonym of initial public offering (IPO).
A designation applied to some types of orders, meaning the order remains in effect until it is either filled or canceled. See also Stop Limited and, Trading Limit.
A Time in Force designation - Good-‘Til-Cancelled (GTC) orders remain active unless cancelled by the trader or completely executed. GTC designated orders automatically expire 120 c
In finance, the “Greeks” are parameters that measure the sensitivity of an option’s value to changes in the following: underlying price, time, volatility, and interest rates. These
H
A conservative strategy used to limit investment loss by effectinga transaction which offsets an existing position.
The mathematical quantity that is equal to the delta of an option. It is useful in that a theoretically neutral hedge can be established by taking offsetting positions in the under
A trading strategy, or part of a broader strategy, that attempts to offset financial exposure through the deployment of one (or more) additional positions. Click here to learn more
High-frequency trading refers to technologically and quantitatively intensive, high-volume trading strategies that rely on computer algorithms and transaction speed. Click here to
Trade setups we use during times of rich option prices. We like to collect credit/sell premium, and hope for a contraction in volatility.Click here to learn more.
A measurement of the magnitude of daily movement in the price of an underlying over a period of time (in history). Future volatility is unknown.
Someone who has bought an option or owns a security.
An option strategy in which the options have the same striking price, but different expiration dates.
A term that implies the target company of an acquisition is not a willing participant.
I
A Time in Force designation that requires all or part of an order to be executed immediately. The portion of an IOC order that is not filled immediately (if any), is automatically
A term that refers to the current market price of volatility for a given option. While historical volatility is observable, future volatility is unknown. The current price of volat
A term describing any option that has intrinsic value. A call option is in-the-money if the underlying security is higher than the striking price of the call. A put option is in-th
In-the-money (ITM) means the the strike price of a call is below the market price of the underlying security, or that the strike price of a put is above the market price of the und
A strategy of covered call writing in which the investor is striving to earn an additional return from option writing against a stock position which he (she) has targeted to sell -
A compilation of the prices of multiple entities into a single number.
A type of option in which the underlying asset is an index.
A class of marketable securities. Unlike direct investments, which investors own themselves, indirect investments are made in vehicles that pool investor money to buy and sell asse
The process by which a private company transforms into a public company. An initial public offering (IPO) represents the first time a private company offers its shares to the publi
A large financial organization engaged in professional investing and trading.
Together, intrinsic value and extrinsic value make up the two parts of an option’s total value. The intrinsic value of an in-the-money (ITM) option is equal to the difference betwe
Selling puts above calls, or calls below puts, when managing a short position.Click here to learn more.
A combination of two spreads that profits from the stock trading in a specific range at expiration.
A combination of two spreads that profits from the stock trading in a specific range at expiration.
Implied volatility reverting to the mean.Click here to learn more.
A metric which tells us whether implied volatility is high or low in a specific underlying based on a given time frame of IV data.Click here to learn more.
J
L
A trading approach that uses options to lock in gains at certain price points (strikes).
The very last full day of open trading before an options expiration day, usually the third Friday of the expiration month.
Adding additional exposure to an existing position while maintaining the original trading assumption.
Options with an expiration month more than one year in the future.
A term used when referring to the execution of positions with more than one component. For example, when trading a straddle, both the call and put must be bought or sold. In this c
A term used when referring to the execution of positions with more than one component. When trading one component of a position prior to the other(s), a trader is said to be “leggi
A letter from a bank to a brokerage firm which states that a customer (who has written a call option) does indeed own the underlying stock and the bank will guarantee delivery if t
The use of a small amount of money to control a large number of securities.
Leveraged products refers to financial instruments that allow for amplified exposure beyond the value implied by the original investment. Click here to learn more.
The exchange-imposed maximum daily price change that a futures contract or futures option contract can undergo.
A conditional order type that indicates a security should be bought or sold at a specific price, or better. Limit orders require a Time in Force designation.
The risk that a position can't be closed when desired.
A call or put traded on a national options exchange.
A trader on a futures exchange who buys and sells for his own account and may sometimes also fill public orders.
A statistical distribution that is often applied to the movement of stock prices. It is a convenient and logical distribution because it implies that stock prices can theoretically
A position wherein an investor's interest in a particular seriesof options is as a net holder (i.e., the number of contractsbought exceeds the number of contracts sold).
Trade setups that benefit from increases in volatility as well as more directional strategies.Click here to learn more.
M
The amount being borrowed to purchase securities. Click here to learn more.
