OptionSIZZLE

Adjustments
An adjusted option may cover more than the usual one hundred shares. For example, after a 3-for-2 stock split, the adjusted option will represent 150 shares. For such options, the premium must be multiplied by a corresponding factor. Example: buying 1 call (covering 150 shares) at 4 would cost $600. See also Strike price interval.

All-or-none order (AON) 
An option order which requires that the order is executed completely, in one part, or not at all. An AON order may be either a day order or a GTC (good ‘til cancel) order. 

American-style option 
 An options contract, put or call, that can be exercised at any time prior to
expiration. Stock, exchange-traded funds, and some index options settle
American-style.

Arbitrage 
A trading technique where by a trader simultaneously purchases and sells two identical or (statistically) equivalent assets in two different markets, in order to profit of a price discrepancy.

Ask 
 Also called the offer, the asking price is the current market price at which
an investor can buy the option in the market.

Assignment 
A notification by the Options Clearing Corporation to a clearing member that an owner of an option has exercised his or her rights. For equity and index options, assignments are made on a random basis by The Options Clearing Corporation. See also Delivery and Exercise.

At-The-Money (ATM) 
When the price of the underlying asset is equal to the strike price of the option, the contract is ATM.

Automatic Exercise
Options with intrinsic value, or in-the-money options, are automatically exercised at expiration so that option holders don’t inadvertently leave money on the table. Beginning with the June 2008 options expiration, all options that are a penny or more in-the-money at expiration will be exercised at expiration.

Averaging down 
Buying more of a stock or an option at a lower price than the original purchase so as to reduce the average cost.

Back Months
Options with the most time left until expiration. These are the most distant expiration months.

Bear Call Spread
Selling a call and buying a call with a higher strike price.

Bear Put Spread
Buying a put and selling a put with a lower strike price.

Bearish 
An adjective describing the opinion that a stock, or a market in general, will decline in price. A negative or pessimistic outlook. 

Beta 
A measure of a stock’s volatility relative to the S&P 500 Index. High Beta stocks have high volatility.

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

Bid-Ask Spread
The difference between the current bid price and the current asking, or
offering price.

Black-Scholes formula 
The first widely-used model for option pricing. 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. 

Block Trade
A large equity trade consisting of 10,000 or more shares.

Box (spread)
A four-sided option spread that involves a long call and a short put at one strike price as well as a short call and a long put at another strike price. Example: buying 1 XYZ May 60 call, and writing 1 XYZ May 65 call; simultaneously buying 1 XYZ May 65 put, and writing 1 May 60 put. 

Break-even point(s) (BEP) 
The stock price(s) at which an option strategy results in neither a profit nor a loss. While a strategy's break-even point(s) are normally stated as of the option's expiration date, a theoretical option pricing model can be used to determine the strategy's break-even point(s) for other dates as well. 

Broker 
A person acting as an agent for making securities transactions. An 'Account Executive' or a 'broker' at a brokerage firm deals directly with customers. A 'Floor Broker' on the trading floor of an exchange actually executes someone else's trading orders. 

Bull (or bullish) spread 
One of a variety of strategies involving two or more options (or options combined with an underlying stock position) that may potentially profit from a rise in the price of the underlying stock.

Bullish
An adjective describing the opinion that a stock, or the market in general, will rise in price -- a positive or optimistic outlook. 

Butterfly
Selling options with the same strike price and also buying options with the same expiration months, but higher and lower strike prices. Generally, the butterfly is in a ratio of two-to-one, with two short options forming the body, an option with a higher strike forming one wing and an option with a lower strike creating the other wing. Butterfly spreads can be created with puts or calls. For example, a long call butterfly might be: buying 1 XYZ May 55 call, writing 2 XYZ May 60 calls and buying 1 XYZ May 65 call. 

Buy-write 
A covered call position in which stock is purchased and an equivalent number of calls written at the same time. This position may be transacted as a combined order, with both sides (buying stock and writing calls) being executed simultaneously. Example: buying 500 shares XYZ stock, and writing 5 XYZ May 60 calls. See also Covered call / covered call writing.

Calendar spread / time spread 
An option strategy which involves the buy/sell of a farther-term option (call or put) and the sell/buy of an equal number of nearer-term options of the same type and strike price. Example: buying 1 XYZ May 60 call (far-term portion of the spread) and 1 XYZ March 60 call (near-term portion of the spread). See also Horizontal spread.

Call option 
An option contract that gives the owner the right to buy the underlying asset at a specified price (its strike price) for a certain, fixed period of time (until its expiration). For the seller of a call option, the contract represents an obligation to sell the underlying stock if the option is assigned.

Carrying cost 
The interest expense on money used to finance a securities position.

