Gamma
The rate of change in an option's delta for a one-unit change in the price of the underlying security.
See also Delta.
Good Until Canceled (GTC)
A designation applied to some types of orders, meaning the order remains in effect until it is either filled or canceled.
See also Stop Limited and,
Trading Limit.
H Back to Top
Hedge
A conservative strategy used to limit investment loss by effecting a transaction which offsets an existing position.
Hedge Ratio
The mathematical quantity that is equal to the delta of an option. It is useful in that a theoretically neutral hedge can be established by taking offsetting positions in the underlying stock and its call options.
See also Facilitation and
Delta.
Holder
The purchaser of an option.
Horizontal Spread
An option strategy in which the options have the same striking price, but different expiration dates.
I Back to Top
Implied Volatility
A measure of the volatility of the underlying stock, it is determined by using option prices currently existing in the market at the time rather than using historical data on the price changes of the underlying stock.
See also Volatility.
Incremental Return Concept
A strategy of covered call writing in which the investor is striving to earn an additional return from option writing against a stock position which he (she) has targeted to sell -- possibly at substantially higher prices.
Index
A compilation of the prices of several common entities into a single number.
See also Price-Weighted Index,
Capitalization-Weighted Index.
Index Option
An option whose underlying entity is an index. Most index options are cash-based.
Institution
An organization, probably very large, engaged in professional investing in securities. Normally a bank, insurance company, or mutual fund.
In-the-money
A term describing any option that has intrinsic value. A call option is in-the-money if the underlying security is higher than the striking price of the call. A put option is in-the-money if the security is below the striking price.
See also Out-of-the-Money and
Intrinsic Value.
Intrinsic value
The value of an option if it were to expire immediately with the underlying stock at its current price; the amount by which an option is in-the-money. For call options, this is the difference between the stock price and the striking price, if that difference
is a positive number, or zero otherwise. For put options it is the difference between the striking price and the stock price, if that difference is positive, and zero otherwise.
See also In-the-Money,
Time Value Premium and Parity.
J There are no glossary terms for this letter.
Back to Top
K There are no glossary terms for this letter.
Back to Top
L Back to Top
Last Trading Day
The very last full day of open trading before an options expiration day, usually the third Friday of the expiration month.
LEAPS®
Long-term Equity Anticipation Securities, or LEAPS®, are long-term stock or index options. LEAPS®, like all options, are available in two types, calls and puts, with expiration dates up to three years in the future.
Leg
A risk-oriented method of establishing a two-sided position. Rather than entering into a simultaneous transaction to establish the position (a spread, for example), the trader first executes one side of the position, hoping to execute the other side at a later
time and a better price. The risk materializes from the fact that a better price may never be available, and a worse price must eventually be accepted.
Letter of Guarantee
A letter from a bank to a brokerage firm which states that a customer (who has written a call option) does indeed own the underlying stock and the bank will guarantee delivery if the call is assigned. Thus the call can be considered covered. Not all brokerage
firms accept letters of guarantee. Also: letter issued to O.C.C. by member firms covering a guarantee of any trades made by one of its customers, (a trader or broker on the exchange floor).
Leverage
In investments, the attainment of greater percentage profit and risk potential. A call holder has leverage with respect to a stock holder - the former will have greater percentage profits and losses than the latter, for the same movement in the underlying stock.
Limit
See Trading Limit.
Limit Order
An order to buy or sell securities at a specified price (the limit). A limit order may also be placed "with discretion". In this case, the floor broker executing the order may use his (her) discretion to buy or sell at a set amount beyond the limit if he (she)
feels it is necessary to fill the order.
Listed Option
A put or call option that is traded on a national options exchange. Listed options have fixed striking prices and expiration dates.
See also Over-the-Counter Option.
Local
A trader on a futures exchange who buys and sells for his own account and may sometimes also fill public orders.
Lognormal Distribution
A statistical distribution that is often applied to the movement of stock prices. It is a convenient and logical distribution because it implies that stock prices can theoretically rise forever but cannot fall below zero.
Long Position
A position wherein an investor's interest in a particular series of options is as a net holder (i.e., the number of contracts bought exceeds the number of contracts sold).
Margin
To buy a security by borrowing funds from a brokerage house. The margin requirement - the maximum percentage of the investment that can be loaned by the brokerage firm -- is set by the Federal Reserve Board.
