An option contract that may be exercised at any time between the
date of purchase and the expiration date. Most exchange-traded
options are American-style.
The process in which professional traders simultaneously buy and sell the same or equivalent securities for a riskless profit. See also Risk Arbitrage.
The price at which a seller is offering to sell an option or stock.
The receipt of an exercise notice by an option writer (seller)
that obligates him to sell (in the case of a call) or purchase
(in the case of a put) the underlying security at the specified
An option is at-the-money if the strike price of the option is
equal to the market price of the underlying security.
A protection procedure whereby the Options Clearing Corporation attempts to protect the holder of an expiring in-the-money option by automatically exercising the option on behalf of the holder.
To buy more of a security at a lower price, thereby reducing the holder's average cost. (Average Up: to buy more at a higher price.)
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An adjective describing an opinion or outlook that expects a decline in price, either by the general market or by an underlying stock, or both. See also Bullish.
An option strategy that makes its maximum profit when the underlying stock declines and has its maximum risk if the stock rises in price. The strategy can be implemented with either puts or calls. In either case, an option with a higher striking price is purchased and one with a lower striking price is sold, both options generally having the same expiration date. See also Bull Spread.
A measure of how a stock's movement correlates to the movement of the entire stock market. The Beta is not the same as volatility. See also Standard Deviation and Volatility.
The price at which a buyer is willing to buy an option or stock.
A type of option arbitrage in which both a bull spread and a bear spread are established for a near-riskless position. One spread is established using put options and the other is established using calls. The spread may both be debit spreads (call bull spread vs. put bear spread) or both credit spreads ( call bear spread vs. put bull spread).
Break-Even Point--the stock price (or prices) at which a particular strategy neither makes nor loses money. It generally pertains to the result at the expiration date of the options involved in the strategy. A "dynamic" break-even point is one that changes as time passes.
Generally referring to an index, it indicates that the index is composed of a sufficient number of stocks or of stocks in a variety of industry groups.
See also Narrow-Based.
Describing an opinion or outlook in which one expects a rise in price, either by the general market or by an individual security. See also Bearish.
An option strategy that achieves its maximum potential if the underlying security rises far enough, and has its maximum risk if the security falls far enough. An option with a lower striking price is bought and one with a higher striking price is sold, both generally having the same expiration date. Either puts or calls may be used for the strategy.
See also Bear Spread.
An option strategy that has both limited risk and limited profit potential, constructed by combining a bull spread and a bear spread. Three striking prices are involved, with the lower two being utilized in one spread and the higher two in the opposite spread. The strategy can be established with either puts or calls; there are four different ways of combining options to construct the same basic position.
See also Covered Call.
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An option strategy in which a short-term option is sold and a longer-term option is bought, both having the same striking price. Either puts or calls may be used.
Calendar Straddle or Combination
See Calendar Spread.
An Option contract that gives the holder the right to buy the
underlying security at a specified price for a certain, fixed
period of time. See also Put.
A stock index which is computed by adding the capitalization (float times price) of each individual stock in the index, and then dividing by the divisor. The stocks with the largest market values have the heaviest weighting in the index. See also Float, Divisor.
A capped option is an option with an established profit cap or
cap price. The cap price is equal to the option's strike price
plus a cap interval for a call option or the strike price minus
a cap interval for a put option. A capped option is automatically
exercised when the underlying security closes at or above (for
a call) or at or below (for a put) the Option's cap price.
The interest expense on a debit balance created by establishing a position.
Referring to an option or future that is settled in cash when exercised or assigned. No physical entity, either stock or commodity, is received or delivered.
The process by which the terms of an option contract are fulfilled through the payment or receipt in dollars of the amount by which the option is in-the-money as opposed to delivering or receiving the underlying stock.
The Chicago Board Options Exchange; the first national exchange to trade listed stock options.
Class (of Options)
Option contracts of the same type (call or put) and Style (American,
European or Capped) that cover the same underlying security.
A transaction in which the purchaser's intention is to reduce or eliminate a short position in a given series of options.
A transaction in which the seller's intention is to reduce or eliminate a long position in a given series of options
A trade that reduced an investor's position. Closing buy transactions reduce short positions and closing sell transactions reduce long positions.
See also Opening Transaction.
The loan value of marginable securities; generally used to finance the writing of uncovered options.
