Glossary of Terms
American-style option: An option that can be exercised at any time prior to its expiration date
Ask / ask price: The price at which a seller is offering to sell an option or a stock.
Assignment: Notification by the option owner to buy or sell a stock.
At-The-Money: An option with a strike price that is equal or very near equal to the current market price of the underlying asset (stock/index).
Bearish: An opinion that expects a decline in price, either by the general market, an underlying stock, or both.
Bid / Bid Price: The price at which a buyer is willing to buy an option or a stock.
Binary Options: Options that either pay you a fixed return when it ends up in the money by expiration or nothing at all.
Black-Scholes formula: The first widely-used model for option pricing, it 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.
Break-even point(s): The stock price(s) at which an option strategy results in neither a profit nor a loss.
Bullish: An opinion in which one expects a rise in price, either by the general market or by an individual security.
Calendar spread: An option strategy that uses a combination of options with different expiration dates (also known as horizontal spreads).
Call option: An option contract that gives the owner the right, but not the obligation, to buy the stock/index at a specified price (strike price) for a certain, fixed period of time (until expiration).
Called Away: The process in which a call option writer is obligated to surrender the underlying stock to the option buyer at a price equal to the strike price of the call option.
Cash Settlement / Cash Delivered: Options that, when exercised, deliver the profit in cash instead of an underlying asset.
CBOE: The Chicago Board Options Exchange; the first national exchange to trade listed stock options.
Closing price: The final price of a security at which a transaction was made.
Collar: A strategy in which a trader/investor purchases stock then sells a near month call option and purchases a put option for insurance.
Condor spread: A strategy that is market neutral and takes advantage of theta decay.
Contingency order: An order that needs to be triggered by an independent event.
Contract size: The amount of the underlying asset covered by the option contract.
Covered call write: A strategy in which one writes call options while simultaneously owning an equal number of shares of the underlying stock.
Covered put write: a strategy in which one sells put options and simultaneously is short an equal number of shares of the underlying security.
Credit: Money received in your account for the sale of an options contract or option spread.
Credit spread: A mostly market neutral trade in which you sell an option at one price and buy an option at the next strike price higher or lower during the same month.
Day order: An order that is only good for the day it is initiated. The order, if not filled, is cancelled at the end of the trading day.
Debit: The amount of money taken out of an account when a trade is initiated.
Debit spread: A spread strategy that is directional in nature; the transaction results in a debit from your account.
Delta: The amount by which an option’s price will change for a corresponding change in price by the underlying entity. Call options have positive deltas, while put options have negative deltas.
Technically, the delta is an instantaneous measure of the option’s price change, so the delta will be altered for even fractional changes by the underlying entity. Consequently, the terms “up delta” and “down delta” may be applicable. They describe the option’s change after a full 1-point change in price by the underlying security (either up or down). The “up delta” may be larger than the “down delta” for a call option, while the reverse is true for put options.
Diagonal Spread: An options spread on the same underlying and same type option, but with different expiration months and strikes.
Equity Option: An option that has common stock as its underlying security.
European-style option: An option contract that can only be exercised on expiration day.
Exercise: The term used to describe the exercising of the rights of the option owner under the terms of the option contract.
Exercise price: The price at which the owner of an option can purchase or sell stock/index. This is also called “strike price” by many traders.
Expiration date: The date on which an option expires and after this date the option will 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.
Expiration month: The month during which the expiration date occurs.
Fair value: A term used to describe the worth of an option or futures contract as determined by a mathematical model.
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, etc.
Gamma: The change in an option’s delta for a $1 move in the stock/index.
Good-’til-cancelled (GTC) order: A type of limit order that remains in effect until it is either executed (filled) or cancelled.
Greeks: A set of mathematical criteria involved in the calculation of stock option prices.
Hedge: Transactions that will protect against loss through a compensatory price movement.
Historic volatility: A measure of actual stock price changes over a specific period of time.
Implied volatility: The volatility percentage that best measures what the market, as a whole, is expecting out of the stock or index for a certain period of time.
In-the-money option: An option that has 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 500 Index or Dow Jones Industrial Average.
Index option: An option whose underlying interest is an index.
Intrinsic value: The in-the-money portion of an option’s price
LEAPS® (Long-term Equity AnticiPation Securities): Also known as long-dated options, long term calls and put options expire up to 39 months into the future.
Level II quotes: Real-time quotes provided by NASDAQ that outline the specific bid-ask spread provided by each market maker.
