Options option stock trader called
Collar - A protective strategy in which a written call and a long put are taken against a previously owned long stock position. The options typically have different strike prices put strike lower than call strike. Expiration months may or may not be the same. The investor may also use the reverse a long call combined with a written put if he has previously established a short stock position in XYZ Corporation. Collateral - Securities against which loans are made.
If the value of the securities relative to the loan declines to an unacceptable level, this triggers a margin call. As such, the investor is asked to post additional collateral or the securities are sold to repay the loan. Combination - An arrangement of options involving two long, two short, or one long and one short positions. The positions can have different strikes or expiration months.
The term combination varies by investor. Condor spread - A strategy involving four strike prices with both limited risk and limited profit potential. Establish a long call condor spread by buying one call at the lowest strike, writing one call at the second strike, writing another call at the third strike, and buying one call at the fourth highest strike. This spread is also referred to as a flat-top butterfly. Contingency order - An order to execute a transaction in one security that depends on the price of another security.
Contract size - The amount of the underlying asset covered by the option contract. This is shares for 1 equity option unless adjusted for a special event. Conversion - An investment strategy in which a long put and a short call with the same strike price and expiration combine with long stock to lock in a nearly riskless profit.
The process of executing these three-sided trades is sometimes called conversion arbitrage. Cover - To close out an open position.
This term most often describes the purchase of an option or stock to close out an existing short position for either a profit or loss. See also Buy-write and Overwrite. Covered combination - A strategy in which one call and one put with the same expiration, but different strike prices, are written against each shares of the underlying stock. In actuality, this is not a fully covered strategy because assignment on the short put requires purchase of additional stock.
Covered option - An open short option position completely offset by a corresponding stock or option position. A covered call could be offset by long stock or a long call, while a covered put could be offset by a long put or a short stock position. This insures that if the owner of the option exercises, the writer of the option will not have a problem fulfilling the delivery requirements.
See also Uncovered call option writing and Uncovered put option writing. Covered straddle - An option strategy in which one call and one put with the same strike price and expiration are written against each shares of the underlying stock.
Credit - Money received in an account either from a deposit or from a transaction that results in increasing the account's cash balance. Credit spread - A spread strategy that increases the account's cash balance when established. A bull spread with puts and a bear spread with calls are examples of credit spreads. Curvature - A measure of the rate of change in an option's Delta for a one-unit change in the price of the underlying stock. Cycle - The expiration dates applicable to the different series of options.
Traditionally, there were three cycles: For example, on January 1, a stock in the January cycle will be trading options expiring in these months: January, February, April and July. Day order - A type of option order that instructs the broker to cancel any unfilled portion of the order at the close of trading on the day the order was first entered. Day trade - A position stock or option that is opened and closed on the same day.
Day Trade Buying Power Debit - Money paid out from an account from either a withdrawal or a transaction that results in decreasing the cash balance. Debit spread - A spread strategy that decreases the account's cash balance when established.
A bull spread with calls and a bear spread with puts are examples of debit spreads. Decay - A term used to describe how the theoretical value of an option erodes or declines with the passage of time.
Time decay is specifically quantified by Theta. Delivery - The process of meeting the terms of a written option contract when notification of assignment has been received. In the case of a short equity call, the writer must deliver stock and in return receives cash for the stock sold. In the case of a short equity put, the writer pays cash and in return receives the stock.
Delta - A measure of the rate of change in an option's theoretical value for a one-unit change in the price of the underlying stock.
Diagonal spread - A strategy involving the simultaneous purchase and writing of two options of the same type that have different strike prices and different expiration dates. Discount - An adjective used to describe an option that is trading at a price less than its intrinsic value i. Discretion - Freedom given by an investor to his or her account executive to use judgment regarding the execution of an order.
Discretion can be limited, as in the case of a limit order that gives the floor broker price flexibility beyond the stated limit price to use his or her judgment in executing the order.
Discretion can also be unlimited, as in the case of a market-not-held order. Early exercise - A feature of American-style options that allows the owner to exercise an option at any time prior to expiration. The investor keeps this amount after all positions are closed and all margin loans paid off. Equity option - An option on shares of an individual common stock or exchange traded fund. Equivalent strategy - A strategy that has the same risk-reward profile as another strategy.