Margin Requirement (for options)
The amount an uncovered (naked) option writer is required to deposit and maintain to cover a position. The margin requirement is calculated daily.
Mark-To-Market
An accounting process by which the price of securities held in account are valued each day to reflect the last sale price or market quote if the last sale is outside of the market quote. The result of this process is that the equity in an account is updated
daily to properly reflect current security prices.
Market Basket
A portfolio of common stocks whose performance is intended to simulate the performance of a specific index.
See Index.
Market-Maker
An exchange member whose function is to aid in the making of a market, by making bids and offers for his account in the absence of public buy or sell orders. Several market-makers are normally assigned to a particular security. The market-maker system encompasses
the market-makers, floor brokers, and order book officials. See also
Order Book Official and Specialist.
Market Not Held Order
Also a market order, but the investor is allowing the floor broker who is executing the order to use his own discretion as to the exact timing of the execution. If the floor broker expects a decline in price and he is holding a "market not held buy order",
he (she) may wait to buy, figuring that a better price will soon be available. There is no guarantee that a "market not held order" will be filled.
Market Order
An order to buy or sell securities at the current market. The order will be filled as long as there is a market for the security.
Married Put and Stock
The simultaneous purchase of stock and the corresponding number of put options. This is a limited risk strategy during the life of the puts because the stock can be sold at the strike price of the puts.
Married Put Strategy
A put and stock are considered to be married if they are bought on the same day, and the position is designated at that time as a hedge.
Model
A mathematical formula designed to price an option as a function of certain variables - generally stock price, striking price, volatility, time to expiration, dividends to be paid, and the current risk-free interest rate. The Black-Scholes model is one of the
more widely used models.
N Back to Top
Naked Option
See Uncovered Option.
Naked writer
See Uncovered call writing and
Uncovered put writing.
Narrow-Based
Generally referring to an index, it indicates that the index is composed of only a few stocks, generally in a specific industry group.
See also broad-based.
Neutral
Describing an opinion that is neither bearish nor bullish. Neutral option strategies are generally designed to perform best if there is little or no net change in the price of the underlying stock or index.
See also Bearish and
Bullish.
Non-Equity Option
An option whose underlying entity is not common stock; typically refers to options on physical commodities and index options.
"Not Held"
See Market Not Held Order.
Notice Period
The time during which the buyer of a futures contract can be called upon to accept delivery. Typically, the 3 to 6 weeks preceding the expiration of the contract.
O Back to Top
Opening Purchase
A transaction in which the purchaser's intention is to create or increase a long position in a given series of options.
Opening Sale
A transaction in which the seller's intention is to create or increase a short position in a given series of options.
Opening Transaction
A trade which adds to the net position of an investor. An opening buy transaction adds more long securities to the account. An opening sell transaction adds more short securities.
See also Closing Transaction.
Open Interest
The number of outstanding option contracts in the exchange market or in a particular class or series.
Option Pricing Curve
A graphical representation of the projected price of an option at a fixed point in time. It reflects the amount of time value premium in the option for various stock prices, as well. The curve is generated by using a mathematical model. The delta (or hedge
ratio) is the slope of a tangent line to the curve at a fixed stock price. See also
Delta, Hedge Ratio, and
Model.
Options Clearing Corporation (OCC)
The issuer of all listed option contracts that are trading on the national option exchanges.
Order Book Official
The exchange employee in charge of keeping a book of public limit orders on exchanges utilizing the "maker-maker" system, as opposed to the "specialist system", of executing orders.
See also Market-Maker and
Specialist.
Out-of-the-money
A call option is out-of-the-money if the strike price is greater than the market price of the underlying security. A put option is out-of-the-money if the strike price is less than the market price of the underlying security.
Over-the-Counter Option (OTC)
An option traded off-exchange, as opposed to a listed stock option. The OTC option has a direct link between buyer and seller, has no secondary market, and has no standardization of striking prices and expiration dates.
See also Listed Stock Option and
Secondary Market.
Overvalued
Describing a security trading at a higher price than it logically should. Normally associated with the results of option price predictions by mathematical models. If an option is trading in the market for a higher price than the model indicates, the option
is said to be overvalued. See also Fair Value and
Undervalued.
P Back to Top
Parity
Describing an in-the-money option trading for its intrinsic value; that is, an option trading at parity with the underlying stock. Also used as a point of reference - an option is sometimes said to be trading at a half-point over parity or at a quarter-point
under parity. An option trading under parity is a discount option. See also
Discount and Intrinsic Value.
