A B C D E
F G H I
J K L M
N O P Q R
S T U V
W X Y Z
When a trader allows an option to expire unexercised.
A type of exotic option whose payoff depends on the average
price of the underlying over a given time period.
Away From The Market
A limit order to buy below the current market price (the
ask) or to sell above the current market price (the bid). These orders are held as either day or
good-until-cancelled orders and may not be filled if the market does not reach
Aggregate Exercise Price
The total exercise value of an option contract. It is found by multiplying the strike price
by the number of shares represented by the contract. For example, if you hold 5 $50 calls, the aggregate exercise
price is 5 * 50 * 100 = $25,000. This
is the amount you would have to pay if you decided to exercise all five
contracts. Whenever an option is
adjusted (through splits are acquisitions, for example) the aggregate exercise
price remains the same. For instance,
if the above $50 call splits 2:1, then you would hold 10 $25 contracts for an
aggregate exercise price of 10*$25*100 = $25,000.
A type of order restriction that designates the trader does
not want any partial fill. Technically,
any buy or sell order is an order to buy or sell up to the number of shares
or contracts specified in the order. If
a trader only wants the entire order filled or nothing at all, then an AON
restriction should be placed. Be aware
that AON orders greatly affect how the order is traded. It is possible to not get filled with an AON
restriction even though the security traded at or through the price. It is not a good idea to use AON on option
orders less than 20 contracts as each option quote is good for at least that
A style of option that allows the holder (buyer) to exercise
anytime prior to expiration. All equity
options are American Style as is the OEX index. Generally, call options should not be exercised early (except to
capture a dividend or other rare cases) and put options should exercised early
once the put is sufficiently in-the-money (where delta = 1). See Also European Option.
An abbreviation for the
American Stock Exchange. This is the
second largest options exchange in the world.
See also CBOE.
Any trade which generates a guaranteed profit for no cash
outlay. The classic case is the
simultaneous purchase and sale of the same security in different markets such
as buy IBM for $100 on the New York Exchange and simultaneously sell it on the
Pacific for $101 1/4. Because so many
traders have access to the quotes, this type of arbitrage rarely occurs. Traders who look for arbitrage situations
are called arbitrageurs or arbs and serve important economic functions in the
markets as they help to keep prices fair.
When the short option position is notified of the long
positions intent to exercise. The long
position "exercises" and the short position is
"assigned". The long position
has the right to exercise; if the trader chooses to exercise, the short
position must oblige.
A term used to describe an option with a strike price equal
to the market price of the stock.
Because it is rare to see a stock trade exactly at one of the strike
prices, the term is loosely used to mean the strike nearest the current stock
The process where the Options Clearing Corporation (OCC)
will exercise an in-the-money call or put without instructions. Generally, equity options are automatically
exercised if they are 3/4 of a point or more in-the-money while index options
are exercised it they are in-the-money by one cent or more. If a trader does not wish to have the
in-the-money option exercised, he should either sell it in the open market or
submit instructions not to exercise with the broker.
A type of ratio spread having unlimited profit potential. For example, if a
trader is short 10 $45 call and long 20 $50 calls he is long a call backspread.
Similarly, short 10 $50 puts and long 20 $45 puts is a long a put backspread.
An investor who believes a stock or index will fall. The term gets its name from the way a bear
attacks; it raises it paws and swipes down simulating a high to low
motion. If you think stocks are moving
from high to low, you are bearish.
Any spread which requires the underlying stock to fall in
order to be profitable. The basic bears
spreads, for example, would be to buy a $50 put and sell a $45 put or buy $50
call and sell a $45 call with all other factors the same. Anytime the trader is buying the high
strike and selling the low strike, with all other factors constant,
it is a bear spread.
A statistical measure showing the relative volatility of a
stock compared to the S&P 500 index.
If you hold a stock with a beta of 1.3, it is expected to perform 30%
better than the S&P 500 index. If
the S&P is up 10%, your stock should be up 13%. Likewise, if the index is down 20%, you should expect your stock
to be down 26%. High beta stocks are
therefore more volatile than the market and low betas are less volatile. High beta stocks will carry relatively high
premiums on the options.