For example, a long May call vertical spread is equivalent to a short May put vertical spread. See also Synthetic position. European-style option - An option that can be exercised only during a specified period just prior to expiration. See also American-style option.
On the ex-dividend date, the previous day's closing price is reduced by the amount of the dividend because purchasers of the stock on the ex-dividend date will not receive the dividend payment. This date is sometimes referred to simply as the ex-date, and can apply to other situations e. If you purchase a stock on the ex-date for a split or distribution, you are not entitled to the split stock or that distribution. However, the opening price for the stock will have been reduced by an appropriate amount, as on the ex-dividend date.
Weekly financial publications, such as Barron's, often include a stock's upcoming ex-date as part of their stock tables. Exchange traded funds ETFs - Exchange traded funds ETFs are index funds or trusts listed on an exchange and traded in a similar fashion as a single equity.
Today, the number of ETFs that trade options continues to grow and diversify. Investors can buy or sell shares in the collective performance of an entire stock portfolio or a bond portfolio as a single security. Exchange traded funds allow investors to enjoy some of the more favorable features of stock trading, such as liquidity and ease of equity style, in an environment of more traditional index investing.
Exercise - To invoke the rights granted to the owner of an option contract. In the case of a call, the option owner buys the underlying stock. In the case of a put, the option owner sells the underlying stock. Exercise by exception processing - A procedure used by OCC as an operational convenience for clearing members. Under these proceedings, OCC assumes a clearing member tendered exercise notices for options that are in-the-money by threshold amounts, unless specifically instructed not to do so.
This procedure protects the owner from losing the intrinsic value of the option because of failure to exercise. Unless instructed not to do so, all expiring equity options held in customer accounts are exercised if they are in-the-money by a specified amount. Exercise price - The price that the owner of an option can purchase call or sell put the underlying stock.
Used interchangeably with strike or strike price. Exercise settlement amount - The difference between the exercise price of the option being exercised and the exercise settlement value of the index on the day the index option is exercised. Expiration cycle - The expiration dates applicable to the different series of options.
Expiration date - The date that an option and the right to exercise it cease to exist. Expiration Friday - 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. If the third Friday of the month is an exchange holiday, the last trading day is the Thursday immediately preceding the third Friday.
Expiration month - The month that the expiration date occurs. Fence - A protective strategy in which a written call and a long put are added to a previously owned long stock position, also referred to as a collar. The options may have the same strike price or different strike prices. The expiration months may or may not be the same. An investor might also use the reverse a long call combined with a written put if he has previously established a short stock position in XYZ Corporation.
Fill-or-kill order FOK - A type of option order that 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. Floor trader - An exchange member on the trading floor who buys and sells for their own account. Fundamental analysis - A method of predicting stock prices based on the study of earnings, sales, dividends, and so on.
Fungibility - Interchangeability resulting from standardization. Options listed on national exchanges are fungible, while over-the-counter options generally are not. Gamma - A measure of the rate of change in an option's Delta for a one-unit change in the price of the underlying stock. This is unlike a day order, which expires if not executed by the end of the trading day. If not executed, a GTC option order is automatically cancelled at the option's expiration. For example, an owner of common stock may buy a put option to hedge against a possible stock price decline.
Historic volatility - A measure of actual stock price changes over a specific period. 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 that 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.
See also Calendar spread. Immediate-or-cancel order IOC - A type of option order that gives the trading crowd one opportunity to take the other side of the trade. After announcement, the order is either partially or totally filled with any remaining balance immediately cancelled.
Implied volatility - The volatility percentage that produces the best fit for all underlying option prices on that underlying stock. See also Individual volatility. For standard options, a call option is in-the-money if the stock price is above the strike price. A put option is in-the-money if the stock price is below the strike price. Index - A compilation of several stock prices into a single number.
Index option - An option whose underlying interest is an index. Generally, index options are cash-settled. Individual volatility - The volatility percentage that justifies an option's price, as opposed to historic volatility or implied volatility.
