all or none An order for options or other securities that tells the broker to fill it only if it can be filled in full.
alligator spread Trader jargon for a position idea that looks great based on market conditions except for the fact that brokerage commissions will eat all the profits.
alpha The Greek letter used in many asset pricing models to represent investment performance that did not come from market risk but rather from the investment manager’s skill.
American option An option that can be executed at any time between its purchase date and its expiration date.
arbitrage Literally means “riskless profit”; used to take advantage of a mispricing in the market by buying the underpriced asset and simultaneously selling the overpriced asset.
arithmetic average The mean of a series of numbers, found by adding all the numbers and then dividing by the number of items in the series.
ask The price at which the broker sells an option to you. It is the higher of the two numbers in the bid-ask spread.
assignment The process that the exchange uses to determine which of the many option writers will be responsible for the exercise of a particular option.
at-the-money The term used to describe an option if the strike price is equal to the current price of the underlying.
back spread A position in which a trader has more long options than short options on a given underlying asset.
batting average The ratio of the number of winning trades to the number of losing trades.
beta The Greek letter used in many asset pricing models to represent exposure to market risk. The market as a whole has a beta of 1; assets with more risk have a beta of more than 1, and those with less risk have a beta of less than 1.
bid The price at which a broker buys an asset from a customer.
bid-ask spread In price quotes for options and other assets, the bid-ask spread is the difference between the price that the broker pays to acquire an asset and the price at which she sells. The difference is the broker’s profit.
binary options A type of option that specifies an event, such as an asset hitting a certain price, and pays out only if that event happens. These are risky and often unregulated.
binomial model An asset pricing model that looks at the likelihood of two different outcomes, then the likelihood of two outcomes for each of those. It is a way to think about option prices.
Black-Scholes An option pricing model that considers interest rates, volatility, price of the underlying asset, and time to expiration.
black swan A term used to describe the risk of an unusual event. The question the event raises is whether it is a one-time happening or the first of many.
box spread So-called because the payoff diagram forms a box. It involves a long call and short put at one strike price, along with a short call and a long put at another strike price.
breakout In technical analysis, the point where the price of a financial asset crosses the trendline.
butterfly spread A combination of a bear spread and a bull spread, using puts or calls, designed to take advantage of extreme volatility.
buy-limit order An order to buy a financial asset that includes instructions to the broker to execute the order only if the asset is at or below a predetermined price.
buy-to-close An option purchase order used to end a short position.
buy-to-open An option purchase order used to establish a long position.
buy-write A basic but effective option strategy involving writing calls on underlying assets that are already in your account. Also known as covered calls.
calendar spread Buying a call with one expiration date and then selling a call on the same underlying asset with the same strike price but a different expiration date.
call An option that gives the right, but not the obligation, to buy an underlying asset at a predetermined price on or before a predetermined date.
candlestick charting A technical analysis system that combines information about price and volume in the same chart entry.
cash settlement At expiration, the option holder receives (or pays, for a put) the cash value of the underlying asset rather than the underlying asset itself.
clearinghouse The organization that ensures the purchases or sales of options take place and that the cash or underlying asset is transferred properly when an option is exercised.
collar Also known as a fence, this strategy involves having a long call and a short put, or a short call and long put, at different strike prices above and below the price of an underlying asset.
collateralized debt obligation A security formed by combining a large pool of bonds and then selling off parts of it.
commodity A raw material or agricultural product, such as metals, fuels, or grains.
compound average rate of return Also known as the geometric average or the time-weighted return, this involves multiplying all the numbers in a series together and then taking it by the root of the number of items in the series. This is used to consider compounding.
condor A strategy similar to a butterfly but with a range of strike prices. It is used to benefit from volatility.
confidence index The yield on high-yield bonds divided by the yield on intermediate-quality bonds. The greater the relative return people demand for intermediate-quality bonds, the more concerned they are about the economy. This measure was first developed at Barron’s, the financial newspaper.
contingent order An order to buy or sell an asset that depends on a certain price being reached.
convergence A convergence takes place when moving averages calculated over different time periods come together. This is often a sign a trend is ending.
conversion An arbitrage strategy used when the price of an at-the-money call is higher than the price of an at-the-money put. You go long a put and short a call (with the same strike price and expiration) on an underlying asset you already own.