Cash settlement 
On expiration the options are settled in cash. 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 generates the cash settlement amount. See also Exercise settlement amount. Indexes like the S&P 500 Index (.SPX) and the S&P 100 Index (.OEX) are examples of cash settled options.

Cash Secured Put
Selling put options with the intention or willingness to take delivery of shares. Cash is deposited in the account and, if the stock price falls to the strike price of the put option, assignment results in delivery of the shares into the account.

Class of options 
A term referring to all options of the same type -- either calls or puts -- covering the same underlying stock. 

Closing transaction 
A reduction or an elimination of an open position by the appropriate offsetting purchase or sale. An existing long option position is closed by a selling transaction. An existing short option position is closed by a purchase transaction. This transaction will reduce the open interest for the specific option involved. 

Closing price 
The final price of a security at which a transaction was made. See also Settlement price.

Collar 
A protective strategy in which a written call and a long put are taken against a previously owned long stock position. The options may have the same strike price or different strike prices and the expiration months may or may not be the same. For example, if the investor previously purchased XYZ Corporation at $46 and it rose to $62, a 'collar' involving the purchase of a May 60 put and the writing of a May 65 call could be established as a way of protecting some of the unrealized profit in the XYZ Corporation stock position. The reverse -- a long call combined with a written put -- might also be used if the investor has previously established a short stock position in XYZ Corporation. See also Risk Reversal.

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.

Condor 
A strategy involving four strike prices that has both limited risk and limited profit potential. A long call condor spread is established 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.

Contract size 
The amount of the underlying asset covered by the option contract. This is 100 shares for one equity option unless adjusted for a special event, such as a stock split or a stock dividend, or otherwise special by the listing exchange. 

Conversion 
Sometimes used when options are overpriced, the floor trader would buystock on the open market and sell the equivalent position in the options market. For example, buying 100 shares of XYZ stock, writing 1 XYZ May 60 call, and buying 1 XYZ May 60 put at desirable prices. The process of executing these three-sided trades is sometimes called 'conversion arbitrage.' See also Reversal / reverse conversion 

Cover 
To close out an open position. This term is used most frequently to describe the purchase of an option or stock to close out an existing short position for either a profit or loss.

Covered call  
An option strategy in which a call option is written against an equivalent amount of long stock. Example: writing 2 XYZ May 60 calls while owning 200 shares or more of XYZ stock. See also Buy-write.

Covered option 
An open short option position that is fully offset by a corresponding stock or option position. That is, 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 and Uncovered put option.

Covered put 
Short put and short stock.

Covered Straddle
Selling a straddle and owning shares. The covered straddle is not really covered. Only the calls are covered. The strategy has a bullish bias.

Covered Write
When a short option position is hedged with another option or shares, it is covered. A covered write is the opposite of a naked write.

Credit 
Money received in an account either from a deposit or a transaction that results in increasing the account's cash balance. 

Credit spread 
Any spread where the premium received from selling part of the spread is greater than the premium paid for the other part of the spread.

Crossed Sale
Also known as Crossed Trade, it is a trade done from broker to broker
rather than in the marketplace.

Cycle 
The expiration dates applicable to the different series of options. Traditionally, there were three cycles: 
Cycle     Available expiration months 
January     January / April / July / October 
February     February / May / August / November 
March     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 that class of options has been assigned. For example, on January 1, a stock in the January cycle will be trading options expiring in these months: January, February, April, and July. After the January expiration, the months outstanding will be February, March, April and July. 

Day order 
A type of option order which instructs the broker to cancel any unfilled portion of the order at the close of trading on the day the order is first entered. 

Day trade 
A position (stock and/or options) that is opened and closed on the same day. 

Debit 
Money paid out from an account either from a withdrawal or a transaction that results in decreasing the cash balance. 

Debit spread 
An option spread strategy that decreases the account's cash balance when it is established. Any spread where the premium paid from buying part of the spread is greater than the premium received for the other part of the spread.

Decay 
A term used to describe how the theoretical value of an option 'erodes' or reduces 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.

Deep-in-the-Money
A call option is deep in-the-money when the strike price is well below the current market price. A put option is deep-in-the-money when the strike price is much higher than the current market price.

Delivery
The process of satisfying put exercise or call assignment. In either case, stock is delivered. In the case of indexes, delivery involves the transfer of cash equal to the settlement value of the index minus the strike price of the options contract.

Delta 
The price change in an option for every point move in the underlying instrument. Put options have negative deltas.

Delta Neutral
A position where the total deltas are zero. For example, since 100 shares has a delta of +1.00, long 100 shares and long two puts with deltas of -.50 is delta neutral.

Derivative 
A financial security whose value is determined in part from the value and characteristics of another security, the underlying security. 

