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A market that provides for the purchase or sale of previously
sold or bought options through closing transactions.
All option contracts of the same class that also have the same
unit of trade, expiration date and strike 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.
A position wherein a person's interest in a particular series
of options is as a net writer (i.e., the number of contracts sold
exceeds the number of contracts bought).
An exchange member whose function it is to both make markets--buy and sell for his own account in the absence of public orders--and to keep the book of public orders. Most stock exchanges and some option exchanges utilize the specialist system of trading.
An order to simultaneously transact two or more option trades. Typically, one option would be bought while another would simultaneously be sold. Spread orders may be limit orders, not held orders, or orders with discretion. They cannot be stop orders, however.
Any option position having both long options and short options of the same type on the same underlying security.
A measure of the volatility of a stock. It is a statistical quantity measuring the magnitude of the daily price changes of that stock.
The return that an investor would make on a particular position if the underlying stock were unchanged in price at the expiration of the options in the position.
Similar to a stop order, the stop-limit order becomes a limit order, rather than a market order, when the security trades at the price specified on the stop. See also Stop Order.
An order, placed away from the current market, that becomes a market order if the security trades at the price specified on the stop order. Buy stop orders are placed above the market while sell stop orders are placed below.
The purchase or sale of an equal number of puts and calls having the same terms.
With respect to option investments, a preconceived, logical plan of position selection and follow-up action.
The stated price per share for which the underlying security may be purchased (in the case of a call) or sold (in the case of a put) by the option holder upon exercise of the option contract.
Striking Price Interval
The distance between striking prices on a particular underlying security. Normally, the interval is 2.50 points for stocks under $25, 5 points for stocks selling over $25 per share, and 10 points (or greater) is acceptable for stocks over $200 per share. There are, however, exceptions to this general guideline.
See narrow-based index.
A requirement that any investing strategy fall within the financial means and investment objectives of an investor.
Describing a strategy or trading philosophy in which the investor is operating in accordance with his (her) financial means and investment objectives.
A term in technical analysis indicating a price area lower than the current price of the stock, where demand is thought to exist. Thus a stock would stop declining when it reached a support area. See also Resistance.
A strategy equivalent in risk to purchasing a put option where an investor sells stock short and buys a call.
An option strategy that is equivalent to the underlying stock. A long call and a short put is synthetic long stock. A long put and a short call is synthetic short stock.
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The method of predicting future stock price movements based on observation of historical stock price movements.
The collective name denoting the expiration date, striking price, and underlying stock of an option contract.
The price of an option, or a combination of options, as computed by a mathematical model.
A measure of the rate of change in an option's theoretical value for a one-unit change in time to the option's expiration date. See 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 especially quantified by Theta..
See Calendar Spread.
The portion of the option premium that is attributable to the amount of time remaining until the expiration of the option contract. Time value is whatever value the option has in addition
to its intrinsic value.
Time Value Premium
The amount by which an option's total premium exceeds its intrinsic value.
Total Return Concept
A covered call writing strategy in which one views the potential profit of the strategy as the sum of capital gains, dividends, and option premium income, rather than viewing each one of the three separately.
The amount of difference between the performance of a specific portfolio of stocks and a broad-based index with which they are being compared. See also market basket.
An investor or professional who makes frequent purchases and sales.
The exchange-imposed maximum daily price change that a futures contract or futures option contract can undergo.
Treasury Bill/Option Strategy
(90/10 strategy) a method of investment in which one places approximately 90% of his funds in risk-free, interest-bearing assets such as Treasury bills, and buys options with the remainder of his assets.
The classification of an option contract as either a put or a call.
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Uncovered Call 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.
A written option is considered to be uncovered if the investor does not have an offsetting position in the underlying security. See also Covered.
Uncovered Put 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.
The security subject to being purchased or sold upon exercise of the option contract.
Describing a security that is trading at a lower price than it logically should. Usually determined by the use of a mathematical model. See also Overvalued and Fair Value.
Unit of Trading
The minimum quantity or amount allowed when trading a security. The normal minimum for common stock is 1 round lot or 100 shares. The normal minimum for options is one contract (which normally covers 100 shares of stock).
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Variable Ratio Write
An option strategy in which the investor owns 100 shares of the underlying security and writes two call options against it, each option having a different striking price.
A measure of the rate of change in an option's theoretical value for a one-unit change in the volatility assumption.
(1)Most commonly used to describe the purchase of one option and sale of another where both are of the same type and same expiration, but have different strike prices. (2)It is also used to describe a delta-neutral spread in which more options are sold than are purchased.
A measure of the fluctuation in the market price of the underlying security. Mathematically, volatility is the annualized standard deviation of returns.
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To sell an option. The investor who sells is called the writer.
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