The amount you
pay for placing a trade. A net outflow of cash from your account
as the result of a trade.
Measures the
rate of change in an option's theoretical value for a one-unit
change in the underlying. Calls have positive Deltas and puts have
negative Deltas. In OptionVue 5, Delta for non-futures based options
is the dollar amount of gain/loss you should experience if the
underlying goes up one point. For futures-based options, Delta
represents an equivalent number of futures contracts times 100.
A strategy in
which the Delta-adjusted values of the options (plus any position
in the underlying) offset one another. In the goals tab of the
Trade Finder, you can ask OptionVue 5 to scale recommended trades
to help an existing position become Delta neutral at the current
price of the underlying.
A type of calendar
spread. It is a debit transaction where options are purchased in
a nearer expiration and options of the same type are sold in a
farther expiration, on the same underlying. It is diagonal because
the options have different strike prices. A strategy in the TradeFinder.
Type of calendar
spread. It is a credit transaction where options are sold in a
nearer expiration and options of the same type are purchased in
a farther expiration, on the same underlying. It is diagonal because
the options have different strike prices. A strategy in the TradeFinder.
DIRECTIONAL TRADE
A trade designed
to take advantage of an expected movement in price.
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EARLY EXERCISE
A feature of
American-style options that allows the owner to exercise an option
at any time prior to its expiration date.
EQUITY OPTION
An option on
shares of an individual common stock. Also known as a stock option.
EUROPEAN STYLE
OPTION
An option that
can only be exercised on the expiration date of the contract.
EXCHANGE TRADED
The generic term
used to describe futures, options and other derivative instruments
that are traded on an organized exchange.
EXERCISE
The act by which
the holder of an option takes up his rights to buy or sell the
underlying at the strike price. The demand of the owner of a call
option that the number of units of the underlying specified in
the contract be delivered to him at the specified price. The demand
by the owner of a put option contract that the number of units
of the underlying asset specified be bought from him at the specified
price.
EXERCISE PRICE
The price at
which the owner of a call option contract can buy an underlying
asset. The price at which the owner of a put option contract can
sell an underlying asset. See STRIKE PRICE.
EXPIRATION, EXPIRATION
DATE, EXPIRATION MONTH
This is the date
by which an option contract must be exercised or it becomes void
and the holder of the option ceases to have any rights under the
contract. All stock and index option contracts expire on the Saturday
following the third Friday of the month specified.
EXPIRATION CYCLE
Traditionally,
there were three cycles of expiration dates used in options trading:
JANUARY CYCLE
(1): January / April / July / October
FEBRUARY CYCLE
(2): February / May / August / November
MARCH CYCLE (3):
March / June / September / December
Today, equity
options expire on a hybrid cycle which involves a total of four
option series: the two nearest-term calendar months and the next
two months from the traditional cycle to which it has been assigned.
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FAIR VALUE
See THEORETICAL
PRICE, THEORETICAL VALUE.
FILL
When an order
has been completely executed, it is described as filled.
FILL OR KILL
(FOK) ORDER
This means do
it now if the option (or stock) is available in the crowd or from
the specialist, otherwise kill the order altogether. Similar to
an all-or-none (AON) order, except it is "killed" immediately
if it cannot be completely executed as soon as it is announced.
Unlike an AON order, the FOK order cannot be used as part of a
GTC order.
FRONT MONTH
The first month
of those listed by an exchange - this is usually the most actively
traded contract, but liquidity will move from this to the second
month contract as the front month nears expiration. Also known
as the NEAR MONTH.
FAR MONTH, FAR
TERM
See BACK
MONTH.
FOLLOW-UP ACTION
Term used to
describe the trades an investor makes subsequent to implementing
a strategy. Through these adjustments, the investor transforms
one strategy into a different one in response to price changes
in the underlying.