Diagonal spread 
Selling an options contract and buying one with a later expiration date and a higher or lower strike price. Example: buying 1 May 60 call and writing 1 March 65 call. 

Dividend
The portion of a company’s profits that are paid out to shareholders. Dividends are normally paid quarterly.

Equal-dollar Weighted Index
A type of index where all of the components have an equal influence on the overall performance of the index.

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 
In a margin account, this is the difference between the securities owned and the margin loans owed. It is the amount the investor would keep after all positions have been closed and all margin loans paid off. 

Equity option 
An option on shares of an individual common stock or exchange traded fund. 

European-style option 
A type of options contract that can only be exercised at expiration. Most, but not all, index options settle European Style.

Ex-date / Ex-dividend date 
The day before which an investor must have purchased the stock in order to receive the dividend. On the ex-dividend date, the previous day's closing price is reduced by the amount of the dividend (rounded up to the nearest eighth) 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; for example, splits and distributions. 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
The place where options trade. Today, seven options exchange list puts and calls in the United States: the Chicago Board Options Exchange [CBOE], the International Securities Exchange [ISE], the American Stock Exchange [AMEX], the Philadelphia Stock Exchange [PHLX], the New York Stock Exchange [NYSE], the NASDAQ, and the Boston Options Exchange [BOX].

Exchange traded funds (ETFs) 
Exchange traded funds (ETFs) are index funds or trusts that are listed on an exchange and can be traded in a similar fashion as a single equity. The first ETF came about in 1993 with the AMEX's concept of a tradable basket of stocks -- the Standard & Poor's Depositary Receipt (SPDR). 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 some of the more favorable features of stock trading, such as liquidity and ease of equity style features to 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 The Options Clearing Corporation as an operational convenience for it's clearing members. Under these proceedings, a clearing member is deeming to have 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 that are held in customer accounts will be exercised if they are in the money by a specified amount. 

Exercise price 
The price at which the owner of an option can purchase (call) or sell (put) the underlying stock. Used interchangeably with striking price, strike, or exercise price. 

Exercise settlement amount /value
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. For many indexes, the settlement value is computed on Friday morning and, for that reason, the last day to trade some index options is on a Thursday before expiration.

Expiration
The date when an option ceases to exist. After that point, the contract is null and void. Stock options expire on the Saturday following the third Friday of the expiration month.

Expiration cycle 
The expiration dates applicable to the different series of options. Traditionally, there were three cycles: 
Cycle     Available expiration months 
January     January / April / July / October 
February     February / May / August / November 
March     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 that class of options has been assigned. For example, on January 1, a stock in the January cycle will be trading options expiring in these months: January, February, April, and July. After the January expiration, the months outstanding will be February, March, April and July. 

Expiration date 
The date on which 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. Note: If the third Friday of the month is an exchange holiday, the last trading day will be the Thursday immediately preceding the third Friday. 

Expiration month 
The month during which the expiration date occurs. 

Extrinsic Value
The value of an option beyond its intrinsic worth (see Intrinsic Value). Outof-the-money options consist only of extrinsic value.

Fill-or-kill order (FOK) 
A type of option order which 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.e., filled in its entirety) as soon as it is announced in the trading crowd, it is to be 'killed' (i.e., cancelled) immediately. Unlike an AON order, a FOK order cannot be used as part of a GTC order. 

Fixed Return Options [FROs]
A type of binary options contract that pays $100 if the contract is in-the money at expiration and zero if the contract is out-of-the-money. Float The amount or number of shares a company has outstanding.

Floor broker 
A trader on an exchange floor who executes trading orders for other people. 

Floor trader 
An exchange member on the trading floor who buys and sells for his or her own account.

Front Month
The options contracts that have the least amount of life remaining. On May 1, the front month contract is the contract that expires in May. On May 31, the front month contract is the June contract because the May contract has already expired.

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. Classes of options listed and traded on more than one national exchange are referred to as multiple-listed / multiple-traded options. 

Gamma 
The amount of change in delta for every point change in the underlying asset.

Good-'til-cancelled (GTC) order 
A type of limit order that remains in effect until it is either executed (filled) or cancelled, as opposed to a day order, which expires if not executed by the end of the trading day. A GTC option order is an order which if not executed will be automatically cancelled at the option's expiration. 

Greeks/The Greeks
A series of measures used to anticipate and track changes in the value of options due to factors such as movement in the underlying asset, changes in volatility, and the passage of time. Delta, Vega, Gamma, and Theta make up the Greeks.

