S&P 500 Index: Widely regarded as the best single gauge of the U.S. equities market, this world-renowned index includes a representative sample of 500 leading companies in leading industries of the U.S. economy. Although the S&P 500 focuses on the large-cap segment of the market, with over 80% coverage of U.S. equities, it is also an ideal proxy for the total market.

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.

Secondary market: A market where securities are bought and sold after their initial purchase by public investors.

Sector index:An index that measure the performance of a narrow market segment, such as biotechnology or small capitalization stocks.

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.

Series of options: Option contracts on the same class having the same strike price and expiration month. For example, all XYZ May 60 calls constitute a series.

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.

Specialist / specialist system: A New York (NYSE) or American (ASE) Stock Exchange  member whose function is to maintain a fair and orderly market in a given stock or a given class of options. The specialist accomplishes this by managing the limit order book and making bids and offers for his own account in the absence of opposite side bids and offers from public investors. See also Market-maker and Market-maker system

Spin-off: A stock dividend issued by one company in shares of another corporate entity, such as a subsidiary corporation of the company issuing the dividend.

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

Standardization: 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.

Stock dividend: A dividend paid in shares of stock rather than cash. See also Spin-off

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.

Strangle: The purchase or sale of an equivalent number of puts and calls on a given underlying stock with the same expiration date but different strike prices. The strangle purchaser seeks to profit from relatively large movements in the price of the underlying stock, regardless of direction.

Strike / strike price: The price at which the owner of an option can purchase (call) or sell (put) the underlying stock. Used interchangeably with 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.

Suitability: A requirement that any investing strategy fall within the financial means and investment objectives of an investor or trader.

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.

Synthetic long call: A long stock position combined with a long put of the same series as that call.

Synthetic long put: A short stock position combined with a long call of the same series as that put.

Synthetic long stock: A long call position combined with a short put of the same series.

Synthetic position: A strategy involving two or more instruments that has the same risk-reward profile as a strategy involving only one instrument. The following list summarizes the six primary synthetic positions.

Synthetic short call: A short stock position combined with a short put of the same series as that call.

Synthetic short put: A long stock position combined with a short call of the same series as that put.

Synthetic short stock: A short call position combined with a long put of the same series.

 

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 option pricing model: The first widely-used model for option pricing. 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.

Theoretical value: The estimated value of an option derived from a mathematical model. See also Model and Black-Scholes formula

Theta: A measure of the rate of change in an option's theoretical value for a one-day change in time to the option's expiration date. See also Time decay

Tick: The smallest unit price change allowed in trading a security. For listed stock, this is generally one cent.  For a listed option under $3, this is generally five cents; $3 and above, 10 cents.

Time decay: A term used to describe how the theoretical value of an option 'erodes' or reduces with the passage of time. Time decay is specifically quantified by theta.

Time 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). Also known as calendar spread or horizontal spread.

Time value: The part of an option's total price or premium that exceeds its intrinsic value. The price or premium of an out-of-the-money option consists entirely of time value.

Trader: Any investor who makes frequent purchases and sales; a member of an exchange who conducts his or her buying and selling on the trading floor of the exchange.

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

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. In academic studies, the spread between bid and ask is taken into account as a transaction cost.

Type of options: The classification of an option contract as either a put or a call.

 

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 / uncovered option: see naked (uncovered) option.

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 (called) or sold (put) upon exercise of the option contract.

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

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

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 the option contract; i.e., to sell stock (in the case of a call) or buy stock (in the case of a put) if the option is assigned. An investor who so sells an option that he currently does not own is called the writer, regardless of whether the option is covered or uncovered.

XYZ / XYZ Corporation: A fictitious company used as the underlying stock throughout this glossary.