The difference between the asking price and the bid
price. For example, if the bid is $5
and the ask is $5 1/2, then the spread is 1/2 point. Spreads tend to widen when there is more risk or less liquidity
(which is a form of risk). Because of
this, it is not uncommon to see far months, out-of-the-money, or deep
in-the-money options trade with very wide bid/ask spreads. The market (not the market makers)
determines the spreads, which is contrary to what most traders believe.
The New York Stock Exchange.
Black-Scholes Option Pricing Model
A theoretical option-pricing model developed by Fisher Black
and Myron Scholes that produces the theoretical value of an American call
option with the following five inputs: stock price, exercise price, risk-free
interest rate, volatility and time. It
is arguably the single most important piece of research in modern finance
theory and Myron Scholes was awarded a Nobel Prize for his contributions in
A long call and short put at one strike (synthetic long
position) along with a short call and long put (synthetic short position) at
another. The box spread can also be
viewed as a bull vertical spread with calls and bear vertical spread with puts
(or vice versa). The value of the box
position is the present value of the difference in strikes and is considered to
An investor who believes a stock or index will rise. The term gets its name from the way a bull
attacks; it lowers its horns and raises its head high. If you think stocks are heading from low to
high, you are bullish.
Any spread which requires the underlying to rise in order to
be profitable. The basic bull spreads,
for example, would be to buy a $50 call and sell as $55 call or buy a $50 put
and sell a $55 put. Any time the trader
is buying the low strike and selling the high strike, with all
other factors constant, it is a bull spread.
Remember it by the mnemonic Buy Low, Sell High
= BLSH = Bullish
A spread consisting of at least three different commissions
where the trader buys a low strike, sells two middle strikes and buys a high
strike, all equally spaced and on the same underlying. For example, buy 1 $50 call, sell 2 $55
calls, and buy 1 $60 call. The trade
can also be done with puts. In
addition, synthetic versions of each piece can be used making more than three
Another view of the butterfly spread is that it is a bull
spread matched with a bear spread either with calls or puts.
Butterfly spreads are primarily used by market makers to
take advantage of minor price discrepancies between spreads.
A trade where the investor buys stock and simultaneously
sells a call against it. It is a
covered call position but the buy-write is a way to enter the trade. Both the stock and call are executed at the
same time thereby eliminating market movement risk. See also Sell-Write.
Cabinet Bid (CAB)
A clearing trade that allows market makers to clear deep-out-of-the-money option
contracts for 1 cent per option (or $1 per contract).
This is a trade you should be aware of as it causes a lot of
problems for traders -- especially near tax time. Traders holding deep-out-of-the-money options will often desire
to close it out even though there is no bid and many brokers suggest placing
the trade as a cabinet bid.
The problem arises when traders wish to clear out the option
near year-end for a tax loss. There
have been many cases where traders check their accounts on January 1 only to
find the order still open! There are
many reasons why it may not fill but just be aware that you should place these
trades "versus junk" which will guarantee the sale and a confirmation
for your tax records.
See horizontal spread.
A contract between two people which gives the owner the
right, but not the obligation, to buy stock at a specified price over a given
time period. The seller of the call has
an obligation to sell the stock if the long put position decides to buy.
Cash Market (Spot Market)
The market for the underlying stock (or index). For example, some traders may refer to Intel
shares of stock as the "cash market" when talking about Intel
options. Because options can be used to
defer a purchase or sale, the underlying shares are called the "cash
market" or "spot" market (because this is where the asset can be
purchased "on the spot").
A type of option settlement usually used by index
options. These options do not deliver
or receive shares in the underlying index.
Instead, they are settled for the cash value between the closing of the
index (subject to specific guidelines) and the strike price multiplied by the
contract size. For example, if a
particular index closes at $4,050 and a trader holds the 10 $4,000 strike
calls, that trader will receive $50 * 10 * 100 = $50,000 cash the following
business day. The trader cannot
exercise the call and receive shares of the index.