Hedge / hedged position 
A position established with the specific intent of protecting an existing position. 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 of time. 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 which 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. Example: buying 1 XYZ May 60 call (far-term portion of the spread) and writing 1 XYZ March 60 call (near-term portion of the spread). See also Calendar spread 

Immediate-or-cancel order (IOC) 
A type of option order which gives the trading crowd one opportunity to take the other side of the trade. After being announced, the order will be either partially or totally filled with any remaining balance immediately cancelled. An IOC order, which can be considered a type of day order, cannot be used as part of a GTC order since it will be cancelled shortly after being entered. The difference between fill-or-kill (FOK) orders and IOC orders is that a IOC order may be partially executed. 

Implied volatility 
The volatility percentage that justifies an option's price, as opposed to historic or implied volatility. A theoretical option 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. 

The level of volatility reflected in prevailing options prices. Each options contract has a unique level of implied volatility that is computed using an options pricing model. It is fluid and consistently changing. When high, IV indicates that option premiums are expensive. Low IV is generally associated with cheap options. But, really, it’s all relative.

In-The-Money 
An adjective used to describe an option with intrinsic value. 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 
Sometimes called averages, indexes are benchmarks for tracking a group of securities. The S&P 500 is an index of the share price action of five hundred of the largest US companies.

Index option 
An option whose underlying interest is an index. Generally, index options are cash-settled. 

Industry
A company’s primary business activity. Companies within the same industry tend to be influenced by some of the same factors and, consequently, their share prices often see co-movement (they move together).

In Play
When a company becomes subject of market rumors such as a possible takeover, it is In Play. Stocks that are In Play often see high volume and volatility.

Insider
Directors, officers, board members and other players within a company that have access to information that you and I don’t.

In-the-Money [ITM]
Options that have intrinsic value. A call option is ITM if the market price of the underlying asset is greater than the strike price of the option. A put is ITM if the price of the underlying asset is less than the strike price.

Institution 
A professional investment management company. Typically, this term is used to describe large money managers such as banks, pension funds, mutual funds, and insurance companies. 

Intrinsic value 
The value of an in-the-money option minus its time value. Intrinsic value is the current real tangible value embedded in the options contract. The intrinsic value of a call option is computed as the value of the underlying asset minus the strike price. For a put, intrinsic value is the strike price minus the value of the underlying asset.

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) combination. An iron butterfly contains four options as is an equivalent strategy to a regular butterfly spread which contains only three options. For example, a short iron butterfly might be: buying 1 XYZ May 60 call and 1 May 60 put, and writing 1 XYZ May 65 call and writing 1 XYZ May 55 put. 

IV Gapper
A big change in implied volatility [IV]. IV gaps higher when the market expects the underlying asset to make a big move in the short term. IV can gap lower when an important event, like an earnings report, has passed.

Iron Condor
Combination of a bull put spread and a bear call spread. The trade is created by selling a put and buying a lower strike price put and also selling a call and buying a call with a higher strike price. The short options have consecutive strike prices (short strangle).

ISE 
International Securities Exchange. 

Last trading day 
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. Note: If the third Friday of the month is an exchange holiday, the last trading day will be the Thursday immediately preceding the third Friday. 

LEAPS® - Long-term Equity AnticiPation Securities, a.k.a long term options 
This means calls and puts with an expiration as long as thirty-nine months. Currently, equity LEAPS have two series at any time with a January expiration. For example, in October 2007, LEAPS are available with expirations of January 2009 and January 2010. 

Leg 
A term describing one side of a position with two or more sides. When a trader legs into a spread, he/she establishes one side first, hoping for a favorable price movement so the other side can be executed at a better price. This is, of course, 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 100 shares of stock by investing a much smaller amount than that required to buy the stock. If the stock increases by 10 percent, for example, the option might double in value. Conversely, a 10 percent stock price decline might result in the total loss of the purchase price of the option. 

Limit order 
A trading order placed with a broker to buy or sell stock or options at a specific price. 

Liquidity / liquid market 
A trading environment characterized by high trading volume, a narrow spread between the bid and ask prices, and the ability to trade larger sized orders without significant price changes. 

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
Taking a position in a stock or option in anticipation of an appreciation in price. For example, one could be long puts if they expect the underlying asset to fall and the puts to increase in value.

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 (the strike price) at or before some date in the future (the expiration date). It results from an opening purchase transaction -- e.g., long call or long put. 

Long stock position 
A position in which an investor has purchased and owns stock. 

Long-dated options 
In English, this means calls and puts with an expiration as long as thirty-nine months. Currently, equity LEAPS have two series at any time with a January expiration. For example, in October 2000, LEAPS are available with expirations of January 2002 and January 2003. 

Margin / margin requirement 
The minimum equity required to support an investment position. To buy on margin refers to borrowing part of the purchase price of a security from a brokerage firm. For long puts and calls, there is no margin. The contracts must be paid for in full. On the other hand, uncovered writing of index options has very high margin requirements. Requirements for writing options can get somewhat complicated and will vary from firm to firm.