Any position involving both put and call options that is not a straddle.
See Futures Contract.
An order which can be executed only if another event occurs; i.e. "sell Oct 45 call 7.25 with stock 52 or lower".
A riskless transaction in which the arbitrageur buys the underlying security, buys a put, and sells a call. The options have the same terms. See also Reversal Arbitrage.
See Convertible Security.
See Synthetic Put.
A security that is convertible into another security. Generally, a convertible bond or convertible preferred stock is convertible into the underlying stock of the same corporation. The rate at which the shares of the bond or preferred stock are convertible into the common is called the conversion ratio.
To buy back as a closing transaction an option that was initially written.
A written option is considered to be covered if the writer also has an opposing market position on a share-for-share basis in the underlying security. That is, a short call is covered if the underlying stock is owned, and a short put is covered (for margin purposes) if the underlying stock is also short in the account. In addition, a short call is covered if the account is also long another call on the same security, with a striking price equal to or less than the striking price of the short call. A short put is covered if there is also a long put in the account with a striking price equal to or greater than the striking price of the short put.
An option strategy in which a call option is written against long stock on a share-for-share basis.
Covered Call Option Writing
A strategy in which one sells call options while simultaneously owning an equivalent position in the underlying security or strategy in which one sells put options and simultaneously is short an
equivalent position in the underlying security.
Covered Put Write
A strategy in which one sells put options and simultaneously is short an equal number of shares of the underlying security.
An option strategy in which one call and one put with the same strike price and expiration are written against 100 shares of the underlying stock. In actuality, this is not a "covered" strategy because assignment on the short put would require purchase of stock on margin. This method is also known as a covered combination.
Covered Straddle Write
The term used to describe the strategy in which an investor owns the underlying security and also writes a straddle on that security. This is not really a covered position.
Money received in an account. A credit transaction is one in which the net sale proceeds are larger than the net buy proceeds (cost), thereby bringing money into the account. See also Debit.
The expiration dates applicable to various classes of options. There are three cycles: January/April/July/October, February/May/August/November, and March/June/September/ December.
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An expense, or money paid out from an account. A debit transaction is one in which the net cost is greater than the net sale proceeds. See also Credit.
To take securities from an individual or firm and transfer them to another individual or firm. A call writer who is assigned must deliver stock to the call holder who exercised. A put holder who exercises must deliver stock to the put writer who is assigned.
The process of satisfying an equity call assignment or an equity put exercise. In either case, stock is delivered. For futures, the process of transferring the physical commodity from the seller of the futures contract to the buyer. Equivalent delivery refers to a situation in which delivery may be made in any of various, similar entities that are equivalent to each other (for example, Treasury bonds with differing coupon rates).
The amount by which an option's price will change for a one-point change in price by the underlying entity. Call options have positive deltas, while put options have negative deltas. Technically, the delta is an instantaneous measure of the option's price change, so that the delta will be altered for even fractional changes by the underlying entity.
See also Hedge Ratio.
A ratio spread that is established as a neutral position by utilizing the deltas of the options involved. The neutral ratio is determined by dividing the delta of the purchased option by the delta of the written option.
See also Ratio Spread and Delta.
Depository Trust Corporation (DTC)
A corporation that will hold securities for member institutions. Generally used by option writers, the DTC facilitates and guarantees delivery of underlying securities if assignment is made against securities held in DTC.
A financial security whose value is determined in part from the
value and characteristics of another security, the underlying
Any spread in which the purchased options have a longer maturity than do the written options as well as having different striking prices. Typical types of diagonal spreads are diagonal bull spreads, diagonal bear spreads, and diagonal butterfly spreads.
An option is trading at a discount if it is trading for less than its intrinsic value. A future is trading at a discount if it is trading at a price less than the cash price of its underlying index or commodity. See also Intrinsic Value and Parity.
A riskless arbitrage in which a discount option is purchased and an opposite position is taken in the underlying security. The arbitrageur may either buy a call at a discount and simultaneously sell the underlying security (basic call arbitrage) or may buy a put at a discount and simultaneously buy the underlying security (basic put arbitrage).
See also Discount.
Freedom given to the floor broker by an investor to use his judgment regarding the execution of an order. Discretion can be limited, as in the case of a limit order that gives the floor broker.125 or.25 point from the stated limit price to use his judgment in executing the order. Discretion can also be unlimited, as in the case of a market-not-held order.