An abbreviation for the Chicago Board Options Exchange. This is the largest options exchange in the
All call or put options of a particular underlying. For example, all IBM calls are one class of
options. All IBM puts are another
See Options Clearing Corporation.
A transaction where an option seller buys the same contract
to close. A closing transaction
relieves the seller from the potential obligation under the original sale. For example, a trader sells 1 XYZ March $50
call to open. The trader may be forced
to sell 100 shares of XYZ at a price of $50 if the long position exercises. At a later time, the trader decides he does
not want to have this obligation so can buy 1 XYZ March $50 call to close. The trader's profits or losses depend on the
opening selling price and closing purchase price. See also Closing Sale, Opening Purchase, Opening Sale.
A transaction where an option buyer sells the same contract
to close. A closing transaction removes
the rights from the original purchase.
For example, a trader buys 1 XYZ March $50 call to open. This trader may purchase 100 shares of XYZ
by expiration in March for $50. At a
later time, the trader may decide to sell this right to someone else so could
sell 1 XYZ march $50 to close. The
trader's profits or losses depend on the opening purchase price and closing
selling price. See also Closing
Purchase. Opening Purchase, Opening Sale.
A strategy where an investor sells calls against a long
stock position to finance the purchase of protective puts. From a profit and loss standpoint, it is
effectively a bull spread so has limited upside potential and limited downside
risk. For example, an investor who owns
stock at $100, sells a $105 call and purchases a $95 put is utilizing a collar
strategy. The investor will give up all
gains in the stock above $105 but not take any losses below $95. Also called funnels, range-forwards,
cylinders and split-price conversions.
Also known as a combo, this is not a uniquely defined
term. Most in the equities market use
it to mean a strangle -- a strategy where the investor buys a call and a
put at different strike prices on the same underlying. For example, a long $50 call and a long $45
put would be a long combo. It has the
same basic intention as a straddle with less potential for gains and losses.
Other traders, especially in the futures markets, use combo
to mean synthetic long or short position. For example, long $50 call and short $50 put (synthetic long
stock) would be called a combo.
A spread involving at least four commissions. The condor trader has similar intentions as
the butterfly except the middle two strikes are split. For example, buy 1 $50 call, sell 1 $55
call, sell 1 $60 call, and buy 1 $65 call.
The condor is a lower risk, lower return strategy compared to the
butterfly. The condor is really two
laddered butterfly spreads.
A position usually used by market makers to hedge risk. A conversion is long stock, long put and
short call with the options having the same strike and time to expiration. The trader is long stock and long synthetic
short stock, which is why the position is hedged. Because of this, the trader is guaranteeing the sale of his long
stock at the exercise price. The cost
of the conversion is the present value of the exercise price. See also Reversal.
The sale of a call option against a long stock
position. The short call is "covered"
because the investor will always be able to deliver the shares regardless of
how high the underlying moves. See also
Naked or Uncovered Positions.
Any purchase and sale of an option that results in a credit to the account. For example, if you buy a $50 call and sell a $45 call, the net will be a credit paid to your account assuming the two options are traded simultaneously. This is because the lower strike call will always be more valuable and therefore carry a higher price. Likewise, you can buy a $50 put and sell a $55 put simultaneously, which will result as a net credit to your account. With puts, the higher strike will always be more valuable and carry a higher price. With any credit spread, the initial credit is always yours to keep regardless of what happens to the underlying stock. The trade is not risk-free, however, as limited losses will occur if the stock lands in a particular range. See also Debit Spread.
Any purchase and sale of an option that results in a debit to the account. For
example, if you buy a $50 call and sell a $55 call, the net will be a debit
to your account assuming the two options are traded simultaneously. This is
because the lower strike call will always be more valuable and therefore carry
a higher price. Likewise, you can buy a $50 put and sell a $45 put simultaneously,
which will result as a net debit to your account. With puts, the higher strike
will always be more valuable and carry a higher price. With debit spreads, the
stock must move in a particular direction in order to show a profit. See
also Credit Spread.