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 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 order 
A trading order placed with a broker to immediately buy or sell a stock or option at the best available price. 

Market quote 
A quotation of the current best bid / ask prices for an option or stock in the marketplace (an exchange trading floor). This information is usually obtained by the investor from someone at 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 his or her own account and who has the responsibility of making bids and offers and maintaining a fair and orderly market. See also Specialist / specialist group / specialist system 

Market-maker system
A method of supplying liquidity in options markets by having market makers in competition with one another. An alternative to a specialist system. They are similarly charged with making fair and orderly markets in a given class of options. 

Market-not-held order 
A type of market order which allows the investor to give discretion to the floor broker regarding the price and/or time at which a trade is executed. 

Market-on-close order (MOC) 
A type of option order which requires that an order be executed at or near the close of trading 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. 

Market Value-Weighted Index
A type of index that is constructed to give greater weight to stocks with higher market values. The S&P 500 Index and the NASDAQ 100 Index (.NDX) are examples of market value-weighted indexes. They are dominated by large cap stocks.

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. 

Maximum Pain Theory
The notion that the price of the underlying asset will gravitate towards the point where the most options expire worthless.

Model 
A mathematical formula used to calculate the theoretical value of an option. See also Black-Scholes formula 

Moneyness
The relationship between the strike price of the option and the price of the underlying asset. See at-the-money, out-of-the-money, and in-the-money.

Multiplier
A numerical value used to determine the total premium for an options contract. Stock options have a multiplier of 100. Therefore, if an option is quoted at $4.00 a contract, it costs $400.00 to buy that contract ($4.00 x 100).

Multiple-listed / multiple-traded option 
Any option contract that is listed and traded on more than one national options exchange.

Naked (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 long call position. A short put position is uncovered if the writer is not short stock or long another put. 

NASD (National Association of Securities Dealers) 
The National Association of Securities Dealers is an industry association of broker/dealers in the over-the-counter securities business. The NASD is a self-regulatory body and administers the NASDAQ stock market. 

NASDAQ (National Association of Securities Dealers Automated Quotation system.) 
Dissemination of quotations from the NASD and/or members thereof. 

Near-the-Money
An option contract with a strike price near the price of the underlying asset. A near-the-money option is often used when none of the options is at-themoney.

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. 

Non-equity option 
Any option that does not have common stock as the underlying asset. Non-equity options include options on futures, indexes, foreign currencies, Treasury security yields, etc. 

Not-held order 
A type of order which 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 trader 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 Discretion and Market-not-held order 

NYSE 
New York Stock Exchange. 

Offer / offer price 
In the options business this means the same as ask / ask price, or the price at which a seller is offering to sell an option or a stock. 

One-cancels-other order (OCO) 
A type of option 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. For example, the investor would enter an OCO order if he/she wished to buy 10 May 60 calls or 10 June 60 calls or any combination of the two which when summed equaled 10 contracts. An OCO order may be either a day order or a GTC order. 

Open interest 
The total number of outstanding option contracts on a given series or for a given underlying stock. Open interest is updated once a day.

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. 

Opening Purchase
The initial purchase of an options contract. A new position in long calls is a buy-to-open order.

Opening Sale
An initial sale of an options contract. For example, in a covered call, the strategist will sell-to-open a new short call position.

Option Chains
A tabular format for viewing put and call quotes. The chains generally list calls on one side of the table and puts on the other.

Option Clearing Corporation [OCC]
The issuer of all exchange-traded option contracts. The OCC handles the clearing of all stock, ETF, and index options.

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 contract right is exercised by the owner. 

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 is 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. 

Option writer 
The seller of an option contract who is obligated to meet the terms of delivery if the option owner exercises his or her right. This seller has made an opening sale transaction, and has not yet closed that position. 

Optionable stock 
A stock on which listed options are traded. 

Options Clearing Corporation (OCC) 
A registered clearing agency whose shares are owned by the exchanges that trade listed equity options, OCC is an intermediary between option buyers and sellers. OCC issues and guarantees all listed option contracts. 

Order Flow
The ongoing transactions, or trading, on the options exchanges.


OTC option 
An over-the-counter option is one which is traded in the over-the-counter market. OTC options are not listed on an options exchange and do not have standardized terms. These are to be distinguished from exchange-listed and traded equity options with NASD stocks as the underlying equity issue, which are standardized.

Out-of-the-money option [OTM]
An options contract with no intrinsic value, i.e., all of its value consists of time value. A call option is out of the money if the stock price is below its strike price. A put option is out of the money if the stock price is above its strike price. See also Intrinsic value and Time value 

Owner 
Any person who has made an opening purchase transaction, call or put, and has that position in a brokerage account. 