Physical Option
An option whose underlying security is a physical commodity that is not stock or futures. The physical commodity itself (a currency, treasury debt issue, commodity) - underlies that option contract.
See also equity option,
index option.
Position
As a noun, specific securities in an account or strategy. (A covered call writing position might be long 1,000 XYZ and short 10 XYZ January 30 calls). As a verb, to facilitate; to buy or sell - generally a block of securities - thereby establishing a position.
See also Facilitation and
Strategy.
Position Limit
The maximum number of put or call contracts on the same side of the market that can be held in any one account or group of related accounts. Short puts and long calls are on the same side of the market. Short calls and long puts are on the same side of the
market.
Premium
The price of an option contract, determined in the competitive marketplace, which the buyer of the option pays to the option writer for the rights conveyed by the option contract.
Price-Weighted Index
A stock index which is computed by adding the prices of each stock in the index, and then dividing by the divisor.
See also Capitalization-weighted index,
Divisor.
Payoff Diagram
See Profit Graph.
Profit Graph
A graphical representation of the potential outcomes of a strategy. Dollars of profit or loss are graphed on the vertical axis, and various stock prices are graphed on the horizontal axis. Results may be depicted at any point in time, although the graph usually
depicts the results at expiration of the options involved in the strategy.
Profit Range
The range within which a particular position makes a profit. Generally used in reference to strategies that have two break-even points - an upside break-even and a downside break-even. The price range between the two break-even points would be the profit range.
See also Break-Even Point.
Profit Table
A table of results of a particular strategy at some point in time. This is usually a tabular compilation of the data drawn on a profit graph.
See also Profit Graph.
Protected Strategy
A position that has limited risk. A protected short sale (short stock, long call) has limited risk, as does a protected straddle write (short straddle, long out-of-the-money combination).
See also Combination and
Straddle.
Public Book (of orders)
The orders to buy or sell, entered by the public, that are generally away from the current market. The order book official or specialist keeps the public book. Market-Makers on the CBOE can see the highest bid and lowest offer at any time. The specialist's
book is closed (only he knows at what price and in what quantity the nearest public orders are).
See also Order Book Official,
Market-Maker, and Specialist.
Put
An option contract that gives the holder the right to sell the underlying security at a specified price for a certain fixed period of time.
See also Call.
Q There are no glossary terms for this letter.
Back to Top
R Back to Top
Ratio Calendar Combination
A strategy consisting of a simultaneous position of a ratio calendar spread using calls and a similar position using puts, where the striking price of the calls is greater than the striking price of the puts.
Ratio Calendar Spread
Selling more near-term options than longer-term ones purchased, all with the same strike; either puts or calls.
Ratio Spread
Constructed with either puts or calls, the strategy consists of buying a certain amount of options and then selling a larger quantity of more out-of-the-money options.
Ratio Strategy
A strategy in which one has an unequal number of long securities and short securities. Normally, it implies a preponderance of short options over either long options or long stock.
Ratio Write
Selling of call options in a ratio higher than 1 to 1 against the stock that is owned.
Resistance
A term in technical analysis indicating a price area higher than the current stock price where an abundance of supply exists for the stock and therefore the stock may have trouble rising through the price.
See also Support.
Return (on investment)
The percentage profit that one makes, or might make, on his investment.
Return if Exercised
The return that a covered call writer would make if the underlying stock were called away.
Reversal Arbitrage
A riskless arbitrage that involves selling the stock short, writing a put, and buying a call. The options have the same terms.
See also Conversion Arbitrage.
Rho
The expected change in an option's theoretical value for a 1 percent change in interest rates.
See also Theoretical Value.
Risk Arbitrage
A form of arbitrage that has some risk associated with it. Commonly refers to potential takeover situations where the arbitrageur buys the stock of the company about to be taken over and sells the stock of the company that is effecting the takeover.
Roll Down
Close out options at one strike and simultaneously open other options at a lower strike.
Roll Forward (Out)
Close-out options at a near-term expiration date and open options at a longer-term expiration date.
Rolling
A follow-up action in which the strategist closes options currently in the position and opens other options with different terms, on the same underlying stock.
See also Roll Down, Roll Forward, and
Roll Up.
Roll Up
Close out options at a lower strike and open options at a higher strike.