One of the "Greeks" denoting an option's
sensitivity to the underlying price.
Deltas on calls will always range between 0 and 1 and between 0 and -1
for puts (sometimes delta can exceed these ranges but only in unusual
circumstances and then only for a short while). If a $50 call option is priced at $5 with delta of 1/2, the
option will be worth approximately $5 1/2 if the underlying moves up one full
point (the option gained 1/2 point to the stocks one point). Deltas constantly change and are highly
dependent on the strike price, time to expiration and volatility of the
A trading strategy typically used by market makers where the
total deltas of all positions add to zero (or at least very close to it). Because the underlying stock or index moves,
traders must continually adjust their positions to remain delta neutral. Retail commissions often make this strategy
too costly to use.
Any financial asset whose value is determined by the value
of another security known as the underlying security. Options and futures are probably the most well-known derivatives
but there are many others including Collateralized Mortgage Obligations (CMOs),
swaps, swaptions, options on futures, and a host of others. Many bonds even are derivative securities as
they have embedded call or put features.
A spread where the investor is long a strike at one month
and short a strike at another month with both options being calls or puts and
on the same underlying. If the trade
results in a net debit (credit), it is a long (short) diagonal spread. For example, a trader buys a March $50 call
and sells a January $60 call would be holding a diagonal spread. Quotes are listed in the newspaper with
months across the top and strikes down the side. You will see the quotes for a diagonal spread appear on the
diagonal of the quote matrix -- hence the name.
The day on which a stock trades without the right to the dividend. Say XYZ
is trading at $100 and pays a $1 dividend with the ex-date being tomorrow.
If you buy the stock today (or bought anytime prior), you will be entitled to
the upcoming $1 dividend. If you wait until tomorrow, the stock will trade
for $99 (because the stock price will be reduced by the amount of the dividend)
but you will not be entitled to the upcoming $1 dividend.
The procedure where a trader notifies the seller of his
intent to buy the stock (if a call) or sell the stock (if a put). The trader wishing to exercise an option
simply notifies the brokerage firm, which notifies the Options Clearing
Corporation (OCC). The OCC then pairs a
short position through random assignment.
See also Assignment.
Same as strike price.
It is the price where the buyer and seller of the option agree to
transact stock. For example, if a
trader has a $50 call, he holds a $50 exercise price and can purchase the stock
at anytime for $50. The short position
must sell for $50. Likewise, the holder
of a $50 put has and exercise price of $50 and may sell the stock for $50 at
anytime. The seller of the put must
purchase the stock for $50. With all
else constant, lower call strikes will always be more expensive than higher
ones with the reverse being true for puts.
Technically, option expiration (for equities) is always the
Saturday following the third Friday of the month. If a trader has an October call option, it can no longer be
exercised after that point. But, for
trading purposes, the last day to buy or sell an option will be the third
Friday of the month. Equity options can
be traded until 4:02 EST and 4:15 EST for index options.
A style of option that allows the holder (buyer) to exercise
only at expiration. Most index options
are European style with the exception of OEX.
See American Option.
Same as time value.
An option's price can be separated into two components time value
(extrinsic) and intrinsic. The
intrinsic value is the amount by which the option is in-the-money and the
extrinsic value is the remaining amount.
The following equation may help:
Option Premium - Intrinsic value = time value.
The theoretical value of an asset.
Fill Or Kill (FOK)
An order time frame (as opposed to the standard
"day" or "good 'til cancelled" order) where the trader is
attempting to have the order filled immediately in entirety or not at all. Fill or kill orders are not generally a good
idea to use. In most cases, the floor
traders kill it immediately to avoid making a hasty decision.
One of many "Greeks" used in options. It denotes the sensitivity
of an option's delta with respect to the underlying stock. It can be viewed
as the delta of the delta. Long call and put positions have positive gamma
while the short positions have negative gamma. It measures the speed component
of the option and therefore it's risk. High gamma positions are riskier relative
to low gamma with all other factors the same.
