Fence: 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.

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 broker: A trader on an exchange floor who executes trading orders for other people.

Floor trader:An exchange member on the trading floor who buys and sells for his or her own account.

Fundamental analysis: A method of predicting stock prices based on the study of earnings, sales, dividends, and other fundamental accounting data.

Fungibility: Interchangeability resulting from standardization. Options listed on national exchanges are fungible, while over-the-counter options generally are not. Classes of options listed and traded on more than one national exchange are referred to as multiple-listed / multiple-traded options. 

Gamma: A measure of the rate of change in an option's delta for a one-dollar change in the price of the underlying stock. An option with a gamma of 0.06 will exhibit a $0.06 increase or decrease in its delta for a $1.00 rise or fall in the underlying stock. See also Delta

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.

Greeks: The Greeks are various functions which show the sensitivity of Fair Value of an option to changes in market conditions. These functions are very helpful in assessing and comparing various option positions. They show what effect different variables will have on the fair value price of an option. The Greeks include Delta, Gamma, Vega, Theta, and Rho. See also option Greeks

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-water mark: Where a fund (usually a hedge fund) applies a high-water mark to an investor's money, this means that the manager will only receive performance fees, on that particular pool of invested money, when its value is greater than its previous greatest value. Should the investment drop in value then the manager must bring it back above the previous greatest value before he can receive performance fees again.

Historic volatility: A measure of actual stock price changes over a specific period of time. See also Standard deviation

Holder: Any person who has made an opening purchase transaction, call or put, and has that position in a brokerage account.

Horizontal 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 Calendar spread

 

Kappa: A measure of the rate of change in an option's theoretical value for a one-percent change in the volatility assumption.

Last trading day:The last business day prior to the option's expiration date during which purchases and sales of options can be made. For equity options, this is generally the third Friday of the expiration month. Note: If the third Friday of the month is an exchange holiday, the last trading day will be the Thursday immediately preceding the third Friday.

LEAPS® (Long-term Equity AnticiPation Securities also known as long-dated options): In English, this means calls and puts with an expiration as long as thirty-nine months. Currently, equity LEAPS have two series at any time with a January expiration. For example, in November 2006, LEAPS are available with expirations of January 2008 and January 2009.

Leg: A term describing one side of a position with two or more sides. When a trader legs into a spread, he/she establishes one side first, hoping for a favorable price movement so the other side can be executed at a better price. This is, of course, a higher-risk method of establishing a spread position.

Leverage: A term describing the greater percentage of profit or loss potential when a given amount of money controls a security with a much larger face value. For example, a call option enables the owner to assume the upside potential of 100 shares of stock by investing a much smaller amount than that required to buy the stock. If the stock increases by 10 percent, for example, the option might double in value. Conversely, a 10 percent stock price decline might result in the total loss of the purchase price of the option.

Limit order: A trading order placed with a broker to buy or sell stock or options at a specific price.

Liquidity / liquid market: A trading environment characterized by high trading volume, a narrow spread between the bid and ask prices, and the ability to trade larger sized orders without significant price changes.

Listed option: A put or call traded on a national options exchange. In contrast, over-the-counter options usually have non-standard or negotiated terms.

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.

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 November 2006, LEAPS are available with expirations of January 2008 and January 2009.

 

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-maker system, (competing): A method of supplying liquidity in options markets by having market makers in competition with one another. An alternative to a specialist system. They are similarly charged with making fair and orderly markets in a given class of options.

Market-not-held order: A type of market order which allows the investor to give discretion to the floor broker regarding the price and/or time at which a trade is executed.

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.

Model: A mathematical formula used to calculate the theoretical value of an option. See also Black-Scholes formula

Multiple-listed / multiple-traded option: Any option contract that is listed and traded on more than one national options exchange. See also Fungibility

 

Naked (uncovered) option: A short option position that is not fully collateralized. A short call position is uncovered if the writer does not have a long stock or a 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.

NASDAQ (National Association of Securities Dealers Automated Quotation  system.): Dissemination of quotations from the NASD and/or members thereof.

Neutral: An adjective describing the belief that a stock or the market in general will neither rise nor decline significantly.

Neutral strategy: an option strategy (or stock and option position) expected to benefit from a neutral market outcome.