cost of carry The interest rate charged on money or securities borrowed for a trade.
covered call Also known as a buy-write strategy, this is a basic but effective option strategy involving writing calls on underlying assets already in your account.
covered option An option and the asset needed if the option is exercised. This includes writing a call on shares of stock you already own, or writing a put with enough cash in your account to buy the underlying if the option is exercised.
credit default swap A derivative contract that is a form of insurance on a collateralized debt obligation. It pays off if the collateralized debt obligation goes bankrupt.
crossover In technical analysis, a crossover occurs if the price crosses the moving average line. It is often used as a signal to make an options trade.
cup-and-handle A technical analysis formation that shows how less-informed traders react, creating an opportunity for those who have better information.
day order An order to buy or sell a security that is good only on the day that it is entered.
day trader Someone who wants to profit in the financial markets by making a large volume of small trades that are closed out at the end of each trading day.
delta The rate at which an option price changes, given a change in the price of the underlying asset.
derivative A financial contract that draws its value from the value of another asset.
divergence In technical analysis, the point where the moving averages for different periods move apart. This usually means a new trend is beginning.
dividend A payment that a company makes to its shareholders from its profits.
dollar-weighted return An investment performance calculation that looks at the changes in the total dollar value of a portfolio.
“edge minus odds” A money management system used by traders that is based on the percentage of winning trades you make relative to the total number of trades. Also known as the Kelly criterion.
Elliott Wave A theory of technical analysis based on cycles of market activity that are decades or even centuries long.
equity option An option that trades on the value of individual stocks.
European option An option that can be exercised only on the expiration date.
exchange-traded fund (ETF) A type of mutual fund that trades on an exchange like a share of stock. These are commonly issued on different market indexes and often used in different option strategies.
exercise The process of using the option to buy or sell the underlying security.
exercise price The price at which an option can be exercised. Also known as the strike price.
exotic An option written on an unusual underlying asset or with unusual features. These are often individually negotiated, not standardized.
expiration The date and time at which the option must be exercised or it becomes worthless.
expiration cycle The set of expiration dates that apply to a particular option.
extrinsic value The difference between an option’s premium and the amount by which it is in the money. Also known as time value.
fence A strategy that involves having a long call and a short put, or a short call and long put, at different strike prices above and below the price of an underlying asset. Also known as a collar.
Fibonacci sequence A series of numbers found in nature and mathematics that is the basis of some technical analysis systems. It is equal to the sum of two numbers in a series, as follows: 0, 1, 1, 2, 3, 5, 8, 13, 21 …. See also Golden Ratio.
first derivative In calculus, the term for the rate of change. In options trading, this is known as the delta.
fixed fractional A money management system for traders that is based on trading a predetermined percentage of the account, adjusted for the amount of risk on the trade.
fixed ratio A money management system for traders that is based on the amount of profit that is expected for a given position size.
flag A chart pattern in technical analysis that shows a short-term deviation from a trend.
forward contract An agreement to buy an underlying asset at a predetermined date in the future at a price agreed upon today. This is usually a customized contract.
fungible Items that are interchangeable. For example, one dollar bill is as useful as another, so dollar bills are fungible items.
futures commission merchant The regulatory term for a broker who is licensed to deal in futures contracts.
futures contract A derivative contract that gives you the obligation to buy or sell an asset at a specified future date for a specified price.
gamma The rate at which the delta of an option changes as the price of the underlying asset changes.
Gann A complicated theory of technical analysis based in part on money management.
gearing The word used in UK English for leverage, which is the use of borrowed money to increase risk and, it is hoped, return.
Golden Ratio A series of numbers found in nature and mathematics that is the basis of some technical analysis systems. It is equal to the sum of two numbers in a series, as follows: 0, 1, 1, 2, 3, 5, 8, 13, 21 …. Also known as the Golden Proportion. See also Fibonacci sequence.
good ’til cancelled (GTC) order An order to buy or sell something that is in place until the person who places the order requests otherwise.
good ’til date (GTD) order An order to buy or sell something that is in place until a prespecificed date.