A British term used to describe one aspect of leverage of an
option. It is not uniquely defined but
the two most common definitions are (1) The price of the stock divided by the
price of the option (2) The strike price of the option divided by the price of
the options. Under definition 1, if the
underlying stock is trading for $100 and you purchase a call option for $2, the
gearing is $100/$2 = 50. In other words,
you are controlling $100 worth of stock for $2 so have leveraged the asset by a
factor of 50. Definition 2 views the
options price in relation to the strike price.
If the above option is a $110 strike, the gearing is $110/2 = 55. This method is saying you have potentially
committed yourself to a price of $110 but only paid $2 for it so have leveraged
the asset by a factor of 55.
Good 'Til Cancelled (GTC)
An order time limit that specifies to leave the order open
until it is either filled or cancelled by the investor. The New York Stock Exchange allows for a
maximum time limit of six months but brokerage firms have the liberty to make
the restrictions tighter if they feel.
Check with your brokerage firm for the specific time frame designated by
their GTC orders. See also Day
Order, Fill Or Kill, Immediate Or Cancel.
There are five main Greek letters used to specify an
option's price sensitivity. The five
Greek letters are: (1) Delta
(sensitivity in relation to movements of the underlying stock), (2) Gamma (sensitivity in relation to speed
of movement of the underlying), (3)
Vega (sensitivity in relation to volatility),
(4) Theta (sensitivity in relation to time) (5) Rho (sensitivity in relation to interest rates)
Any of a number of strategies where the call strike is lower
than the put strike leaving the trader with a built-in box position and a
guaranteed minimum value at expiration.
One of the basic guts positions, for example, is long $50 call and long
$60 put which is a guts strangle.
Because the call strike is below the put strike, the position will
always have at least $10 (the difference in strikes) in value; pick any
stock price and the above strangle will be worth at least ten.
Any strategy that is used to limit investment loss by adding a position that
offsets an existing position. For example, a long bull spread (buy $50 call
and sell a $60 call, for example) is a hedged position. The sale of the $60
call reduces the price (and risk) of the long $50 call.
The long position or owner of an option.
A spread where the trader buys and sells options of the same
type -- either calls or puts -- on the same underlying with the same strike but
different times to expiration. For
example, if a trader buys a March $50 and sells a January $50, that is a
horizontal spread. If the trade results
in a debit, it is called a long horizontal and short if a credit is received.
Quotes are listed in the newspaper with months across the
top and strikes down the side. You will
see the quotes for a horizontal spread appear horizontally of the quote matrix
-- hence the name. Also called a time or calendar spread.
Immediate Or Cancel (IOC)
An order time frame (as opposed to the standard "day" or "good
'til cancelled" order) where the investor is requesting an immediate fill
or cancellation of the trade. Unlike its Fill-Or-Kill counterpart, the IOC
order does not need to be filled in its entirety.
The volatility necessary to put into the Black-Scholes
Option Pricing Model to produce the current quote on the option. It is the forward volatility of the
underlying stock that is implied by the market price.
A call option with a strike below and a put option with a
strike above the current stock price are said to be in-the-money. This is also the amount of intrinsic value
of an option -- the amount that would be received if exercised
immediately. For example, if the stock
is $103 1/2, a $100 call is $3 1/2 points in-the-money. If the trader exercised the call
immediately, he would receive stock worth $103 1/2 and pay only $100 for a net
gain of $3 1/2. Any amount above this
$3 1/2 figure in the option's premium is called time or extrinsic value. See also Out-Of-The-Money, Extrinsic
An option's intrinsic value is the amount by which it is in
the money. See also In-The-Money,
A butterfly spread constructed by a bull spread with calls
and a bear spread with puts with all options representing the same underlying
and expiration date. It can also be
viewed as a long straddle paired with a short strangle. A long iron butterfly is equivalent to a short
A strategy using a long call and short put (synthetic long position) and a short
call and long put (synthetic long position) at another date with all options
represent the same underlying. If the position is initiated for a debit (credit)
it is a long (short) jelly roll. The value of a jelly roll is the cost of carry
between months less the present value of dividends received.
