Options Trading Dictionary Mike Smith Options strategist Hawkeye Options Option Traders Dictionary Important Notes: a. We have as far as is possible attempted to provide accurate and clear definitions on the terminology used in Options trading. The information has been gathered from various sources as well as our own trading experience. b. We would encourage you to do your own due diligence an anything that is not clear and educate yourself fully prior to considering options trading c. We will be offering regular reviews that will be made available to all on the mailing list so if you have received this directly from another source, that is Ok but we would encourage you to sign up at www.eliteoptiontrading.com to ensure you have the latest version and receive future updates d. We always encourage feedback from those who use our services e. We hope you find this dictionary useful and wish you well in your continued journey into Options trading. Kind Regards Mike Smith A Accumulation Adding to an existing position on a new entry signal All-or-None (AON) An order that must be completely filled or else it will not be executed. Order American style An option contract that may be exercised at any time between the date of option entry and expiry. Most US and ASX options are American style. Arbitrage The process in which professional traders simultaneously buy and sell the same or equivalent securities for a riskless profit. Ask Price The price at which a seller is offering to sell an option or stock. Assignment The receipt of an exercise notice by an option seller that obligates him to honour the option contact at the specified strike price. At-the-money The strike price of the option is equal to the current price of the underlying share. ATM At the money Automatic A protection procedure whereby there is an exercise of the option if it is in the Exercise money on expiry on behalf on the holder Average Down To buy more of a security at a lower price, thereby reducing the holder's y average cost. (Generally Not advised!) r a B n o i t c i Back-testing The testing of a strategy based on historical price movements to see if the D s results are consistently favourable r e Baltic dry index A shipping index that tracks the level of the transportation of "dry goods". d a Some suggest is a leading indicator r T Bear Spread A two leg option strategy, usually with the same expiry, that makes its n maximum profit when the underlying stock declines and has its maximum risk if o i the stock rises in price. t p O 2 Bear trap A downward move that has little technical evidence that encourages investors to take bearish positions prematurely. Bearish An outlook that expects the market or a specific stock to more likely drop in price Beta A figure that shows how a share price generally moves in comparison to the market as a whole Bid Price The price at which a buyer is willing to buy an option or stock. Binary Options Options that either pay you a specified return if finishing in the money on expiry or zero return if it doesn't Black-scholes A formula commonly used to determine the fair price of an option taking into account underlying price, time and volatility Breadth The number of stocks advancing versus those declining. Breadth is termed either "inclining" (if more advancing) or "declining" Break-even point The price point at which the cost of a position is offset by the growth in its value Breakout A price moves above a previous resistance level or below a previous support level. Bull Spread A two leg option strategy, usually with the same expiry, that makes its maximum profit when the underlying stock increases and has its maximum risk if the stock drops in price. Bullish An outlook that expects the market or a specific stock to more likely rise in price Butterfly Spread Describes 3 leg option strategies to either trade an expectation of a price continuing in a range or an either way breakout (this determines the type and set up of options used). Buy to close Buy an option to close an existing sold contract Buy to open Buy an option to open a new contract Buy-write Covered call approach that involves buying stock and immediately selling a call C Calendar Spread An option strategy in which a long term option is bought and a short-term option in the same underlying asset is sold, both having the same strike price. Call An Option contract that gives the holder the right to buy the underlying security at a specified price on or before an expiry date Call Ratio A credit options trading strategy with unlimited profit to upside and limited Backspread profit to downside through buying more out of the money calls than in the money calls are shorted. Call Ratio spread A credit options trading strategy with the ability to profit when a stock goes up, down or sideways through shorting more out of the money calls than in the money calls are bought. y Called away Where a call option seller is obligated to surrender the underlying stock to the r a option buyer at the specified strike price n o i Capitalization The total amount of securities issued by a corporation. This may include: t c bonds, debentures, preferred stock, common stock and surplus. i D Cash- An option that is settled in cash (rather than in the exchange of shares) when s r Based(settled) exercised or assigned. E.g. Index options e d option a r T CBOE The Chicago Board Options Exchange n Chain A list of options quotes across multiple strike prices. o i t p O 3 Clearing house A regulated body that ensure an orderly options market. The source of cash margin for uncovered sold options positions Close The end of a trading day where final prices for the day are determined Collateral The loan value of marginable securities. These may offset the necessity for a "cash-margin'' in uncovered sold options positions Combination A general term for any position involving two or more option legs e.g. Spreads/butterfly Condor spread A four leg option strategy that profits from a stock trading within a range Consolidation When stocks starts going sideways after a significant rise or fall where market sentiment becomes neutral awaiting the next piece of news that may further alter expectation Contango A term originating from the oil market that indicates normal market conditions. This is when further month implied volatility is higher than nearer month implied volatility. Contingent Order An order which can be executed only if another event occurs e.g. If the stock price is $x then buy option y Contract size The amount of underlying asset covered by the option contract. This is generally 100. Correction When a stock drops in price temporarily before potentially rebounding later. Some suggest up to 10%. Cover To buy to close a previously sold option. Covered Where the investor owns shares to cover potential exercise of a sold options position(in the case of a call) or is short the stock to cover exercise in the case of a sold Put. Covered Call An option strategy in which a call option is sold against long stock held on a share-for-share basis. Credit spread An option spread in which the premium received from the sold leg is larger than the premium paid for the bought leg, so bringing money into the account. Such positions are usually subject to a cash margin requirement Cycle The expiration dates applicable to various classes of options. There are three cycles: January/April/July/October, February/May/August/November, and March/June/September/ December. D Day order An order that expires at the end of the trading day if not executed Debit spread An option spread in which the premium received from the sold leg is less than the premium paid for the bought leg, thereby bringing money into the account Delta The amount the value of an option will change for a 1c change in price in the underlying share. Derivative A financial product (e.g. Option) whose value is determined in part from the y value and characteristics of the underlying security. r a Diagonal Spread An option strategy in which a long term option is bought and a short-term n o i option in the same underlying asset is sold, at different same strike prices. t c Dividend When a company pays a share of the profit to existing shareholders. i D s Dividend payment The date that those who are entitled to the dividend payment receive it from r e date the company. Does not impact on share price generally as this has already d a occured on the ex-dividend date r T Downside Generally used with a covered call strategy, expresses the protection provided n Protection by the premium received. E.g. $1 premium = protection up to a $1 price drop in o i the underlying t p O 4 E Early Exercise The exercise of an option contract before its expiry date (Only possible with (assignment) American style options). Earnings season Specific times of the year at which many companies report their corporate results and projections. Can result in rapid movement of specific share prices as market expectations often change on the basis on these reports.