Parity 
A term used to describe an option contract's total premium when that premium is the same amount as its intrinsic value. For example, when an option's theoretical value is equal to its intrinsic value, it is said to be 'worth parity.' When an option is trading for only its intrinsic value, it is said to be 'trading for parity.' Parity may be measured against the stock's last sale, bid, or offer. 

Payoff diagram 
A chart of the profits and losses for a particular options strategy prepared in advance of the execution of the strategy. The diagram is plot of expected profit or loss against the price of the underlying security. 

PCX 
Pacific Stock Exchange. 

PHLX 
Philadelphia Stock Exchange. 

Physical delivery option 
An option whose underlying entity is a physical good or commodity, like a common stock or a foreign currency. When that option is exercised by its owner, there is delivery of that physical good or commodity from one brokerage or trading account to another. 

Pin risk 
The risk to an investor (option writer) that the stock price will exactly equal the strike price of a written option at expiration; i.e., that option will be exactly at the money. The investor will not know how many of his/her written (short) options he/she will be assigned. The risk is that on the following Monday he/she might have an unexpected long (in the case of a written put) or short (in the case of a written call) stock position, and thus be subject to the risk of an adverse price move. 

Pit 
A specific location on the trading floor of an exchange designated for the trading of a specific option class or stock. 

Portfolio Margin
A set of margin rules instituted in 2007 that are based on the total risk of the portfolio rather than based on traditional strategy based margin requirements. Portfolio margin accounts are available through some brokers, but mainly offered to institutions and high net worth investors.

Position 
The combined total of an investor's open option contracts (calls and/or puts) and long or short stock. 

Position Delta
The total delta of a position or portfolio. Since 100 shares of stock have delta of +1.00, a position consisting of 200 shares and puts with a -.50 delta, will have total delta of 1.5.

Position trading 
An investing strategy in which open positions are held for an extended period of time. 

Premium 
Total price of an option: intrinsic value plus time value. 
Often (erroneously) this word is used to mean the same as time value.

Primary market 
For securities that are traded in more than one market, the primary market is usually the exchange where trading volume in that security is highest. 

Profit/loss graph 
A graphical presentation of the profit and loss possibilities of an investment strategy at one point in time (usually option expiration), at various stock prices. 

Put/Call Parity
See Parity

Put/Call Ratio
The number of puts traded divided by the number of calls. It can be applied to an individual stock, a sector, an index, or an entire market. Put/call ratios are generally used in contrary manner. For example, when ratios reach extremely high levels, put buying is unusually high and it could be an indication that pessimism is too high. From a contrary view, high levels of pessimism are often a good time to turn bullish.

Put option 
An option contract that gives the owner the right to sell the underlying stock at a specified price (its strike price) for a certain, fixed period of time (until its expiration). For the writer of a put option, the contract represents an obligation to buy the underlying stock from the option owner if the option is assigned. 

Quarterlys
A type of options contract that expires at the end of each quarter instead of on the Saturday following the third Friday of the expiration month.

Ratio Backspread
A spread strategy that involves selling options and buying a greater number of out-of-the-money options. Backspreads are often in a ratio of 1-to-2 or 2-to-3.

Ratio spread 
A term most commonly used to describe the purchase of an option(s), call or put, and the writing of a greater number of the same type of options that are out-of-the-money with respect to those purchased. All options involved have the same expiration date. For example, buying 5 XYZ May 60 calls and writing 6 XYZ May 65 calls. See also Ratio write. 

Ratio write 
An investment strategy in which stock is purchased and call options are written on a greater than one-for-one basis; i.e., more calls written than the equivalent number of shares purchased. For example, buying 500 shares of XYZ stock, and writing 6 XYZ May 60 calls. See also Ratio spread. 

Realized gains and losses 
The net amount received or paid when a closing transaction is made and matched together with an opening transaction. 

Resistance 
A term used in technical analysis to describe a price area at which rising prices are expected to stop or meet increased selling activity. This analysis is based on historic price behavior of the stock. 

Reversal / reverse conversion 
An investment strategy used by professional option traders in which a short put and long call with the same strike price and expiration are combined with short stock to lock in a nearly riskless profit. For example, selling short 100 shares of XYZ stock, buying 1 XYZ May 60 call, and writing 1 XYZ May 60 put at favorable prices. The process of executing these three-sided trades is sometimes called 'reversal arbitrage.' See also Conversion 

Rho 
A measure of the expected change in an option's theoretical value for a 1 percent change in interest rates. 

Risk Graph
Sometimes called a payoff chart, the risk graph is a visual depiction of the profit and loss associated with an options strategy.

Risk reversal
Term used for what is also called a collar. This trade involves the simultaneous sell of an OT call and the buy of an OTM put, combined with stock or not. This generates a position that has a defined risk BEP scenario tighter than a straight stock position.

