-
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 til cancel) order.
-
American-style
option
An option that can be exercised at any time prior to its
expiration date. See also European-style option
-
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. See also Delivery and Exercise
-
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. See also Covered call
/ covered call writing.
-
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). See also Horizontal 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. See also Exercise settlement amount.
-
Class
of options
A term
referring to all options of the same type “either calls or puts"
covering the same underlying stock.
-
Closing
price
T he final price of a security at which a transaction was
made. See also Settlement price.
-
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. See also Fence.
-
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. See also Buy-write and Overwrite.
-
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. See also Uncovered call option
writing and Uncovered put option writing.
-
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. See also American-style option.
-
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.
- FINRA
The
Financial Regulatory Authority (FINRA), formerly the National
Association of Securities Dealers (NASD) is the largest
non-governmental regulator for all securities firms doing business in
the United States. All told, FINRA oversees nearly 5,100 brokerage
firms, about 173,000 branch offices and more than 669,000 registered
securities representatives. Created in July 2007 through the
consolidation of NASD and the member regulation, enforcement and
arbitration functions of the New York Stock Exchange, FINRA is
dedicated to investor protection and market integrity through effective
and efficient regulation and complimentary compliance and
technology-based services.
-
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. See also
Standard deviation.
-
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. See also Individual volatility.
-
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 a January expiration. For example, in October 2000, LEAPS are
available with expirations of January 2002 and January 2003.
-
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. See also
Intrinsic value and Time value.
-
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. See also Mark-to-market.
-
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. See also Volatility.
-
Street
name
Registering one's personal investments in the name of the
broker having custody of the investments.
-
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. See also Stock dividend.
-
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. See also
Stop-limit order.
-
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. See also Bull (or bullish) spread and Bear
(or bearish) spread.
-
Volatility
A
measure of stock price fluctuation. Mathematically, volatility is the
annualized standard deviation of a stock's daily price changes. See
also Historic volatility and Individual volatility and Implied
volatility.