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Stock Options Terms and Definitions -

American-Style Option
Ask Price or Offer
Assignment
At-the-Money (ATM)
Automatic Exercise
Bearish
Bear Spread
Bid Price
Break-Even Point
Bullish
Bull Spread
Butterfly Spread
Calendar Spread
Call
Cash Settlement
Closing Purchase
Closing Sale
Cover
Covered
Covered Call

Option Writing
Credit
Debit
Deliver
Delta
Diagonal Spread
Early Exercise (assignment)
Equity Options
European-Style Options
Exercise
Exercise price
Expiration date
Expiration time
Floor Broker
Forward Volatility Skew
Fundamental Analysis
Good Until Canceled (GTC)
Hedge
Horizontal Spread

Implied Volatility
Implied Volatility Skew
Index Option
In-the-Money (ITM)
Intrinsic value
Last Trading Day
LEAPS*
Leg
Limit Order
Low Implied Volatility
Margin
Margin Requirement (for options)
Mark-To-Market
Market-Maker
Market Order
Married Put Strategy
Neutral
Opening Purchase
Opening Sale

Open Interest
Option Pricing Curve
Options Clearing Corporation (OCC)
Out-of-the-money (OTM)
Overvalued
Premium
Profit/Loss Graph
Protected Strategy
Put
Resistance
Reverse Volatility Skew
Roll Down
Roll Forward (Out)
Rolling
Roll Up
Short Position
Spread Order
Spread Strategy
Standard Deviation

Stop-Limit Order
Stop Order
Straddle
Strike Price
Support
Synthetic Stock
Technical Analysis
Theoretical Value
Theta
Time Decay
Time Value
Treasury Bill/Option Strategy
Uncovered Call Writing
Uncovered Option
Underlying Asset (Security)
Vertical Spread
Volatility
Write

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.

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Ask Price or Offer

The price at which a seller is offering to sell an option or stock.

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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.

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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.

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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.

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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.

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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.

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Bid Price

The price at which a buyer is willing to buy an option or stock.

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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.

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Bullish

Describing an opinion or outlook in which one expects a rise in price, either by
the general market or by an individual security.

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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.

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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.

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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.

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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.

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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.

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Closing Purchase

A transaction in which the purchaser's intention is to reduce or eliminate a
short position in a given series of options.

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Closing Sale

A transaction in which the seller's intention is to reduce or eliminate a long
position in a given series of options

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Cover

To buy back as a closing transaction an option that was initially written.

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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Early Exercise (assignment)

The exercise or assignment of an option contract before its expiration date.

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Equity Options

Options on shares of an individual common stock.

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European-Style Options

An option contract that may be exercised only during a specified period of time
just prior to its expiration.

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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.

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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.

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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.

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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.

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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.

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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.

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Fundamental Analysis

A method of analyzing the prospects of a security by observing accepted
accounting measures such as earnings, sales, assets, and so on.

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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.

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Hedge

A conservative strategy used to limit investment loss by effecting a transaction
which offsets an existing position.

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Horizontal Spread

An option strategy in which the options have the same striking price, but
different expiration dates.

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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.

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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.

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Index Option

An option whose underlying entity is an index. Most index options are cash-
settled.

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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.

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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.

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Last Trading Day

The very last full day of open trading before an options expiration day, usually
the third Friday of the expiration month.

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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.

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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.

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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.

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Low Implied Volatility

When the current Implied Volatility is in the lowest 20% of its range for the
last 6 months:

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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Opening Purchase

A transaction in which the purchaser's intention is to create or increase a long
position in a given series of options.

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Opening Sale

A transaction in which the seller's intention is to create or increase a short
position in a given series of options.

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Open Interest

The number of outstanding option contracts in the exchange market or in a
particular class or series.

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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.

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Options Clearing Corporation (OCC)

The issuer of all listed option contracts that are trading on the national
option exchanges.

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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.

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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.

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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.

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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.

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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).

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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.

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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.

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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.

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Roll Down

Close out options at one strike and simultaneously open other options at a lower
strike.

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Roll Forward (Out)

Close-out options at a near-term expiration date and open options at a longer-
term expiration date.

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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.

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Roll Up

Close out options at a lower strike and open options at a higher strike.

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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).

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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.

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Spread Strategy

Any option position having both long options and short options of the same type
on the same underlying security.

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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.

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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.

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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.

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Straddle

The purchase or sale of an equal number of puts and calls having the same terms.

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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.

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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.

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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.

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Technical Analysis

The method of predicting future stock price movements based on observation of
historical stock price movements.

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Theoretical Value

The price of an option, or a combination of options, as computed by a
mathematical model.

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Theta

A measure of the rate of change in an option's theoretical value for a one-unit
change in time.

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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Volatility

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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Write

Selling an option. The investor who sells is called the writer.

* LEAPS is a Registered Trade Mark of LEAPS*

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