A theoretical pricing model can be used to generate an option's individual volatility when the five remaining quantifiable factors stock price, time until expiration, strike price, interest rates and cash dividends are entered along with the price of the option itself. Institution - A professional investment management company. Typically, this term describes money managers such as banks, pension funds, mutual funds and insurance companies.
Intrinsic value - The in-the-money portion of an option's premium. Iron butterfly - An option strategy with limited risk and limited profit potential that involves both a long or short straddle , and a short or long strangle. An iron butterfly contains four options. It is equivalent to a regular butterfly spread that contains only three options. Kappa - A measure of the rate of change in an option's theoretical value for a one-unit change in the volatility assumption.
Lambda - A measure of leverage. Last trading day - The last business day before the option's expiration date during which purchases and sales of options can be made. Leg - A term describing one side of a position with two or more sides. When a trader legs into a spread, they establish one side first, hoping for a favorable price movement in order to execute the other side at a better price.
This is 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 shares of stock by investing a much smaller amount than that required to buy the stock. Limit order - A trading order placed with a broker to buy or sell stock or options at a specific price.
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 strike price at or before some date in the future the expiration date.
This position results from an opening purchase transaction long call or long put. Long stock position - A position in which an investor has purchased and owns stock.
To buy on margin refers to borrowing part of the purchase price of a security from a brokerage firm. Learn More About Margin 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 closing market quotes. As a result, the equity in an account is updated daily to reflect current security prices properly.
Market order - A trading order placed with a broker to immediately buy or sell a stock or option at the best available price. The investor usually obtains this information from a brokerage firm. However, for listed options and stocks, these quotes are widely disseminated and available through various commercial quotation services. Market maker - An exchange member on the trading floor who buys and sells options for their own account and who has the responsibility of making bids and offers and maintaining a fair and orderly market.
Market maker system competing - A method of supplying liquidity in options markets by having market makers in competition with one another. As an alternative to a specialist system, they are also responsible for making fair and orderly markets in a given class of options. Market-on-close order MOC - A type of option order that requires that an order be executed at or near the close of trading on the day the order is entered.
Market to Market 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. See also Black-Scholes formula. Naked or uncovered option - A short option position that is not fully collateralized if notification of assignment is received. A short call position is uncovered if the writer does not have a long stock or deeper-in-the-money long call position.
A short put position is uncovered if the writer is not short stock or long another deeper-in-the-money put. Net credit - Money received in an account either from a deposit or a transaction that results in increasing the account's cash balance.
Net debit - Money paid from an account either from a withdrawal or a transaction that results in decreasing the cash balance. 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. The proportions of this strategy are subject to change based on prevailing interest rates.
Non-equity options include options on futures, indexes, foreign currencies, Treasury security yields, etc. Not-held order - A type of order that 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 broker 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 Discretio n and Market-not-held order. Also known as ask or ask price. One-cancels-other order OCO - A type of option order that 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 they wished to buy 10 May 60 calls or 10 June 60 calls or any combination of the two which when summed equaled 10 contracts.
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 - A contract that gives the owner the right, but not the obligation, to buy or sell a particular asset the underlying stock at a fixed price the strike price for a specific period of time until expiration.
The contract also obligates the writer to meet the terms of delivery if the owner exercises the contract right. Option period - The time from when a buyer or writer of an option creates an option contract to the expiration date; sometimes referred to as an option's lifetime. Option pricing curve - A 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 was 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. You collect a cash premium in return for accepting an obligation to buy stock by paying the strike price. A collar is a covered call position, with the addition of a put. The put acts as an insurance policy and limit losses to a minimal but adjustable amount.
The purchase of one call option, and the sale of another. Or the purchase of one put option, and the sale of another. Both options have the same expiration. Thus, the higher priced option is sold, and a less expensive, further out of the money option is bought. This strategy has a market bias call spread is bearish and put spread is bullish with limited profits and limited losses. A position that consists of one call credit spread and one put credit spread.
Again, gains and losses are limited. Diagonal or double diagonal spread. These are spreads in which the options have different strike prices and different expiration dates. The option bought expires later than the option sold 2.