An acronym for Long-Term Equity Anticipation Securities. Leaps are just
longer term options with expirations up to three years. Because of the time
involved, there are many strategies available with LEAPS that cannot be done
with regular options.
An order that guarantees the price but not the
execution. If a trader places and order
to buy 10 contracts at a limit of $5 (the limit), the only way the order will
fill is if it can be filled for $5 or lower. Similarly, if a sell order is placed for $10, the only way it
will fill is for $10 or higher.
Because of these restrictions, limit orders are not guaranteed to fill.
A position initiated from the purchase of the security. If a trader buys 10 March $50 calls, he is
long the position. A long position is
one that is owned. Also, long positions
will increase (at least theoretically) in value as the underlying
increases. See also Short Position.
The use of borrowed funds to purchase stock. If you have a margin account,
you are required to only pay for half the position (assuming the stock is marginable)
and pay interest on the remainder. For example, an investor can buy $50,000
worth of IBM but only needs to deposit 50% or $25,000 (called the Regulation
T or Reg T amount). The trader would pay interest on the remaining $25,000.
Margin accounts provide additional leverage, which can work for and against
the trader. If IBM is up 10%, the margin trader will be up 20%. Most of the
popular stocks are marginable but options never are; they must be paid in full.
However, this does not mean you can't be on margin for an option trade. For
example, an investor owns $50,000 worth of IBM outright in a margin account.
The brokerage firm is willing to send the investor a check for $50,000 (half
the amount) because he is only required to have half the position paid for.
This is sometimes called margin cash available. It is this cash that can be
used to fully pay for options, but you will have a debit balance and pay interest
on it. This is a very basic overview and there are other restrictions, such
as minimum amounts that can be margined, so check with your broker before placing
your margin trades.
Market On Close (MOC)
An order qualifier that says to buy/sell the position very
close to the closing price (usually within the last five minutes of trading) if
the limit order does not execute during the day. For example, a trader has an order to sell 100 shares at a limit
of $50 MOC. If the stock does not trade
high enough to execute the order, it will covert to a market order within the
final minutes of the trading day and fill.
An order to buy or sell at the best available quote when
tje trade reaches the floor (or market maker). It is guaranteed to execute because the price is allowed to
fluctuate. Also, there is no need to
designate "day" or "good-til-cancelled" with a market order
because it is sure to fill (unless it is a short sale with no
"uptick"). See also Limit
Marketable Limit Order
A limit order to buy at the offer or sell at the bid. For example, if the quote is $5 on the bid
and $5 1/4 on the offer, an order to sell at a limit of $5 is called a marketable
limit order. Likewise, an order to buy
at a limit of $5 1/4 is a marketable limit too.
A short position not covered by an offsetting position. A trader who sells
calls to open is short the call. If the underlying stock is not in the account,
that call is naked (uncovered). Naked positions are considered to be the most
risky as they have unlimited liability (or nearly unlimited for puts) to the
trader. Naked positions require margin deposits to insure to performance by
An order qualifier designating that the floor broker or
specialist has discretion over how and when to fill the order. "Not held" orders can be very
useful for very large orders as it allows the floor broker of specialist to
work the order by slowly feeding it into the market. You are designating that the broker is "not held" to
time and sales -- hence the name. As a
general rule, "not held" qualifiers will usually net you a better
fills in the long run but that requires that the trader use them almost
exclusively. To casually use a
"not held" order once in a while or on smaller orders is probably not
A transaction where an option seller buys the contract to open. An opening
purchase is initiating a "long" position. See also Opening Sale,
Closing Purchase and Closing Sale.
The net long and short positions for any option
contract. If a trader "buys to
open" and another "sells to open," then open interest will
increase by the number of contracts.
This is because both traders are opening. If one "buys to open" and the other "sells to
close," then open interest will remain unchanged. Finally, if one "buys to close"
and another "sells to close," then open interest will decrease by the
amount of the contracts.
A transaction where an option buyer sells the contract to
open. An opening sale put the option
seller in a potential obligation to buy stock (if short puts) or sell stock (if
short calls). The trader receives a
premium to the account for this transaction.