FUTURE, FUTURES
CONTRACT
A standardized,
exchange-traded agreement specifying a quantity and price of a
particular type of commodity (soybeans, gold, oil, etc.) to be
purchased or sold at a pre-determined date in the future. On contract
date, delivery and physical possession take place unless the contract
has been closed out. Futures are also available on various financial
products and indexes today.
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GAMMA
Gamma expresses
how fast Delta changes with a one-point increase in the price of
the underlying. Gamma is positive for all options. If an option
has a Delta of 45 and a Gamma of 10, then the option's expected
Delta will be 55 if the underlying goes up one point. If we consider
Delta to be the velocity of an option, then Gamma is the acceleration.
GOOD 'TIL CANCELED
(GTC) ORDER
A Good 'Till
Canceled order is one that is effective until it is either filled
by the broker or canceled by the investor. This order will automatically
cancel at the option's expiration.
GREEKS
The Greek letters
used to describe various measures of the sensitivity of the value
of an option with respect to different factors. They include Delta,
Gamma, Theta, Rho, and Vega.
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HISTORIC VOLATILITY
A measure of
the actual price fluctuations of the underlying over a specific
period of time. At OptionVue, we use the term statistical volatility,
reserving the word historic to refer to our past historical data
for both IV and SV.
HORIZONTAL CREDIT
SPREAD
A type of calendar
spread. It is a credit transaction where you buy an option in a
nearer expiration month and sell an option of the same type in
a farther expiration month, with the same strike price, and in
the same underlying asset. This is a strategy available in the
TradeFinder.
HORIZONTAL DEBIT
SPREAD
A type of calendar
spread. It is a debit transaction where you sell an option in a
nearer expiration month and buy an option of the same type in a
farther expiration month, with the same strike price, and in the
same underlying asset. This is a strategy available in the TradeFinder.
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IMMEDIATE-OR-CANCEL
(IOC) ORDER
An option order
that gives the trading floor an opportunity to partially or totally
execute an order with any remaining balance immediately cancelled.
ILLIQUID
An illiquid market
is one that cannot be easily traded without even relatively small
orders tending to have a disproportionate impact on prices. This
is usually due to a low volume of transactions and/or a small number
of participants.
IMPLIED VOLATILITY
(IV)
This is the volatility
that the underlying would need to have for the pricing model to
produce the same theoretical option price as the actual option
price. The term implied volatility comes from the fact that options
imply the volatility of their underlying, just by their price.
A computer model starts with the actual market price of an option,
and measures IV by working the option fair value model backward,
solving for volatility (normally an input) as if it were the unknown.
In actuality,
the fair value model cannot be worked backward. OptionVue 5 computes
IV by working forward repeatedly through a series of intelligent
guesses until the volatility is found which makes the fair value
equal to the actual market price of the option.
INDEX
The compilation
of stocks and their prices into a single number. E.g. The S&P
500.
INDEX OPTION
An option that
has an index as the underlying. These are usually cash-settled.
IN-THE-MONEY
(ITM)
Term used when
the strike price of an option is less than the price of the underlying
for a call option, or greater than the price of the underlying
for a put option. In other words, the option has an intrinsic value
greater than zero.
INTRINSIC VALUE
Amount of any
favorable difference between the strike price of an option and
the current price of the underlying (i.e., the amount by which
it is in-the-money). The intrinsic value of an out-of-the-money
option is zero.
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LAST TRADING
DAY
The last business
day prior to the option's expiration during which purchases and
sales of options can be made. For equity options, this is generally
the third Friday of the expiration month.
LEAPS
Long-term Equity
Anticipation Securities, also known as long-dated options. Calls
and puts with expiration as long as 2-5 years. Only about 10% of
equities have LEAPs. Currently, equity LEAPS have two series at
any time, always with January expirations. Some indexes also have
LEAPs.
LEG
Term describing
one side of a spread position.
