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A
Acceptance
Contractual agreement instigated when the drawee of a time Draft "accepts" the draft by writing the word "accepted" thereon. The drawee assumes responsibility as the acceptor and for payment at maturity. See: Letter of Credit and banker`s acceptance.
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.
Advance/Decline Line
Each days declining issues are subtracted from that days advancing issues. The difference is added to (subtracted from if negative) a running sum. Failure of this line to confirm a new High is a sign of weakness. Failure of this line to confirm a new low is a sign of strength.
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.
Alligator spread
The Term used to describe a spread in the options Market that generates such a large Commission that the client is unlikely to make a Profit even if the markets move as the Investor anticipated.
American-style option
An option that can be exercised at any time prior to its expiration date. See also European-style option
AMEX
Acronym for American Stock Exchange which has the third highest volume of Trading in the USThe bulk of trading On AMEX consists of index options (computer technology index, institutional index, major Market index) and Shares of small to medium-sized companies are predominant. Recently merged with Nasdaq.
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.
Autocorrelation
The correlation of a variable with itself over successive time intervals. Sometimes called serial correlation.
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.
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B
Back Testing
Optimizing a trading Strategy on Historical Data and applying it to fresh data to see how well the strategy works.
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.
Bounce
A Stock price`s abrupt decline and recovery. A sudden rebound in The Market (or an individual stock) typified by a strong upward move directly after a strong downward move. Also used in the context of securities to refer to the Rejection and ensuing Reclamation of a security.
Breadth of the market
In the context of general equities, percentage of stocks participating in a particular Market move. Technical analysts say there was significant Breadth if two-thirds of the stocks listed On an Exchange move in the same direction during a Trading session.
Breakout
A rise in a security`s price above a resistance level (commonly its previous High price) or a Drop below a level of support (commonly the former lowest price.) A Breakout is taken to signify a continuing move in the same direction. Can be used by Technical analysts as a Buy or Sell indicator.
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.
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C
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.
Candlestick Charts
A Charting method originally developed in Japan. The High and low are described as Shadows and plotted as a single line. The Price range between the open and Close is plotted as a rectangle On the single line. If the close is above the open, the body of the rectangle is white. If the close of the day is below the open, the body of the rectangle is black.
Capital gain
When a Stock is sold for a profit, the Capital gain is the difference between the Net sales price of the securities and their net cost, or original basis. If a stock is sold below cost, the difference is a capital loss.
Cash Market
The market for the Purchase and Sale of physical currencies.
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.
CBOE
Acronym for Chicago Board Options Exchange. It is a securities Exchange created in the early 1970s for The Public trading of standardized option contracts. Primary Place stock options, foreign Currency options, and index options (S&P 100, 500, and OTC 250 index)
CBOT
Acronym for Chicago Board of Trade. It is largest futures Exchange in the US, and was a pioneer in the development of financial futures and options.
Ceiling
The highest price, interest rate, or other numerical factor allowable in a financial transaction.
Class of options
A term referring to all options of the same type – either calls or puts – covering the same underlying stock.
Clear a position
To eliminate a long or Short position, leaving no ownership or obligation
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.
CME
Acronym for Chicago Mercantile Exchange. A not-for-profit Corporation owned by its members. Its primary functions are to provide a location for Trading futures and options, to collect and disseminate Market information, to maintain a clearing mechanism, and to enforce trading rules. Applies to Derivative products. Primary Place futures (OTC 250 industrial Stock price index, S& P 100 and 500 index) and futures options (S&P 500 stock index) are traded
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.
Commodity
A Commodity is food, metal, or another fixed physical substance that investors Buy or sell, usually via futures contracts.
Common Stock
Securities that represent equity ownership in a company. Common shares let an investor vote on such matters as the election of directors. They also give the holder a share in a company`s profits via dividend payments or the capital appreciation of the security. Units of ownership of a public corporation with junior status to the claims of secured/unsecured creditors, bondholders and preferred shareholders in the event of liquidation.
Consumer Durables
Consumer products that are expected to last three years or more, such as an automobile or a home appliance.
Consumer Goods
Goods not used in production but, bought for personal or household use such as food, clothing, and entertainment.
Consumer Price Index
The CPI measures the prices of Consumer Goods and services and is a measure of the pace of US inflation. The US Department of Labor publishes the CPI every month.
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 Month
The month in which futures contracts may be satisfied by making or accepting a delivery.
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.
Correlation
Statistical measure of the degree to which the movements of two variables (stock/option/convertible prices or returns) are related.
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.
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D
Daily Range
The difference between the High and low during one Trading day.
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.
Delta
For options, also called the neutral Hedge ratio. Expresses the expected change in the option price, given a one-unit change in the price of the underlying contract.
Detrend
To remove the general drift, tendency, or bent of a set of statistical data as related to time. Often accomplished by regressing a Variable or a time index and perhaps time-squared and capturing the residuals
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.
DJIA
Acronym for Dow Jones Industrial Average. Measure of the performance of the Collection of 30 "blue-chip", considered the leaders of the market.
Double Bottom/ Double Top
These are reversal patterns. It is a decline or advance twice to the same level (plus or Minus 3%). It indicates support or resistance at that level.
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E
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.
Elliot Wave Theory
Originally published by Ralph Nelson Elliot in 1939. It is a Pattern recognition theory. It holds that the Stock market follows a pattern of five waves Up and three waves down to form a Complete cycle. Many technicians believe that this pattern can Hold true for as Short a time period as one day. However, it is generally used to measure long periods of time in the market.
Emerging markets
The financial markets of developing economies.
Equilibrium price
The price when the supply of goods matches demand.
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 Rate
The price of one country`s currency expressed in another country`s currency.
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.