Rolling 
A trading action in which the trader simultaneously closes an open option position and creates a new option position at a different strike price, different expiration, or both. Variations of this include rolling up, rolling down, rolling out and diagonal rolling. 

SEC 
The Securities and Exchange Commission. The SEC is an agency of the federal government which is in charge of monitoring and regulating the securities industry. 

Secondary market 
A market where securities are bought and sold after their initial purchase by public investors. 

Sector index 
An index that measure the performance of a narrow market segment, such as biotechnology or small capitalization stocks. 

Secured put / cash-secured put 
An option strategy in which a put option is written against a sufficient amount of cash (or T-bills) to pay for the stock purchase if the short option is assigned. 

Series of options 
Option contracts on the same class having the same strike price and expiration month. For example, all XYZ May 60 calls constitute a series. 

Sell-to-Close
See Closing Sale

Sell-to-Open
See Opening Sale

Sentiment
The prevailing mood relative to a stock, index, or market.

Series
All option contracts of the same class that have the same expiration date and strike price.

Settlement 
The process by which the underlying stock is transferred from one brokerage account to another when equity option contracts are exercised by their owners and the inherent obligations assigned to option writers. 

Settlement Date
The date when payment is made to fulfill the terms of the options contract. It is the date to settle a trade.

Settlement price 
The official price at the end of a trading session. This price is established by The Options Clearing Corporation and is used to determine changes in account equity, margin requirements and for other purposes. See also Mark-to-market.

Short
Taking a position in a stock, option, or futures contract in anticipation of a depreciation in value. Strategists can be short stock, puts, calls, straddles, etc.

Short option position 
The position of an option writer which represents an obligation on the part of the option's writer to meet the terms of the option if it is exercised by its owner. The writer can terminate this obligation by buying back (cover or close) the position with a closing purchase transaction. 

Short stock position 
A strategy that profits from a stock price decline. It is initiated by borrowing stock from a broker-dealer and selling it in the open market. This strategy is closed (covered) at a later date by buying back the stock and returning it to the lending broker-dealer. 

Skew
See Volatility Skew

Specialist / specialist group / specialist system 
One or more exchange members whose function is to maintain a fair and orderly market in a given stock or a given class of options. This is accomplished by managing the limit order book and making bids and offers for his/her/their own account in the absence of opposite market side orders. See also Market-maker and Market-maker system, (competing) 

Spin-off 
A stock dividend issued by one company in shares of another corporate entity, such as a subsidiary corporation of the company issuing the dividend. 

Spread / spread order 
A position consisting of two parts, each of which alone would profit from opposite directional price moves. As orders, these opposite parts are entered and executed simultaneously in the hope of (1) limiting risk, or (2) benefiting from a change of price relationship between the two parts. 

Standard deviation 
A statistical measure of price fluctuation. One use of the standard deviation is to measure how stock price movements are distributed about the mean. See also Volatility 

Standardization 
Interchangeability resulting from standardization. Options listed on national exchanges are fungible, while over-the-counter options generally are not. Classes of options listed and traded on more than one national exchange are referred to as multiple-listed / multiple-traded options. 

Statistical Volatility
A measure of historical volatility computed as the annualized standard deviation of returns over a period of days (20, 30, 90 days).

Stock dividend 
A dividend paid in shares of stock rather than cash. See also Spin-off 

Stock split 
An increase in the number of outstanding shares by a corporation, through the issuance of a set number of shares to a shareholder for a set number of shares that the shareholder already owns. For example, a corporation might declare a '2-for-1 stock split.' This means that for every share of stock an investor owns, he/she will be given another, thus owning 2 shares instead of 1. There will be a corresponding reduction in equity value per share. In this case, the new shares (post-split) will be worth one-half their previous value but the investor will own twice as many shares. See also Stock dividend 

Stop order 
A type of contingency order, often erroneously known as a 'stop-loss' order, placed with a broker that becomes a market order when the stock trades, or is bid or offered, at or through a specified price. See also Stop-limit order 

Stop-limit order 
A type of contingency order placed with a broker that becomes a limit order when the stock trades, or is bid or offered, at or through a specific price. 

Straddle 
A long call and long put on the same underlying asset with the same strike price and expiration month. Example: a long straddle might be buying 1 XYZ May 60 call, and buying 1 XYZ May 60 put. 

Strangle
A long call and long put on the same underlying asset with the same expiration month, but different expiration months. Normally, strangles are created with out-of-the-money puts and calls.

Strap
Buying two at-the-money calls and one at-the-money put. The puts andcalls have the same expiration date and strike prices. It is a bullish variation of the straddle.

Strike / strike price 
The price at which the owner of an option can purchase (call) or sell (put) the underlying stock. Used interchangeably with striking price, strike, or exercise price. 