Greeks The slang term for the Greek letters used in options valuation. See also alpha; beta; delta; gamma; rho; theta; vega.
head-and-shoulders A technical chart formation of three peaks in a row, which is considered an indicator of a price decline.
hedge ratio Also known as delta; the ratio between the change in an option’s value relative to the change in the value of the underlying asset.
hedging Using derivatives to ensure against unfavorable price changes in the underlying asset.
implied volatility The portion of an option’s price that is not attributed to the price of the underlying, the time to expiration, the strike price, or interest rates. It is a measure of how volatile the market expects the underlying asset to be.
in-the-money A term used to describe options that are profitable to be exercised.
index arbitrage A trade that looks to make a profit on the difference between the value of a market index and the value of the assets that make up the index.
index option An option based on the value of an underlying financial market index, such as the S&P 500 or the Financial Times Stock Exchange Index.
interest rate arbitrage A trade that looks to make a profit from the differences in interest rates among different types of bonds, such as the difference between government bonds and high-grade corporate bonds.
interest rate option An option that is based on the value of debt securities such as U.S. government bonds.
internal rate of return (IRR) The discount rate that makes the current value of an investment equal to its purchase price.
intrinsic value The portion of an option’s price that is attributed to the price of the underlying asset.
investor Someone who looks to make a profit from holding financial instruments for a long period of time.
iron butterfly A trade similar to a regular butterfly except it involves selling the mid-strike straddle and buying the surrounding strangle.
iron condor A trade similar to a regular condor except it involves selling the mid-strike straddle and buying the surrounding strangle.
Kelly criterion A money management system used by traders that is based on the percentage of winning trades you make relative to the total number of trades. Also known as edge minus odds.
law of one price Says that identical assets should have the same price in every market.
leverage Using borrowed money to increase the risk on a trade in the hopes of increasing the return.
limit order An order to trade an item that kicks in only when a specified price is reached.
long A synonym for owning an asset.
long straddle The purchase of a call and put with the same strike price. It pays off if the price of the underlying asset increases or decreases significantly. See also straddle; short straddle.
long strangle The purchase of a call with one strike price and a put with a higher strike price. It pays off if the price of the underlying asset increases or decreases significantly. See also strangle; short strangle.
long synthetic stock An option position that mimics the payoff of a share of common stock. It consists of a long call and a short put on the same underlying asset.
Long-term Equity AnticiPation Securities (LEAPS) A type of option that expires in 2 to 5 years rather than the shorter time periods of most exchange-traded options.
margin The amount of cash or securities that must be on account with a brokerage firm in order to borrow money or to take a leveraged position, such as an option trade.
margin agreement The contract a customer signs with a brokerage firm which states that he or she understands the risks and costs involved with margin.
margin call A notification that a broker sends to a customer if the customer’s margin falls below the minimum required for the positions in the account. If the customer does not deposit more cash or securities, the broker will close out the customer’s position.
mark to market The process of updating the value of trading accounts at the end of the day to reflect the official closing price for the day.
market maker A trader who is in the business of ensuring that there are buyers and sellers for a particular option. If no orders come from the public, the market maker will take the trade. Most market makers then hedge their positions.
market order An order to buy or sell an asset at whatever the current price might be.
market sentiment The overall mood of the market. Is the average trader feeling confident or fearful?
married call An options trade that involves shorting the underlying asset and buying calls to protect against a price increase in the underlying asset.
married put An options trade that involves buying the underlying asset and buying puts to protect against a price decrease in the underlying asset.
martingale A money management system popular with gamblers and traders that calls for starting with a small initial position. If the position loses, then the next trade should be made with twice the amount of money. The trader should keep doubling the size of the position until a trade wins. Then, he or she should start over.
merger arbitrage A trading strategy designed to take advantage of price changes in underlying assets that result from a merger announcement.
mini Futures contracts that are sized for individual investors.
Modified Dietz Method An investment performance calculation that considers the effect of cash deposits on the investment account.
moneyness The catch-all term for describing how the underlying price of an asset is relative to the exercise price. Is it in-the-money, at-the-money, or out-of-the-money?