See Limit Order and Market Not Held Order.
A mathematical quantity used to compute an index. It is initially an arbitrary number that reduces the index value to a small, workable number. Thereafter, the divisor is adjusted for stock splits (price-weighted index) or additional issues of stock (capitalization-weighted index).
Generally used in connection with covered call writing, this is the cushion against loss, in case of a price decline by the underlying security, that is afforded by the written call option. Alternatively, it may be expressed in terms of the distance the stock could fall before the total position becomes a loss (an amount equal to the option premium), or it can be expressed as percentage of the current stock price. See also Covered Call Write.
For option strategies, describing analyses made during the course of changing security prices and during the passage of time. This is as opposed to an analysis made at expiration of the options used in the strategy. A dynamic break-even point is one that changes as time passes. A dynamic follow-up action is one that will change as either the security price changes or the option price changes or time passes.
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Early Exercise (assignment)
The exercise or assignment of an option contract before its expiration date.
A receipt issued by a bank in order to verify that a customer (who has written a call) in fact owns the stock and therefore the call is considered covered.
A feature of an option that stipulates that the option may only be exercised at its expiration. Therefore, there can be no early assignment with this type of option.
The process whereby a stock's price is reduced when a dividend is paid. The ex-dividend date (ex-date) is the date on which the price reduction takes place. Investors who own stock on the ex-date will receive the dividend, and those who are short stock must pay out the dividend.
Options on shares of an individual common stock. See also Non-Equity Option.
An option contract that may be exercised only during a specified period of time just prior to its expiration.
To implement the right under which the holder of an option is entitled to buy (in the case of a call) or sell (in the case of a put) the underlying security.
The limit on the number of contracts which a holder can exercise in a fixed period of time. Set by the appropriate option exchange, it is designed to prevent an investor or group of investors from "cornering" the market in a stock.
The price at which the option holder may buy or sell the underlying security, as defined in the terms of his option contract. It is the price at which the call holder may exercise to buy the underlying security or the put holder may exercise to sell the underlying security. For listed options, the exercise price is the same as the Striking Price. See also Exercise.
Exercise settlement amount
The difference between the exercise price of the option and the exercise settlement value of the index on the day an exercise notice is tendered, multiplied by the index multiplier.
A rather complex mathematical analysis involving statistical distribution of stock prices, it is the return which an investor might expect to make on an investment if he were to make exactly the same investment many times throughout history.
An expiration cycle relates to the dates on which options on a particular underlying security expire. A given option, other than LEAPS®, will be assigned to one of three cycles, the January cycle, the February cycle or the March cycle.
The day on which an option contract becomes void. For stock options expiring prior to February 15, 2015, this date is the Saturday immediately following the third Friday of the expiration month. For stock options expiring on or after February 15, 2015, this date is the third Friday of the expiration month. Brokerage firms, however, may set an earlier deadline for notification of an option buyer's intention to exercise. If Friday is a holiday, the last trading day will be the preceding Thursday. See also Expiration Time and Automatic Exercise.
The time of day by which all exercise notices must be received on the expiration date. Technically, the expiration time is currently 5:00PM on the expiration date, but public holders of option contracts must indicate their desire to exercise no later than 5:30PM on the business day preceding the expiration date. The times are Eastern Time.
See also Expiration Date.
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The process of providing a market for a security. Normally, this refers to bids and offers made for large blocks of securities, such as those traded by institutions. Listed options may be used to offset part of the risk assumed by the trader who is facilitating the large block order. See also Hedge Ratio.
Normally, a term used to describe the worth of an option or futures contract as determined by a mathematical model. Also sometimes used to indicate intrinsic value.
See also Intrinsic Value and Model.
Exchange traded equity or index options, where the investor can specify within certain limits, the terms of the options, such as exercise price, expiration date, exercise type, and settlement calculation.
The number of shares outstanding of a particular common stock.
A broker on the exchange floor who executes the orders of public customers or other investors who do not have physical access to the trading area.
A method of analyzing the prospects of a security by observing accepted accounting measures such as earnings, sales, assets, and so on.
See also Technical Analysis.
A standardized contract calling for the delivery of a specified quantity of a commodity at a specified date in the future.