Limit order: A trading order placed with a broker to buy or sell stock or options at a specific price.
Listed option: A put or call option that is traded on a national option exchange. Listed options have fixed strike prices and expiration dates.
Margin / margin requirement: The minimum amount of money required to support an investment position.
Market maker: An exchange member whose function is to make bids and offers for his account in the absence of public buy or sell orders. Several market-makers are normally assigned to a particular security. The market-maker system encompasses the market-makers and the board brokers.
Market order: A trading order placed with a broker to immediately buy or sell a stock or option at the best available price.
Naked selling or naked shorting: The illegal practice of short-selling options that have not been proven to exist.
Near-the-money options: Options with strike prices near the spot price of the 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.
Open interest: The net total of outstanding open contracts in a particular option series. An opening transaction increases the open interest, while any closing transaction reduces the open interest.
Option: A contract that gives the owner the right, but not the obligation, to buy or sell a particular stock/index at a fixed price (strike price) for a specific period of time (expiration date).
Options chains: Tables presenting the various options that a stock offers over various strike prices and expiration dates.
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 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: Describing an in-the-money option that is trading for its intrinsic value: that is, an option trading at parity with the underlying stock.
An option is sometimes said to be trading at a half-point over parity or at a quarter-point under parity, for example. An option trading under parity is a discount option.
Position: 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.”
It also refers to buying or selling a block of securities, thereby establishing a position.
Premium: The total price of an option contract is made up of the sum of the intrinsic value and the time value premium.
Even though most people refer to the price of an option contract as the “premium,” it is not an accurate description. The premium of an option contract is the part of the price that is not intrinsic.
Protective put: An options trading strategy that hedges against a drop in stock price using put options.
Put-call ratio: The ratio of the number of open put options against the number of open call options. The higher the resulting number, the more put options are bought, or shorted, on the underlying asset.
Ratio spread: Constructed with either puts or calls, the strategy consists of buying a certain amount of options and then selling a larger quantity of out-of-the-money options.
Resistance: An price area where the stock has fallen from in the past. Generally these areas are where a stock rallied to, then the sellers stepped in and overwhelmed the sellers, causing the shares to fall in price.
RHO: A measure of the expected change in an option’s theoretical value for a 1 percent change in interest rates.
Roll up: An options trading strategy of closing out options at a lower strike prices and opening options at a higher strike prices.
Settlement: The process by which the underlying stock is transferred from one brokerage account to another when the option terms are enforced.
Settlement price: The official price at the end of a trading session. This price is established by The Options Clearing Corporation.
Spread: An options position consisting of more than one type of option on a single underlying asset.
Standard deviation: A statistical measure of price fluctuation.
Stock repair strategy: An options strategy that aims to recover lost value in a stock quickly through writing call options against it.
Straddle: The purchase or sale of an equal number of puts and calls that have the same terms.
Strangle: An strategy in which the investor holds a position in both a call (buy) and put (sell) with different strike prices but with the same maturity and underlying asset.
Synthetic position: A strategy that generally involves substituting a stock with a long term option (LEAP).
Synthetic put: A security that some brokerage firms offer to their customers. These occur when a broker sells stock short and buys a call, while the customer receives the synthetic put. This is not a listed security, but a secondary market that is available as long as there is secondary demand.
Technical analysis: A method of predicting future stock price movements based on the study of historical market data, such as the prices themselves, trading volume, open interest, the relation of advancing issues to declining issues, and short selling volume.
Theta: The change in an option’s theoretical value for 1 day change in time until options expiration.
Time decay: The reduction of a stock option’s extrinsic value as expiration date draws nearer.
Ticker Symbol: The abbreviation that represents the shares and options of a company’s shares traded in the stock market. For example, MSFT is the ticker symbol for Microsoft shares, while MSQFB is the ticker symbol for Microsoft’s June29Call options.
Trading pit / floor: A specific location on the trading floor of an exchange designated for the trading of a specific option class or stock.
Vega: The rate of change in an option’s theoretical value for a point change in the volatility assumption.
Vertical Spread: Any option spread strategy in which the options have different strike prices but the same expiration date.
Volatility: A measure of the amount by which an underlying security is expected to fluctuate within a given period of time. Generally measured by the annual standard deviation of the daily price changes in the security, volatility is not equal to the beta of the stock.
Volume: The number of transactions that took place in a trading day.
Write: Also called shorting an option, this is the act of creating a new options contract and selling it on the exchange using a “Sell To Open” order. The person who writes an option is known as the “Writer.”