The amount an uncovered (naked) option writer is required to deposit and maintain to cover a position. The margin requirement is calculated daily.
A term referring to the current market value of a security. Derives from “mark-to-market,” which is a system of valuing assets by the most recent market price.
An accounting process by which the price of securities held in account are valued each day to reflect the last sale price or market quote if the last sale is outside of the market
A portfolio of common stocks whose performance is intended to simulate the performance of a specific index. See Index.
A theory focusing on the degree to which asset prices reflect all relevant and available information. Proponents of strong market efficiency believe all pertinent information is al
Also a market order, but the investor is allowing the floor broker who is executing the order to use his own discretion as to the exact timing of the execution. If the floor broker
An order type for immediate execution at current market prices. If willing buyers or sellers exist to take the other side, market orders are filled. Market orders are generally use
An exchange member whose function is to aid in the making of a market by making bids and offers in the absence of public buy or sell orders.
Marketable securities are equity or debt instruments listed on an exchange that can be bought and sold easily. Maturities of marketable debt securities must be one year or less. Cl
A combination of a long stock position with a long put
The simultaneous purchase of stock and the corresponding number of put options. This is a limited risk strategy during the life of the puts because the stock can be sold at the str
A put and stock are considered to be married if they are bought on the same day, and the position is designated at that time as a hedge.
A type of corporate action that occurs when two companies unite and establish a single, new company.
A mathematical formula designed to price an option as a function of certain variables - generally stock price, striking price, volatility, time to expiration, dividends to be paid,
A class of marketable securities, money market instruments are short-term equity and debt securities with maturities of one year or less that trade in liquid markets. Examples of m
A statistics-based simulation used to model the probability of different outcomes.
A type of indirect investment, a mutual fund is a professionally managed investment vehicle that contains pooled money from individual investors. Mutual funds use the pooled money
N
A call or put that does not have an offsetting stock or option position.
A written option is considered to be uncovered if the investor does not have an offsetting position in the underlying
See Uncovered call writing and Uncovered put writing.
Generally referring to an index, it indicates that the index is composed of only a few stocks, generally in a specific industry group. See also broad-based.
The value of an asset if it were sold immediately and all debts associated with it were repaid.
Describing an opinion that is neither bearish nor bullish. Neutral option strategies are generally designed to perform best if there is little or no net change in the price of the
An option whose underlying entity is not common stock; typically refers to options on physical commodities and index options.
Also a market order, but the investor is allowing the floor broker who is executing the order to use his own discretion as to the exact timing of the execution. If the floor broker
The time during which the buyer of a futures contract can be called upon to accept delivery. Typically, the 3 to 6 weeks preceding the expiration of the contract.
O
The total number of outstanding contracts for a given option series.
Any position that has not yet been closed or expired.
A transaction in which the purchaser's intention is to createor increase a long position in a given series of options.
A transaction in which the seller's intention is to create or increase a short position in a given series of options.
A trade which adds to the net position of an investor. An opening buy transaction adds more long securities to the account. An opening sell transaction adds more short securities.
A type of derivative, an option is a contract that grants the right, but not the obligation, to buy or sell an underlying asset at a set price on (or sometimes before) a specific d
A graphical representation of the projected price of an option at a fixed point in time. It reflects the amount of time value premium in the option for various stock prices, as wel
A stock which has associated listed options.
Options are contracts that give the bearer the right, but not the obligation, to either buy or sell an amount of some underlying asset at a pre-determined price at or before the co
The Options Clearing Corporation (OCC) provides central counterparty clearing and settlement services to 15 exchanges. Financial instruments cleared through the OCC include options
The exchange employee in charge of keeping a book of public limit orders on exchanges utilizing the "maker-maker" system, as opposed to the "specialist system", of executing orders
A call option is out-of-the-money if the strike price is greaterthan the market price of the underlying security. A put optionis out-of-the-money if the strike price is less than t
Out-of-the-money (OTM) means the strike price of a call is above the market price of the underlying security, or that the strike price of a put is below the market price of the und
Trades that are negotiated and executed directly between two parties, without the use of an exchange or other intermediary.
An option traded off-exchange, as opposed to a listed stock option. The OTC option has a direct link between buyer and seller, has no secondary market, and has no standardization o
Describing a security trading at a higher price than it logically should. Normally associated with the results of option price predictions by mathematical models. If an option is t
P
Trading a discrepancy in the correlation of two underlyings. Click here to learn more.
The term parity has several common uses in finance. As it relates to options trading, parity means that an option is trading at a price equivalent to intrinsic value.