LEGGING
Term used to
describe a risky method of implementing or closing out a spread
strategy one side ("leg") at a time. Instead of utilizing
a "spread order" to insure that both the written and
the purchased options are filled simultaneously, an investor gambles
a better deal can be obtained on the price of the spread by implementing
it as two separate orders.
LEVERAGE
A means of increasing
return or worth without increasing investment. Using borrowed funds
to increase one's investment return, for example buying stocks
on margin. Option contracts are leveraged as they provide the prospect
of a high return with little investment. The % Double parameter
for each option in the Matrix is a measure of leverage.
LIMIT ORDER
An order placed
with a brokerage to buy or sell a predetermined number of contracts
(or shares of stock) at a specified price, or better than the specified
price. Limit orders also allow an investor to limit the length
of time an order can be outstanding before canceled. It can be
placed as a day or GTC order. Limit orders typically cost slightly
more than market orders but are often better to use, especially
with options, because you will always purchase or sell securities
at that price or better.
LIQUID
A liquid market
is one in which large deals can be easily traded without the price
moving substantially. This is usually due to the involvement of
many participants and/or a high volume of transactions.
LONG
You are long
if you have bought more than you have sold in any particular market,
commodity, instrument, or contract. Also known as having a long
position, you are purchasing a financial asset with the intention
of selling it at some time in the future. An asset is purchased
long with the expectation of an increase in its price. Both Long
Option and Long Underlying are strategies available in the TradeFinder.
LONG BACKSPREAD
A strategy available
in the Trade Finder. It involves selling one option nearer the
money and buying two (or more) options of the same type farther
out-of-the-money, using the same type, in the same expiration,
on the same underlying. Requires margin.
LONG OPTION
Buying an option.
A strategy available in the TradeFinder. See LONG.
LONG STRADDLE
A strategy available
in the Trade Finder. See STRADDLE.
LONG STRANGLE
A strategy available
in the Trade Finder. See STRANGLE.
LONG SYNTHETIC
A strategy available
in the Trade Finder. See SYNTHETIC.
LONG UNDERLYING
Buying the underlying
(i.e. stock). A strategy available in the Trade Finder. See LONG.
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MARGIN
See COLLATERAL.
MARK TO MARKET
The revaluation
of a position at its current market price.
MARKET MAKER
A trader or institution
that plays a leading role in a market by being prepared to quote
a two way price (Bid and Ask) on request - or constantly in the
case of some screen based markets - during normal market hours.
MARKET ORDER
Sometimes referred
to as an unrestricted order. It's an order to buy or sell a security
immediately at the best available current price. A market order
is the only order that guarantees execution. It should be used
with caution in placing option trades, because you can end up paying
a lot more than you anticipated.
MARKET PRICE
A combination
of the Bid, Ask, and Last prices into a single representative price.
In OptionVue 5, when the Bid, Ask, and Last are all available,
the default formula for MARKET PRICE is (10*Bid + 10*Ask + Last)
/ 21.
MARKET-NOT-HELD
ORDER
A type of market
order that allows the investor to give discretion regarding the
price and/or time at which a trade is executed.
MARKET-ON-CLOSE
(MOC) ORDER
A type of order
which requires that an order be executed at or near the close of
a trading day 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.
MID IMPLIED VOLATILITY
(MIV)
Implied volatility
computed based on the mid-point between the Bid and Ask prices.
See IMPLIED VOLATILITY.
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NAKED
An investment
in which options sold short are not matched with a long position
in either the underlying or another option of the same type that
expires at the same time or later than the options sold. The loss
potential of naked strategies can be virtually unlimited.
NEAR TERM
See FRONT
MONTH.
NORMAL DISTRIBUTION
A statistical
distribution where observations are evenly distributed around the
mean. OptionVue 5 uses a lognormal distribution. Studies have shown
that stock prices are very close to being log normally distributed
over time. When you choose bell curve as a price target in the
program, a lognormal distribution based on price, volatility, and
time until valuation date is constructed.