Monte Carlo simulation A statistical technique used in the valuation of options and other assets that looks at the value under a range of distributions of the variables that affect the price.
moving average A series of averages derived from successive segments (typically of constant size and overlapping) of a series of values. In trading, this may mean looking at results for 5-, 15-, or 30-day periods.
multiple-listed option An exchange-traded option that can be traded on several different exchanges.
naked option A short option position in which you do not own the underlying (for a call) or the means to buy it (for a put), so you have greater financial exposure if the option is assigned.
net credit A positive balance in your trading account.
net debit A negative balance in your trading account.
one cancels other (OCO) order A contingent order to purchase or sell an asset that, if executed, will cancel a different order.
one triggers other (OTO) order A contingent order to purchase or sell an asset that, if executed, will cause a different order to be executed.
open arbitrage A trade that seeks to profit from price volatility at the very start of market trading for the day.
open interest Contracts in an options or futures market that are available for potential exercise because they have not been closed out, exercised, or allowed to expire.
open outcry A style of trading that involves human beings on the floor of the exchange who match buy and sell orders. This style of trading is mostly obsolete, having been phased out in favor of electronic trading, but it is still used to trade certain options.
option A contract that gives the holder the right, but not the obligation, to buy or sell an asset at a predetermined price on or before a predetermined date in the future.
option repair An option strategy designed to minimize a losing stock position with the purchase of a call option near the current price and the sale of an option near the original purchase price.
options agreement A contract that a customer signs with a brokerage firm in which the customer acknowledges receiving a guide to options from the broker and understands the risks and fees involves with trading options.
options chain A list of all the options available on a given security.
Options Clearing Corporation (OCC) The organization that guarantees the clearance and exercise of options on financial contracts in the United States.
options cycle The cycle of months in which options on a given underlying asset expire. Typical cycles are January, April, July, and October (JAJO); February, May, August, and November (FMAN); and March, June, September, and December (MJSD).
Options Industry Council (OIC) An organization sponsored by the U.S. options exchanges to provide educational services to options traders.
options on futures Options that trade on the underlying value of futures contracts, especially futures on commodities and currencies. This is often the only way to trade options on certain commodities.
options series Puts or calls on the same underlying asset that have the same exercise price and expiration date.
out-of-the-money An option price that is not profitable to execute.
over-the-counter (OTC) option An option that does not trade on an organized exchange. These are often customized by a broker to meet a particular customer’s needs.
parity The point at which an option is in the money and has no time value, which usually occurs immediately before expiration.
partial fill An order to buy or sell an option that cannot be executed in its entire amount, so only a part of the order is completed.
pattern day trader A brokerage customer who executes four or more day trades within 5 business days, provided that the number of day trades represents more than 6 percent of the customer’s total trades in the margin account for that same 5-business-day period.
pennant A chart pattern in technical analysis that shows a short-term deviation from a trend.
physical delivery In the futures market, the practice of delivering the underlying asset instead of the cash value at expiration.
pin risk The risk to the writer of an option that the price of the underlying asset will be at or near the option’s strike price at the time of expiration.
pivot point The average of the high, low, and closing prices from the previous trading period, used in technical analysis to measure an overall trend.
position limit The maximum number of contracts that any one account holder can have in the same underlying asset. May be set by either the exchange or the brokerage firm.
premium The price of the derivative.
price improvement The ability of a broker to help a customer buy at a lower price or sell at a higher price than at the time the order was placed.
probability of ruin A key concept in trading money management that measures the likelihood of a single trade wiping out an account.
protective put A put option purchased by the owner of the underlying asset as insurance against a price decline.
put An option that gives the holder the right, but not the obligation, to sell a security to someone else at a predetermined price on a predetermined date.
put-call parity The normal situation in the market, in which the underlying asset price is the same as the price of a long call plus a short put, assuming the same strike price and expiration.
put-call ratio The number of put options divided by the number of call options written on a particular underlying asset. The more puts that are being purchased, the more people are betting that the market is going to fall.
pyramid scheme An investment scheme in which the people at the top are paid by those at the bottom. It’s not relevant to options trading at all, except as a reminder that frauds abound in finance to take advantage of people who expect something for nothing.
pyramiding A system of money management in which you borrow against profits to try to increase the amount of gains from trading.
repurchase agreement An agreement to sell an asset and then buy it back at a predetermined (and usually higher) price at a predetermined date in the future.
retracement A temporary price change within a longer trend.
reversal A change in the direction of a price trend. Also known as a reverse conversion.
reverse head-and-shoulders A technical chart formation of three valleys in a row, which is considered an indicator of a price increase.
rho The Greek letter used for the sensitivity of options to a change in interest rates.