Defined by FINRA Rule 4210 as a stock trader who executes 4 (or more) round-trip day trades over the course of five business days in a margin account. However, if the number of day
A graphical representation of the potential outcomes of a strategy. Dollars of profit or loss are graphed on the vertical axis, and various stock prices are graphed on the horizont
An option whose underlying security is a physical commodity that is not stock or futures. The physical commodity itself (a currency, treasury debt issue, commodity) - underlies tha
The risk that a stock price settles exactly at the strike price when it expires. For option sellers, pin risk means there exists uncertainty around how many contracts may get assig
A system of calculating margin requirements using a risk-based methodology.
As a noun, specific securities in an account or strategy. (A covered call writing position might be long 1,000 XYZ and short 10 XYZ January 30 calls). As a verb, to facilitate; to
The maximum number of put or call contracts on the same side of the market that can be held in any one account or group of related accounts. Short puts and long calls are on the sa
A type of equity, preferred stock is a class of ownership in a company. Preferred stock has a higher claim on earnings and assets than common stock, but does not come with voting r
The value of an option contract which is paid by the buyer to the option writer.
A stock index which is computed by adding the prices of each stock in the index, and then dividing by the divisor. See also Capitalization-weighted index, Divisor.
A term referring to the segment of the capital markets where new securities are issued, like an initial public offering (IPO). Such offerings are underwritten by investment banks o
The likelihood in percentage terms that a stock or index will land above or below some price on the day of expiration. The probability of expiring doesn't care about what happens b
The likelihood in percentage terms that an option position or strategy will be profitable at expiration. For spreads like short verticals or iron condors, you can estimate the prob
The likelihood in percentage terms that a stock or index will reach some higher or lower price at any time between now and expiration. The probability of touching takes into accoun
A graphical representation of the potential outcomes of a strategy. Dollars of profit or loss are graphed on the vertical axis, and various stock prices are graphed on the horizont
The range within which a particular position makes a profit. Generally used in reference to strategies that have two break-even points - an upside break-even and a downside break-e
A table of results of a particular strategy at some point in time. This is usually a tabular compilation of the data drawn on a profit graph. See also Profit Graph.
A position that has limited risk. A protected short sale (short stock, long call) has limited risk, as does a protected straddle write (short straddle, long out-of-the-money combin
The orders to buy or sell, entered by the public, that are generally away from the current market. The order book official or specialist keeps the public book. Market-Makers on the
An option contract that gives the holder the right to sell the underlying security at a specified price for a certain fixed period of time. See also Call.
An option that gives the holder the right to sell stock at a specific price.
A person who sells a put and receives a premium.
Often viewed as an indicator of investor sentiment, the Put-Call Ratio provides information regarding the volume of put contracts relative to call contracts. Traditionally, a ratio
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A strategy consisting of a simultaneous position of a ratio calendar spread using calls and a similar position using puts, where the striking price of the calls is greater than the
Selling more near-term options than longer-term ones purchased, all with the same strike; either puts or calls.
A spread in which more options are sold than purchased.
A strategy in which one has an unequal number of long securities and short securities. Normally, it implies a preponderance of short options over either long options or long stock.
Selling of call options in a ratio higher than 1 to 1 against the stock that is owned.
A synonym of historical volatility.
The date by which an investor needs to own a stock in order to receive the dividend.
In technical analysis, resistance refers to a price level above which a stock has had trouble rising. Technical analysts believe that stocks tend to “test” resistance levels before
Refers to all the shares held by a company’s officers and other insiders. Restricted stock must be traded in compliance with SEC regulations. The restricted stock and float in a co
The percentage profit that one makes, or might make, on his investment.
The return that a covered call writer would make if the underlying stock were called away.
This is potential maximum return you could make on an option trade. It's calculated by taking the maximum potential profit and dividing it by the margin requirement of the position
A riskless arbitrage that involves selling the stock short, writing a put, and buying a call. The options have the same terms. See also Conversion Arbitrage.
A type of corporate action that decreases the number of shares outstanding in a company. Reverse stock splits do not affect the total market capitalization of a company, only the n
One of the Greeks, rho measures the expected change in an option’s theoretical value given a 1% change in interest rates.
A type of corporate action in which a company offers shares to existing shareholders. Technically a rights issue is a type of dividend, but in this case it isn’t a payment, but rat
A form of arbitrage that has some risk associated with it. Commonly refers to potential takeover situations where the arbitrageur buys the stock of the company about to be taken ov
A synonym of extrinsic value.