Expected Return
The expected return on a risky asset, given a probability distribution for the possible rates of return. Expected return equals some risk-free rate (generally the prevailing U.S. Treasury Note or Bond rate) plus a risk premium (the difference between the historic Market return, based upon a well diversified index such as the S&P 500 and the historic US Treasury bond) multiplied by the assets beta. The conditional expected return varies through time as a function of current market information.
Expense Ratio
The percentage of the assets that are spent to run a mutual fund (as of the last annual statement).
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.
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F
FED Pass
A Federal Reserve action adding more reserves to the banking system, increasing the money available for lending, and making credit easier to attain.
Federal Reserve System
The monetary authority of the US, established in 1913, and governed by the Federal Reserve Board located in Washington, D.C. The system includes 12 Federal Reserve Banks and is authorized to regulate monetary policy in the US as well as to supervise Federal Reserve member banks, bank holding companies, international operations of US banks, and US operations of foreign banks.
Fibonacci
The sequence of numbers (0, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, 233...), discovered by the Italian mathematician Leonardo de Pisa in the 13th century and the mathematical Basis of the Elliott Wave theory, where the first two terms of the sequence are 0 and 1 and each successive number in the sequence is the sum of the previous two numbers. Technically, it is a sequence and not a series.
Fill-or-kill order (FOK)
A type of option order which requires that the order be executed completely or not at all. A fill-or-kill order is similar to an all-or-none (AON) order. The difference is that if the order cannot be completely executed (i.e., filled in its entirety) as soon as it is announced in the trading crowd, it is to be 'killed' (i.e., cancelled) immediately. Unlike an AON order, a FOK order cannot be used as part of a GTC order.
Floor
The area of a stock Exchange where active Trading occurs. Also the price at which a Stop Order is activated (when the price drops low enough to activate such an order).
Floor broker
A trader on an exchange floor who executes trading orders for other people.
Floor trader
An exchange member on the trading floor who buys and sells for his or her own account.
Foreign exchange
Currency of another country. Abbreviated Forex.
Fundamental analysis
A method of predicting stock prices based on the study of earnings, sales, dividends, and so on.
Fund family
Set of funds with different Investment objectives offered by one Management company. In many cases, investors may move their Assets from one fund to another within the family at little or no cost.
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G
Gap opening
In the context of general equities, Opening price that is substantially higher or lower than the previous day`s closing price, usually because of some extraordinarily positive or negative news.
GDP
Acronym for Gross Domestic Product. The market value of goods and services produced over time including the income of foreign corporations and foreign residents Working in the U.S., but excluding the income of U.S. residents and corporations overseas.
GNP
Acronym for Gross National Product. Measures and economy`s total income. It is equal to
GDP. Plus the income abroad accruing to domestic residents minus income generated in Domestic market accruing to non-residents.
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.
Growth Fund
A mutual fund that invests primarily in stocks with a history of and future potential for capital gains.
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H
Head and Shoulders
A technical analysis term referring to a chart formation in which a price exhibits three successive rallies, the second one being the highest. The name derives from the fact that on a chart the first and third rallies look like shoulders and the second looks like a head. Believed by technical analysts to be a bearish indicator.
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.
High yield
Description of investments with high rates of return.
Historic volatility
A measure of actual stock price changes over a specific period of time. See also Standard deviation.
Historical data
Past information about a company, used to help forecast the company's future; for example, historical price, price/earnings ratio, revenues and revenue growth, earnings and earnings growth.
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I
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.
Inflection point
A point on a chart that marks the beginning of a significant move, either up or down.
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.
Inside Day
A day in which the Total range of price is within the Range of the previous days price range.
Institutional Trader / Investor
Entity with large amounts to invest, such as investment companies, mutual funds, brokerages, insurance companies, pension funds, investment banks and endowment funds. They account for a majority of overall volume.
Intrinsic value
The in-the-money portion of an option's price. See also In-the-money option.
IPO / Initial Public Offering
A company`s first Sale of Stock to the public. Securities offered in an IPO are often, but not always, those of young, small companies seeking outside equity capital and a public market for their stock. Investors purchasing stock in IPOs generally must be prepared to accept considerable risks for the possibility of large gains. IPOs by investment companies (closed-end funds) usually include underwriting fees that represent a Load to buyers.
IRA
Acronym for Individual Retirement Account. A retirement Account that may be established by an employed person. IRA contributions are tax deductible according to certain guidelines, and the gains in the account are tax-deferred.
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J
Jensen Index
An index that uses the capital asset pricing model to
determine whether a money manager outperformed a market
index.
JPY
The ISO currency code for the Japanese Yen.
Junk Bond
A high-risk, non-investment-grade bond with a low credit rating, usually BB or lower; as a consequence, it usually has a high yield.
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L
Laggard
An under performing stock or security.
Lagging Indicator
An economic indicator that changes after the overall economy has changed; examples include labor costs, business spending, the unemployment rate, the prime rate, outstanding bank loans, and inventory book value.
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.
Leading the market
Moving in advance of the market as a whole. An example is a stock that begins to decline before a bear market.
Leg
One side of an option spread. A leg may be long or short.
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.
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M
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.
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N
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.
NASD (National Association of Securities Dealers)
The National Association of Securities Dealers is an industry association of broker/dealers in the over-the-counter securities business. The NASD is a self-regulatory body and administers the NASDAQ stock market.
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O
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.
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P
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.
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R
Round Lot
The usual increment for trading stock, 100 shares.
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S
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.
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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.
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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.
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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.
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Write / Writer
To sell an option that is not owned through an opening sale transaction. While this position remains open, the writer is subject to fulfilling the obligations of that option contract; i.e., to sell stock (in the case of a call) or buy stock (in the case of a put) if that option is assigned. An investor who so sells an option is called the writer, regardless of whether the option is covered or uncovered.
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