Strike price interval 
The normal price differential between option strike prices. Equity options generally have $2.50 strike price intervals (if the underlying stock price is below $25), $5.00 intervals (from $25 to $200), and $10 intervals (above $200). LEAPS generally start with one at-the-money, one in-the-money, and one out-of-the-money strike price. The latter two are usually set 20%-25% away from the former. 

Strip
Buying two at-the-money puts and one at-the-money call. The puts and calls have the same expiration date and strike prices. It is a bearish variation of the straddle.

Suitability 
A requirement that any investing strategy fall within the financial means and investment objectives of an investor or trader. 

Support 
A term used in technical analysis to describe a price area at which falling prices are expected to stop or meet increased buying activity. This analysis is based on previous price behavior of the stock. 

Synthetic long call 
A long stock position combined with a long put of the same series as that call. 

Synthetic long put 
A short stock position combined with a long call of the same series as that put. 

Synthetic long Stock 
A long call position combined with a short put of the same series. 

Synthetic position 
A strategy involving two or more instruments that has the same risk-reward profile as a strategy involving only one instrument. The following list summarizes the six primary synthetic positions. 

Synthetic short call 
A short stock position combined with a short put of the same series as that call. 

Synthetic short put 
A long stock position combined with a short call of the same series as that put. 

Synthetic short Stock 
A short call position combined with a long put of the same series. 

Technical analysis 
A method of predicting future stock price movements based on the study of 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. 

Theoretical option pricing model 
The first widely-used model for option pricing. 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. 

Theoretical value 
The estimated value of an option derived from a mathematical model. See also Model and Black-Scholes formula.

Theta 
One of the Greeks, Theta measures the impact of time decay on the value
of an options contract.

Time decay 
A term used to describe how the value of an option 'erodes' or reduces in value with the passage of time. Time decay is specifically quantified by theta. 

Time spread 
An option strategy which 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. Example: buying 1 XYZ May 60 call (far-term portion of the spread) and writing 1 XYZ March 60 call (near-term portion of the spread). Also known as calendar spread or horizontal spread. 

Time value 
The part of an option's total price that exceeds its intrinsic value. Time value is equal to the extrinsic value of the options contract. Out-of-the-money options consist only of time value. The value of in-the-money options can include both intrinsic value and time value.

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 of the charges associated with executing a trade and maintaining a position. These include brokerage commissions, fees for exercise and/or assignment, exchange fees, SEC fees, and margin interest. In academic studies, the spread between bid and ask is taken into account as a transaction cost. 

Triple Witching Day
The third Friday in March, June, September and December, which are quarterly expirations that see the simultaneous expirations of stock options, index options, and futures. Sometimes called the quadruple witch because single stock futures also expire at that time.

Type
Whether the option contract is a put or call.

Type of options 
The classification of an option contract as either a put or a call. 

Uncovered Option
See Naked Option

Uncovered call option 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. 

Uncovered put option 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. 

Underlying Instrument
Also called the underlying asset or underlying security, the underlying instrument is the product from which the options contract derives its value.

Underlying security 
The security subject to being purchased or sold upon exercise of the option contract. 

Vega 
The rate of change in an option's value for each one point change in the implied volatility.

Vertical spread 
Most commonly used to describe the purchase of one option and writing of another where both are of the same type and of same expiration month, but have different strike prices. Example: buying 1 XYZ May 60 call and writing 1 XYZ May 65 call. See also Bull (or bullish) spread and Bear (or bearish) spread.

VIX
The CBOE Volatility Index (.VIX) tracks the expected volatility priced into S&P 500 Index options. Sometimes called the “fear gauge” VIX tends to rise when the equity market turns chaotic and individual investors scramble to buy S&P 500 Index put options.

Volatility 
The speed of the movement in an asset or market. Volatility can be high or low and measured in a variety of different ways. See Implied Volatility and Statistical Volatility.

Volatility Crush
A sudden decline in implied volatility that causes a decline in option premiums. Volatility crush often occurs after an important event such as an earnings report.

Volatility Skew
When options on the same underlying security have different levels of implied volatility.

Volume
The number of contracts or shares traded during a given time period.

Wasting Asset
Securities that lose value over time. Options are examples of wasting assets because they have fixed lives and lose value with the passage of time.

Weeklys
A type of options contract that is listed with only one week of life remaining. Weeklys are available on some of the more actively traded indexes such as the S&P 500 Index (.SPX).

Write / writer 
To sell an option that is not owned through an opening sale transaction. While this position remains open, the writer is subject to fulfilling the obligations of that option contract; i.e., to sell stock (in the case of a call) or buy stock (in the case of a put) if that option is assigned. An investor who so sells an option is called the writer, regardless of whether the option is covered or uncovered.