A type of arbitrage in which a profit is theoretically guaranteed. May also be referred to as "Risk-Free Arbitrage."
To close an existing option and replace it with an option of a later date or different strike price. Click here to learn more.
Close out options at one strike and simultaneously open other options at a lower strike.
Close-out options at a near-term expiration date and open options at a longer-term expiration date.
Close out options at a lower strike and open options at a higher strike.
A follow-up action in which the strategist closes options currently in the position and opens other options with different terms, on the same underlying stock. See also Roll Down,
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A trading approach that hinges on increasing position size as an asset’s price moves against you or as capital available in a trading account increases, as opposed to making the fu
A trader who enters and exits a position quickly for a small profit or loss.
A trading strategy, or part of a broader strategy, that attempts to make profits on movement in an underlying asset. Click here to learn more.
The market where securities are bought and sold after their initial offering to public investors.
The Securities and Exchange Commision (SEC) is an agency of the United States government that is charged with monitoring and regulating the securities industry.
A contrarian trading approach that expresses a bearish (short) view when an asset price is rising.
Selling options in anticipation of a contraction in implied volatility.Click here to learn more.
All options of the same class that have the same expiration date and strike 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 require
Refers to the total number of shares in a company that are held by shareholders, including restricted shares (those held by the company’s officers and insiders). Shares outstanding
A position wherein a person's interest in a particular seriesof options is as a net writer (i.e., the number of contracts soldexceeds the number of contracts bought).
A position that is opened by selling borrowed stock, with the expectation the stock price will fall.
A defined risk strategy that uses two varying vertical spread widths, thus creating a directional bias.Click here to learn more.
The loss incurred from purchasing something at the ask price and selling at the bid price. Slippage costs are inversely related to liquidity, which is why we like to trade extremel
Like regular dividends, special dividends are payments made by a company to its shareholders. If a company has a recurring schedule of regular dividends, then any additional divide
An exchange member whose function is to make markets and keep the book of public orders.
A type of corporate action in which an existing publicly-traded company sells a segment of its assets, or distributes new shares, with the purpose of forming an independent company
A position involving a long and short option of different strike prices or expirations, or both.
An order to simultaneously transact two or more option trades. Typically, one option would be bought while another would simultaneously be sold. Spread orders may be limit orders,
Any option position having both long options and short options of the same type on the same underlying security.
A statistical measure of price fluctuation. In volatility trading, standard deviation is often used to measure how stock price movements are distributed around the mean.
The return that an investor would make on a particular position if the underlying stock were unchanged in price at the expiration of the options in the position.
A type of corporate action that increases the number of outstanding shares in a company. Stock splits do not affect the total market capitalization of a company, only the number of
A conditional order type that activates and becomes a market order when a stock reaches the designated price level. Stop Orders are typically placed with the intent of protecting a
Similar to a stop order, the stop-limit order becomes a limit order, rather than a market order, when the security trades at the price specified on the stop. See also Stop Order.
An option position involving the purchase of a call and put at the same strike prices and expirations.
An option position involving the purchase of a call and put at different strike prices.
With respect to option investments, a preconceived, logical plan of position selection and follow-up action.
The price at which stock is purchased or sold when an option is exercised.
A term referring to the price differential between strikes in a given option series. In general, stocks valued less than $50/share have strikes listed in $2.50 increments, stocks v
The distance between striking prices on a particular underlying security. Normally, the interval is 2.50 points for stocks under $25, 5 points for stocks selling over $25 per share
Generally referring to an index, it indicates that the index is composed of only a few stocks, generally in a specific industry group. See also broad-based.
In finance, suitability refers to a guideline (at times a legal requirement) that a particular investment approach/strategy is appropriate for a particular investor given his/her r
Describing a strategy or trading philosophy in which the investor is operating in accordance with his (her) financial means and investment objectives.
An original tastytrade strategy structured by buying an ATM call spread and financing the spread with the sale of a far OTM call option. Click here to learn more.
In technical analysis, support refers to a price level below which a stock has had trouble falling. Technical analysts believe that stocks tend to “bounce” off of these levels as o
A term used to describe a position that is built to simulate another position, but utilizes different financial instruments. For example, synthetic long stock may be constructed by
A strategy equivalent in risk to purchasing a put option where an investor sells stock short and buys a call.
An option strategy that is equivalent to the underlying stock. A long call and a short put is synthetic long stock. A long put and a short call is synthetic short stock.
Risk inherent to the marketplace that cannot be eliminated with diversification.
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A synonym of acquisition (see above).
The subject of an acquisition (or merger) attempt.