NOT-HELD ORDER
An order that
gives a broker discretion as to the price and timing in executing
the best possible trade. By placing this order, a customer agrees
to not hold the broker responsible if the best deal is not obtained.
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OFFER
See ASK.
ONE-CANCELS-THE-OTHER
(OCO) ORDER
Type of 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. Can be placed as a day or GTC order.
OPEN INTEREST
The cumulative
total of all option contracts of a particular series sold, but
not yet repurchased or exercised.
OPEN ORDER
An order that
has been placed with the broker, but not yet executed or canceled.
OPENING TRANSACTION
An addition to,
or creation of, a trading position.
OUT-OF-THE-MONEY
(OTM)
An out-of-the-money
option is one whose strike price is unfavorable in comparison to
the current price of the underlying. This means when the strike
price of a call is greater than the price of the underlying, or
the strike price of a put is less than the price of the underlying.
An out-of-the-money option has no intrinsic value, only time value.
OPTION CHAIN
A list of the
options available for a given underlying.
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PREMIUM
This is the price
of an option contract.
PUT
This option contract
conveys the right to sell a standard quantity of a specified asset
at a fixed price per unit (the strike price) for a limited length
of time (until expiration).
PUT/CALL RATIO
This ratio is
used by many as a leading indicator. It is computed by dividing
the 4-day average of total put VOLUME by the 4-day average of total
call VOLUME.
PUT RATIO BACKSPREAD
In the TradeFinder,
a long backspread using puts only.
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REALIZED GAINS
AND LOSSES
The profit or
losses received or paid when a closing transaction is made and
matched together with an opening transaction.
REVERSAL
A short position
in the underlying protected by a synthetic long. This strategy
is not available in the Trade Finder, but can be constructed and
analyzed in the Matrix.
RHO
The change in
the value of an option with respect to a unit change in the risk-free
rate. This parameter is available in OptionVue 5 - Professional
Edition.
RISK-FREE RATE
The term used
to describe the prevailing rate of interest for securities issued
by the government of the country of the currency concerned. It
is used in the pricing models. OptionVue automatically updates
the US Treasury rates through the BDB. You can override these settings
under View | System Models.
ROLLOVER
Moving a position
from one expiration date to another further into the future. As
the front month approaches expiration, traders wishing to maintain
their positions will often move them to the next contract month.
This is accomplished by a simultaneous sale of one and purchase
of the other.
ROUND TURN
When an option
contract is bought and then sold (or sold and then bought). The
second trade cancels the first, leaving only a profit or loss.
This process is referred to as a round turn. Brokerage charges
are usually quoted on this basis.
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SHORT
An obligation
to purchase an asset at some time in the future. You are short
if you have sold more than you have bought in any particular market,
commodity, instrument, or contract. Also known as having a short
position. An asset is sold short with the expectation of a decline
in its price. Can have almost unlimited risk. Short option (covered),
short option (naked), and short underlying are strategies available
in the Trade Finder. Uncovered short positions require margin.
SHORT BACKSPREAD
A strategy available
in the Trade Finder. It involves buying one option nearer the money
and selling two (or more) options of the same type farther out-of-the-money,
with the same expiration, on the same underlying. Requires margin.
SHORT OPTION
(COVERED)
A strategy available
in the Trade Finder. See COVERED CALL.
SHORT OPTION
(NAKED)
Selling an option
you don't own. A strategy available in the Trade Finder. See SHORT.
SHORT STRADDLE
A strategy available
in the Trade Finder. See STRADDLE.
SHORT STRANGLE
A strategy available
in the Trade Finder. See STRANGLE.
SHORT SYNTHETIC
A strategy available
in the Trade Finder. See SYNTHETIC.
SHORT UNDERLYING
Selling an asset
you don't own. A strategy available in the Trade Finder. See SHORT.
SLIPPAGE
Thinly traded
options have a wider Bid-Ask spread than heavily traded options.