risk-free rate of interest The interest rate on an investment that will be repaid with certainty. The U.S. government bond rate is usually used at the risk-free rate.
roll A trade that involves closing out an open option position while at the same time establishing a new one at a different strike price.
sale contingency An option included in some real estate sales that gives the potential buyer the right to pay money to walk away from the sale if their current house does not sell in a given period of time.
scalping A trading strategy that looks to make a large number of short-term trades with small profits based mostly on volatility of the bid-ask spread.
sell-limit order A sell order placed with the broker for a financial asset with instructions to execute it only if a predetermined price is met or exceeded.
sell-to-close An order to that tells a broker to sell an option in order to close out an existing position.
sell-to-open An order that tells a broker to sell an option in order to establish a new option position.
sentiment indicator A metric used to help options traders and other market observers discern whether prices will be going up or going down.
settlement price The price at which a trade is finalized.
Sharpe ratio A measure of investment performance that shows the risk-adjusted rate of return.
short sell A trade that involves borrowing an asset, selling it on the market, and then repaying it with more of the asset purchased later. If the future price is lower, the short seller keeps the profit between the price of the sale and the price of the repurchase made to cover the position.
short straddle The sale of a call and a put with the same strike price. It pays off if the price of the underlying asset increases or decreases significantly. See also straddle; long straddle.
short strangle The sale of a call with one strike price and a put with a lower strike price. It pays off if the price of the underlying asset increases or decreases significantly. See also strangle; long strangle.
short The trading term used to designate selling a position.
single-stock option An option on shares of a particular stock.
slope The amount a line varies from being perfectly vertical or perfectly horizontal; used to measure the rate of change.
speculator A trader who looks to take risk to make a profit.
spot price The price of an asset as it is currently quoted in the market.
standard deviation A statistical measure of how much a given return on investment differs from the average return, used as a way to measure volatility.
stop order An order that tells the broker to stop buying or selling an asset as soon as a specific price level is hit. Also known as a stop-loss order.
stop-limit order An order that tells the broker to start executing at a given price or better and then stop the execution as soon as another price level is hit.
straddle An options trade that involves buying a call and a put with the same strike price. It is a play on volatility. See also long straddle; short straddle.
strangle An options trade that involves buying a call with one strike price and a put with a lower strike price. It is a play on volatility. See also long strangle; short strangle.
strap A risk-management transaction used by institutional options traders. It involves two long calls and one long put.
strike price The price at which an option can be exercised. Also known as the exercise price.
strip A risk-management transaction used by institutional options traders. It involves two long puts and one long call.
swap A transaction that involves trading a series of payments, such as trading fixed-rate interest payments for floating-rate interest payments.
swaption An option on a swap.
swing trader A trader who holds positions for more than a day but usually for only a few days or weeks.
synthetic security An option position that mimics the payoff of the underlying asset.
theta The rate at which an option’s price changes relative to the passage of time.
time value The amount of an option’s price that is related to the amount of time left to expiration. The longer the amount of time remaining, the more valuable the option.
time-weighted return Also known as the compound average annual growth rate, this involves multiplying all the numbers in a series together and then taking it by the root of the number of items in the series. This is used to consider compounding.
underlying asset The asset on which an option’s value is drawn. It may a common stock, a market index, a commodity future, or even a characteristic of the market such as volatility.
underlying price The price of the asset on which an option is written, and a key component in the price of an option.
value at risk A statistical measure of the amount of money that could be lost on a given trade, used to track option trading risk as well as design hedging positions.
vega The Greek term used to show the sensitivity of an option price to a change in the volatility of the option’s underlying asset. It is denoted by the Greek letter nu.
VIX The Chicago Board Options Exchange’s index on the volatility of options on the Standard & Poor’s 500 Index. It is used as a measure of expected volatility in the financial markets, and there are options that trade on the VIX itself.
volatility How much the price of an underlying asset is likely to change, often measured by standard deviation.
volatility cone A technical indicator used in options trading. It looks at the amount of implied volatility in an option’s price over different time periods.
wash sale The sale of an asset and the repurchase of a substantially similar one within 30 days.
weekly An option that expires each Friday. Weekly options have very little time value.
wheel trade The use of a short put option to establish a position in an underlying asset and the use of a short call to sell it.
writer The trader who sells an option.