A investing/trading methodology used to forecast price direction using historical price and volume data. Technical analysts rely on charts and other data to evaluate a security’s s
The collective name denoting the expiration date, striking price, and underlying stock of an option contract.
Estimated fair value of an option, derived from a mathematical model.
One of the Greeks, theta measures the rate of change in an option’s theoretical value relative to the passage of time.
A term referring to the minimum price movement in a trading instrument.
A term used to describe how the theoretical value of an option "erodes" or reduces with the passage of time. Time decay is especially quantified by Theta..
Designations that dictate the length of time over which an order will keep working before it is cancelled. Examples include: Day Order, Good ‘Til Cancelled (GTC), Immediate or Canc
An option strategy in which a short-term option is sold and a longer-term option is bought, both having the same striking price. Either puts or calls may be used.
A synonym of extrinsic value.
The amount by which an option's total premium exceeds its intrinsic value.
A covered call writing strategy in which one views the potential profit of the strategy as the sum of capital gains, dividends, and option premium income, rather than viewing each
The amount of difference between the performance of a specific portfolio of stocks and a broad-based index with which they are being compared. See also market basket.
An investor or professional who makes frequent purchases and sales.
The exchange-imposed maximum daily price change that a futures contract or futures option contract can undergo.
Your trade size. example: if you normally trade 3 contract for a given strategy or underlying, 2 tranches would be 6 contracts.
(90/10 strategy) a method of investment in which one places approximately 90% of his funds in risk-free, interest-bearing assets such as Treasury bills, and buys options with the r
Treasury Bills (T-Bills) are short-term debt securities backed by the US government with maturities of less than one year. Like zero-coupon bonds, T-Bills are sold at a discount to
Treasury Bonds (T-Bonds) are debt securities backed by the US government with maturities ranging from ten to thirty years. T-Bonds pay a coupon every six months (semiannual) and ha
Treasury Inflation-Protected Securities (TIPS) are debt securities backed by the US government that are indexed to inflation to protect investors from the negative effects of infla
Treasury Notes (T-Notes) are debt securities backed by the US government with maturities ranging from one to ten years. T-Notes pay a coupon every six months (semiannual) and have
Tastytrade return on capital, which is Theta/Buying Power Reduction.
The classification of an option contract as either a put or a call.
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A short call option position in which the writer does not own an equivalent position in the underlying security represented by his option contracts.
A written option is considered to be uncovered if the investor does not have an offsetting position in the underlying security. See also Covered.
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 equiva
Risk that is accompanied with naked options and when your possible max loss is unknown on order entry. Click here to learn more.
The security subject to being purchased or sold upon exercise of the option contract.
Describing a security that is trading at a lower price than it logically should. Usually determined by the use of a mathematical model. See also Overvalued and Fair Value.
The minimum quantity or amount allowed when trading a security. The normal minimum for common stock is 1 round lot or 100 shares. The normal minimum for options is one contract (wh
Company-specific risk that can, in theory, be reduced or eliminated through diversification.
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An option strategy in which the investor owns 100 shares of the underlying security and writes two call options against it, each option having a different striking price.
One of the Greeks, vega measures the rate of change in an option’s theoretical value given a 1% change in implied volatility.
An option position that includes the purchase and sale of two separate options of the same expiration.
(1)Most commonly used to describe the purchase of one option and sale of another where both are of the same type and same expiration, but have different strike prices. (2)It is als
An index that calculates the implied volatility of the S&P 500 index.
A measure of the fluctuation in the market price of a security or index. Also defined as the annualized standard deviation of returns. Volatility is frequently used as an input in
Often referred to as the market’s “fear gauge,” the Chicago Board Options Exchange Volatility Index (VIX) formulates a theoretical estimation for the 30-day implied volatility of S
The underlyings in the volatility asset class used to gauge fear or uncertainty for various financial instruments and commodities.Click here to learn more.
The difference in implied volatility of each opposite, equidistant option. Click here to learn more.
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A type of derivative, warrants entitle the holder to buy the underlying stock of an issuing company at a specified price during a set period of time. Unlike options, the party requ
A list of securities being monitored for potential trading or investing opportunities. Click here to learn more.
A term for securities contracts with one-week expiration periods.
To sell an option. The investor who sells is called the writer.
A colloquial expression that means “selling an option to open.” The “writer” of the option is the seller. Not used when closing a long position because opening sales represent a di
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Looking for how we actually trade rather than what the words mean? The trading glossary covers our own terminology, and membership opens the desk itself.