Therefore, you have to "give" more in order to execute
a trade in thinly traded options; less in heavily traded ones.
This "give" is what we refer to as slippage. The OptionVue
slippage model is a sophisticated formula that takes into account
the volume of your prospective trade in relation to the average
daily volume in the option. You can choose four different degrees
of slippage; large, moderate, small or none. Adjustments should
be made based on your trading experience.
SPREAD
A trading strategy
involving two or more legs, the incorporation of one or more of
which is designed to reduce the risk involved in the others.
SPREAD ORDER
This is an order
for the simultaneous purchase and sale of two (or more) options
of the same type on the same underlying. If placed with a limit,
the two options must be filled for a specified price difference,
or better. It can be critical in this type of order to specify
whether it is an opening transaction or a closing transaction.
STANDARD DEVIATION
The square root
of the mean of the squares of the deviations of each member of
a population (in simple terms, a group of prices) from their mean.
In a normal distribution (or bell curve), one standard deviation
encompasses 68% of all possible outcomes.
STATISTICAL VOLATILITY
(SV)
Measures the
magnitude of the asset's recent price swings on a percentage basis.
It can be measured using any recent sample period. OptionVue defaults
to 20 days. Regardless of the length of the sample period, SV is
always normalized to represent a one-year, single Standard Deviation
price move of the underlying.
Note: It is important
to remember that what is needed for accurate options pricing is
near-term future volatility, which is something that nobody knows
for sure.
STOP ORDER
"Stop-Loss" and "Stop-Limit" orders
placed on options are activated when there is a trade at that price
only on the specific exchange on which the order is located. They
are orders to trade when its price falls to a particular point,
often used to limit an investor's losses. It's an especially good
idea to use a stop order if you will be unable to watch your positions
for an extended period.
STRADDLE
A strategy involving
the purchase (or sale) of both call and put options with the same
strike price, same expiration, and on the same underlying. Both
long and short straddles are strategies in the Trade Finder. A
short straddle means that both the call and put are sold short,
for a credit. A long straddle means that both the call and put
are bought long, for a debit.
STRANGLE
A strategy involving
the purchase or sale of both call and put options with different
strike prices - normally of equal, but opposite, Deltas. The options
share the same expiration and the same underlying. A strangle is
usually a position in out-of-the-money options. Both long and short
strangles are strategies in the Trade Finder. A short strangle
means that both the calls and puts are sold short, for a credit.
A long strangle means both the calls and puts are bought long,
for a debit.
STRATEGY, STRATEGIES
An option strategy
is any one of a variety of option investments. It involves the
combination of the underlying and/or options at the same time to
create the desired investment portfolio and risk.
STRIKE PRICE
The price at
which the holder of an option has the right to buy or sell the
underlying. This is a fixed price per unit and is specified in
the option contract. Also known as striking price or exercise price.
SYNTHETIC
A strategy that
uses options to mimic the underlying asset. Both long and short
synthetics are strategies in the Trade Finder. The long synthetic
combines a long call and a short put to mimic a long position in
the underlying. The short synthetic combines a short call and a
long put to mimic a short position in the underlying. In both cases,
both the call and put have the same strike price, the same expiration,
and are on the same underlying.
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TECHNICAL ANALYSIS
Method of predicting
future price movements based on 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. While OptionVue 5 is not a technical analysis program,
many of our customers use this type of software in conjunction
with OptionVue 5 to make trading decisions.
THEORETICAL VALUE,
THEORETICAL PRICE
This is the mathematically
calculated value of an option. It is determined by (1) the strike
price of the option, (2) the current price of the underlying, (3)
the amount of time until expiration, (4) the volatility of the
underlying, and (5) the current interest rate. OptionVue 5 has
a theoretical price (Th.Pr) for each option in the Matrix.