Ninety-ten (90/10) strategy: A conservative option strategy in which an investor buys Treasury bills (or other liquid assets) with 90 percent of his or her funds, and buys call options (or put options or a mixture of both) with the balance. The proportions of this strategy are subject to change based on prevailing interest rates.

Non-equity option: Any option that does not have common stock as the underlying asset. Non-equity options include options on futures, indexes, foreign currencies, Treasury security yields, etc.

Not-held order: type of order which releases normal obligations implied by the other terms of the order. For example, a limit order designated as 'not-held' allows discretion to the floor trader in filling the order when the market trades at the limit price of the order. In this case, there is no obligation to provide the customer with an execution if the market trades through the limit price on the order. See also Discretion and Market-not-held order

NYSE: New York Stock Exchange.

 

 

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.

One-cancels-other order (OCO): A type of option order which treats two or more option orders as a package, whereby the execution of any one of the orders causes all the orders to be reduced by the same amount. For example, the investor would enter an OCO order if he/she wished to buy 10 May 60 calls or 10 June 60 calls or any combination of the two which when summed equaled 10 contracts. An OCO order may be either a day order or a GTC order.

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 / option contract: A contract that gives the owner (buyer) the right, but not the obligation, to buy or sell a particular asset (the underlying security, i.e. stock or index) at a fixed price (the strike price) for a specific period of time (until it expires). The contract also obligates the writer (seller) to meet the terms of delivery if the contract right is exercised by the owner. The amount the buyer pays the seller for the option is called the option premium.

Option Greeks: The Greeks are various functions which show the sensitivity of Fair Value of an option to changes in market conditions. These functions are very helpful in assessing and comparing various option positions. They show what effect different variables will have on the fair value price of an option. The Greeks include Delta, Gamma, Vega, Theta, and Rho. See also Greeks 

Option period: The time from when an option contract is created by a writer of that option to the expiration date; sometimes referred to as an option's "lifetime."

Option pricing curve: graphical representation of the estimated theoretical value of an option at one point in time, at various prices of the underlying stock.

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.

Optionable stock: A stock on which listed options are traded.

Options Clearing Corporation (OCC): A registered clearing agency whose shares are owned by the exchanges that trade listed equity options, The OCC is an intermediary between option buyers and sellers and guarantees delivery of all listed option contracts.

OTC option: An over-the-counter option is one which is traded in the over-the-counter market. OTC options are not listed on an options exchange and do not have standardized terms. These are to be distinguished from exchange-listed and traded equity options with NASD stocks as the underlying equity issue, which are standardized. See also Fungibility

Out-of-the-money option: A term used to describe an option that has no intrinsic value, i.e., all of its premuim 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

Over-the-counter / Over-the-counter market: A national association having many characteristics of an exchange. Rather than a floor or physically central market place, trading takes place via computer terminals.

Overwrite: An option strategy involving the writing of call options (wholly or partially) against existing long stock positions. This is different from the buy-write strategy which involves the simultaneous purchase of stock and writing of a call. See also Ratio write

Owner: Any person who has made an opening purchase transaction, call or put, and has that position in a brokerage account.

 

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.

PCX: Pacific Stock Exchange.

PHLX: Philadelphia Stock Exchange.

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.

Pin risk: The risk to an investor (option writer) that the stock price will exactly equal the strike price of a written option at expiration; i.e., that option will be exactly at the money. The investor will not know how many of his/her written (short) options he/she will be assigned. The risk is that on the following Monday he/she might have an unexpected long (in the case of a written put) or short (in the case of a written call) stock position, and thus be subject to the risk of an adverse price move.

Pit: A specific location on the trading floor of an exchange designated for the trading of a specific option class or stock.

Position: The combined total of an investor's open option contracts (calls and/or puts) and long or short stock.

Position trading: An investing strategy in which open positions are held for an extended period of time.

Premium: Total price of an option: intrinsic value plus time value; often this word is erroneously construed to mean the same as time value.

Primary market: For securities that are traded in more than one market, the primary market is usually the exchange where trading volume in that security is highest.

Profit/loss graph: A graphical presentation of the profit and loss possibilities of an investment strategy at one point in time (usually option expiration), at various stock prices.

Put / put option: An option contract that gives the owner the right to sell 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 put option, the contract represents an obligation to buy the underlying security from the option owner if the option is assigned. The buyer pays a fee (called a premium) for this right.