If the trader desires to get out of this position, he must enter a
closing purchase. See also Opening
Purchase, Closing Sale, Closing Purchase.
Options Clearing Corporation (OCC)
The organization which acts as a buyer to every seller and a
seller to every buyer thereby guaranteeing the performance of the exchange
A call option with a strike above and a put option with a
strike below the current stock price are said to be out-of-the-money. Also, an option with no intrinsic value is
said to be out-of-the-money.
For example, if the stock is $100, a $105 call and a $95 put are out-of-the-money.
See also In-The-Money and Extrinsic Value.
An option trading with only intrinsic value; the time value is zero. For example,
with the stock at $104 1/2, the $100 call trading at $4 1/2 is trading at parity.
See also In-The-Money and Extrinsic Value.
The risk encountered by the seller of an option that expires
exactly at-the-money. The trader is
unsure if he will be assigned. This
risk is especially critical for market makers using conversions and reversals. Say the stock closes at exactly $50 (or
very, very close) on expiration day. If
the market maker is long stock, long $50 put and short $50 call (conversion),
he is unsure whether to exercise the put because he's unsure about the
assignment of the $50 call. In these
situations, you can almost always close vertical spreads for the full spread
amount as market makers love to offset this risk for an even trade.
The amount paid for an option. The option's premium can be further broken down into intrinsic
value and time value.
See Vertical Spread
A contract between two people which gives the owner the
right, but not the obligation, to sell stock at a specified price over a given
time period. The seller of the put has
an obligation to buy the stock if the long put position decides to sell.
RAES (Retail Automated Execution System)
A proprietary electronic trading system of the Chicago Board Options Exchange.
Any retail market order (or marketable limit order) for 20 contracts or less
is usually filled immediately through RAES.
Any spread having unequal long and short positions is a type
of ratio spread. Specifically, if the
trader has unlimited risk, it is a ratio spread. If the trader has unlimited profit potential, it is a backspread.
Reversal (Reverse Conversion)
A three-sided position used primarily by market makers to
hedge risk. A position of short stock,
short put and long call is a reversal.
Both options must have the same strike price and expiration. The reversal grows to a guaranteed payment
at expiration. The market maker puts on
the position when the credit from the interest earned will be higher than the
One of the "Greeks" representing the sensitivity
of an option's price for a small change in interest rates (usually considered
to be a 1% change in rates).
All option contracts on the same underlying instrument with the same exercise
price and time to expiration. For example, IBM Jan $100 calls are one series
of options, IBM Jan $105 calls are another. Likewise, all IBM Jan $100 put
options designate another series.
A position initiated by the sale of stock or options. Traders who sell options are also said to
"write" the contract so written positions are synonymous with short
See Cash Market.
Any position consisting of a long and short position. If the spread is on the same underlying
stock, it is an intra-market spread. If
it is over different securities, it is an inter-market spread. For example, long $50 call and short $55
call is a vertical spread. See also
Horizontal Spread, Time Spread, Vertical Spread, Diagonal Spread.
Previously known as a stop loss order. A contingency order that becomes a market
order if the stock trades at a certain limit.
For example, say a stock is trading for $100. A trader placing an order to sell the stock at a stop price of
$98 is instructing the broker to make the order a market order if the
stock trades at $98 or lower.
Stop orders do not prevent losses!
The reason is the order will trigger a market order if the stock trades
below $98 as well. The stock could open
for trading at $80 and the trader will be sold at this price instead of the $98
he was expecting. Because they do not
stop losses, the Securities Exchange Commission (SEC) determined the previous
term stop loss order cannot be used.
See also Stop Limit.
A contingency order that becomes a limit order if the stock
trades at a certain limit or lower. For
example, say a stock is trading at $100.