THETA
The sensitivity
of the value of an option with respect to the time remaining to
expiration. It is the daily drop in dollar value of an option due
to the effect of time alone. Theta is dollars lost per day, per
contract. Negative Theta signifies a long option position (or a
debit spread); positive Theta signifies a short option position
(or a credit spread).
TICK
The smallest
unit price change allowed in trading a specific security. This
varies by security, and can also be dependent on the current price
of the security.
TIME DECAY
Term used to
describe how the theoretical value of an option "erodes" or
reduces with the passage of time. Time decay is quantified by Theta.
TIME SPREAD
See CALENDAR
SPREAD.
TIME PREMIUM
Also known as "Time
Value", this is the amount that the value of an option exceeds
its intrinsic value and is a parameter in the Matrix. It reflects
the statistical possibility that an option will reach expiration
with intrinsic value rather than finishing at zero dollars. If
an option is out-of-the-money then its entire value consists of
time premium.
TRADE HALT
A temporary suspension
of trading in a particular issue due to an order imbalance, or
in anticipation of a major news announcement. An industry-wide
trading halt can occur if the Dow Jones Industrial Average falls
below parameters set by the New York Stock 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 charges associated
with executing a trade and maintaining a position, including brokerage
commissions, fees for exercise and/or assignment, and margin interest.
TRUE DELTA, TRUE
GAMMA
More accurate
than standard Delta and Gamma. Projects a change in volatility
when projecting a change in price. Taking this volatility shift
into account gives a more accurate representation of the true behavior
of the option.
TYPE
The type of option.
The classification of an option contract as either a call or put.
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UNCOVERED
A short option
position that is not fully collateralized if notification of assignment
is received. See also NAKED.
UNDERLYING
This is the asset
specified in an option contract that is transferred when the option
contract is exercised, unless cash-settled. With cash-settled options,
only cash changes hands, based on the current price of the underlying.
UNREALIZED GAIN
OR LOSS
The difference
between the original cost of an open position and its current market
price. Once the position is closed, it becomes a realized gain
or loss.
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VEGA
A measure of
the sensitivity of the value of an option at a particular point
in time to changes in volatility. Also known as "Kappa" and "Lambda".
In OptionVue 5, Vega is the dollar amount of gain or loss you should
theoretically experience if implied volatility goes up one percentage
point.
VERTICAL CREDIT
SPREAD
A strategy available
in the Trade Finder. The purchase and sale for a net credit of
two options of the same type but different strike prices. They
must have the same expiration, and be on the same underlying.
See also BULL
PUT SPREAD and BEAR CALL SPREAD.
VERTICAL DEBIT
SPREAD
A strategy available
in the Trade Finder. The purchase and sale for a net debit of two
options of the same type but different strike prices. They must
have the same expiration, and be on the same underlying.
See also BULL
CALL SPREAD and BEAR PUT SPREAD.
VOLATILITY
Volatility is
a measure of the amount by which an asset has fluctuated, or is
expected to fluctuate, in a given period of time. Assets with greater
volatility exhibit wider price swings and their options are higher
in price than less volatile assets. Volatility is not equivalent
to BETA.
VOLATILITY TRADE
A trade designed
to take advantage of an expected change in volatility.
VOLUME
The quantity
of trading in a market or security. It can be measured by dollars
or units traded (i.e. number of contracts for options, or number
of shares for stocks).
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WASH SALE
When an investor
repurchases an asset within 30 days of the sale date and reports
the original sale as a tax loss. The Internal Revenue Service prohibits
wash sales since no change in ownership takes place.
WRITE, WRITER
To sell an option
that is not owned through an opening sale transaction. While this
position remains open, the writer is obligated to fulfill the terms
of that option contract if the option is assigned. An investor
who sells an option is called the writer, regardless of whether
the option is covered or uncovered.
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YATES MODEL
The Yates pricing
model is a refined version of the Black-Scholes pricing model that
takes into account dividends and the possibility of early exercise.
This model is unique to OptionVue 5.
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