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| Stock Options Terms and Definitions - |
American-Style Option 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. Top Ask Price or Offer The price at which a seller is offering to sell an option or stock. Top Assignment 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 strike price. Top At-the-Money (ATM) An option that has the same strike price as the underlying asset. Often used to refer to the option with the strike price closest to the current price of the underlying asset. Top Automatic Exercise 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. Top Bearish 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. Top Bear Spread 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. Top Bid Price The price at which a buyer is willing to buy an option or stock. Top 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. Top Bullish Describing an opinion or outlook in which one expects a rise in price, either by the general market or by an individual security. Top Bull Spread 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. Top Butterfly 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. Top Calendar Spread 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. Top Call 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. Top Cash Settlement 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. Top Closing Purchase A transaction in which the purchaser's intention is to reduce or eliminate a short position in a given series of options. Top Closing Sale A transaction in which the seller's intention is to reduce or eliminate a long position in a given series of options Top Cover To buy back as a closing transaction an option that was initially written. Top Covered 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. Top Covered Call Option Writing A strategy in which one sells call options while simultaneously owning an equivalent position in the underlying security. This strategy does not limit risk. Top Credit 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. Top Debit 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. Top Deliver 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. Top Delta 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. Top Diagonal Spread 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. Top Early Exercise (assignment) The exercise or assignment of an option contract before its expiration date. Top Equity Options Options on shares of an individual common stock. Top European-Style Options An option contract that may be exercised only during a specified period of time just prior to its expiration. Top Exercise 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. Top Exercise price 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. Top Expiration date The day on which an option contract becomes void. The expiration date for listed stock options is the Saturday after the third Friday of the expiration month. Holders of options should indicate their desire to exercise, if they wish to do so, by this date. Top Expiration time 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. Top Floor Broker 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. Top Forward Volatility Skew Markets in which higher strike options have high implied volatility and are therefore over priced, and lower strike options have low implied volatility and are often under priced. Top Fundamental Analysis A method of analyzing the prospects of a security by observing accepted accounting measures such as earnings, sales, assets, and so on. Top 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. Top Hedge A conservative strategy used to limit investment loss by effecting a transaction which offsets an existing position. Top Horizontal Spread An option strategy in which the options have the same striking price, but different expiration dates. 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. Top Implied Volatility Skew Markets in which the front month options have a significantly higher implied volatility than the further out month options. A skew of greater than 15% is considered significant. Top Index Option An option whose underlying entity is an index. Most index options are cash- settled. Top In-the-Money (ITM) An option that has Intrinsic Value (It will also have Time Value if there is still time left before expiration). A Call option is ITM if its strike price is lower than the current market price of the underlying asset. A Put option is ITM if its strike price is higher than the current market price of the underlying security. Top 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 (ITM). For call options, this is the difference between the stock price and the strike price, if that difference is a positive number, or zero otherwise. For put options it is the difference between the strike price and the stock price, if that difference is positive, and zero otherwise. 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. Top 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. Top 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. Top Limit Order An order to buy or sell securities at a specified price (the limit). A limit order may also be placed "with discretion". Always use a limit order when trading options. Top Low Implied Volatility When the current Implied Volatility is in the lowest 20% of its range for the last 6 months: Top 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. Top 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. Top 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. Top 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. Top 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. Top Married Put Strategy 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. Top 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. 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. Top Opening Sale A transaction in which the seller's intention is to create or increase a short position in a given series of options. Top Open Interest The number of outstanding option contracts in the exchange market or in a particular class or series. Top 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. Top Options Clearing Corporation (OCC) The issuer of all listed option contracts that are trading on the national option exchanges. Top Out-of-the-money (OTM) An option that has Time Value and no Intrinsic Value. A Call option is OTM if its strike price is higher than the market price of the underlying asset. A Put option is OTM if its strike price is lower than the market price of the underlying asset. Top 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. Top 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. Top Profit/Loss 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. Top 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). Top 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. Top 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. Top Reverse Volatility Skew Markets in which lower strike options have high implied volatility and are therefore over priced, and higher strike options have low implied volatility and are often under priced. Top Roll Down Close out options at one strike and simultaneously open other options at a lower strike. Top Roll Forward (Out) Close-out options at a near-term expiration date and open options at a longer- term expiration date. Top 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. Top Roll Up Close out options at a lower strike and open options at a higher strike. Top Short Position 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). Top Spread Order 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. Top Spread Strategy Any option position having both long options and short options of the same type on the same underlying security. Top Standard Deviation A measure of the volatility of a stock. It is a statistical quantity measuring the magnitude of the daily price changes of that stock. Top Stop-Limit Order 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. Top 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. Top Straddle The purchase or sale of an equal number of puts and calls having the same terms. Top Strike Price 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. Top Support 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. Top Synthetic Stock 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. Top Technical Analysis The method of predicting future stock price movements based on observation of historical stock price movements. Top Theoretical Value The price of an option, or a combination of options, as computed by a mathematical model. Top Theta A measure of the rate of change in an option's theoretical value for a one-unit change in time. Top 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. Top Time Value 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. Top 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. Top 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. Top Uncovered Option A written option is considered to be uncovered if the investor does not have an offsetting position in the underlying security. 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. Top Underlying Asset (Security) The asset (security) subject to being purchased or sold (delivered) upon exercise of the option contract. Undervalued Describing a security that is trading at a lower price than it logically should. Usually determined by the use of a mathematical model. Top Vertical Spread 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. Top Volatility A measure of the fluctuation in the market price of the underlying security. Mathematically, volatility is the annualized standard deviation of returns. Top Write Selling an option. The investor who sells is called the writer. * LEAPS is a Registered Trade Mark of LEAPS* |
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