A trader placing an order to sell the stock at a stop price of
$98 and a stop limit of $98 is instructing the broker to sell the stock
at a limit of $98 (or higher) if the stock trades at $98 or lower. Notice that two prices must be given: a stop
price and a stop limit. The stop price
activates the order and the stop limit designates the minimum price the trader
is willing to accept. The stop price
can be equal to or less than the stop price (but not greater). Because of this limit, stop limit orders are
not guaranteed to execute even if the stop price is triggered. Stop limit orders do not prevent
losses. See also Stop Order.
A strategy using a long call and long put (or short call and
short put) with both options having the same exercise price and
expiration. The long straddle position
is hoping for a large move in either direction while the short straddle is
hoping for the market to sit fairly flat.
A strategy using two long puts and one long call (or two
short puts and one short call) with all options having the same exercise price
and expiration. It can be viewed as a
ratio straddle as well. See also
A strategy using two long calls and one long put (or two
short calls and one short put) with all options having the same exercise price
and expiration . It can be viewed as a
ratio straddle as well. See also
The fair value of an option based on a known pricing method such as the Black-Scholes
Option Pricing Model. If an option trades higher (lower) than its theoretical
value, traders will become sellers (buyers) with all else constant.
One of the "Greeks" that measures an option's
price sensitivity in relation to time.
Usually it is expressed as the amount of money an option will lose if
one day passes with all other factors the same.
Similar to a conversion or reversal except the stock position is replaced with
a deep-in-the-money option. For example, a market maker who is long stock,
long put and short a call is long a conversion. If the market maker replaces
the long stock position with a deep-in-the-money call, the position is called
a three-way. Note too that the market maker in this example could have shorted
a deep-in-the-money put which will also behave like long stock. Three-ways
eliminate pin risk to the market maker. See also Conversion, Reversal, Pin
See horizontal spread.
The amount of an options price not accounted for by
intrinsic value. If an option is
out-of-the-money, it's premium will consist entirely of time value. For example, say there is a $55 call trading
at $3 with the stock at $50. This
option is out-of-the-money so the entire $3 is time premium. If the stock were at $57, then the $55 call
would be in-the-money by $2; the intrinsic value would be $2 and the time
premium would be $1.
Tick Value (Tick Size)
The smallest allowable price move in a particular
option. For example, an option trading
below $3 can usually trade in 1/6th's so it's tick value would be 1/16. Options trading at $3 or above generally
require 1/8th minimums so it has a tick value of 1/8.
A property of options that states some or all of an option's
value will erode with the passage of time and are consequently known as wasting
assets. Time attacks shorter-term
options much harder than longer term.
All else equal, an option seller will prefer to sell shorter term
options while option buyers will prefer to buy longer term.
See Horizontal Spread.
Any day where futures, index
options and equity options all expire.
Usually this is the third Friday in the end month of each quarter
(March, June, September, December). It
is of interest to traders because market makers must buy and sell the
underlying stocks to unwind (get out of) their positions. This usually causes great volatility in the
Unwind refers to the specific strategy of
"undoing" a buy-write position where the investor would sell the
stock and buy the call to close. Unwind
can be used loosely to mean the reversing of any position.
One of the "Greeks" (although not technically a Greek letter) denoting
an option's price sensitivity for a small change in volatility (usually a 1%
change in volatility). Vega is sometime denoted by the Greek letter Kappa too.
A spread where a trader buys options of the same type --
either calls or puts -- at different strikes with all else the same. For example, if a trader buys a $50 call and
sells a $55 call they would have a vertical spread.
Quotes are listed in the newspaper with months across the
top and strikes down the side. You will
see the quotes for a vertical spread appear vertically on the quote matrix --
hence the name. Also called a time
or calendar spread. See also
Bull Spreads, Bear Spreads.
Statistically, it is the annualized standard deviation of
the price movements in the underlying.
It basically measures the amount of expected movement over time. In layman's terms, a stock that has large price
swings from one day to the next is volatile.
The more volatile the underlying stock, the higher the price of the
option with all other factors the same.
Selling an option to open. Anytime a trader sells an option to open, he is
said to have "written" the contract. A call writer is one who has
sold calls against stock (covered call position) and is also called a covered-write.
Writing is the same as shorting.