# Archives for December 2013

## Stock Options 101 T-W

Stock options 101 includes options trading terms below.

Terms
The collective name denoting the expiration date, striking price, and underlying stock of an option contract.

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

Theta
A measure of the rate of change in an option’s theoretical value for a one-unit change in time to the option’s expiration date.

Time Decay
A term used to describe how the theoretical value of an option “erodes” or reduces with the passage of time.

Time Value
The portion of the option premium that is attributable to the amount of time remaining until the expiration of the option contract. Time value is whatever value the option has in addition to its intrinsic value.

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

Undervalued
Describing a security that is trading at a lower price than it logically should. Usually determined by the use of a mathematical model.

The minimum quantity or amount allowed when trading a security. The normal minimum for common stock is 1 round lot or 100 shares. The normal minimum for options is one contract (which normally covers 100 shares of stock).

Vega
A measure of the rate of change in an option’s theoretical value for a one-unit change in the volatility assumption.

Most commonly used to describe the purchase of one option and sale of another where both are of the same type and same expiration, but have different strike prices. Also used to describe a delta-neutral spread in which more options are sold than are purchased.

Volatility
A measure of the fluctuation in the market price of the underlying security. Mathematically, volatility is the annualized standard deviation of returns.

Write
To sell an option. The investor who sells is called the writer.

Be sure to understand all basic definitions associated with trading stock options. Happy investing!

Trading stock options is a great way to invest. Read the terms below as well as other options trading terms.

Selling more near-term options than longer-term ones purchased, all with the same strike; either puts or calls.

Constructed with either puts or calls, the strategy consists of buying a certain amount of options and then selling a larger quantity of more out-of-the-money options.

Ratio Strategy
A strategy in which one has an unequal number of long securities and short securities. Normally, it implies a preponderance of short options over either long options or long stock.

Ratio Write
Selling of call options in a ratio higher than 1 to 1 against the stock that is owned.

Return if Exercised
The return that a covered call writer would make if the underlying stock were called away

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

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.

Short Position
A position wherein a person’s interest in a particular series of options is as a net writer.

An order to simultaneously transact two or more option trades. Typically, one option would be bought while another would simultaneously be sold. Spread orders may be limit orders, not held orders, or orders with discretion

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

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

Strike Price
The stated price per share for which the underlying security may be purchased (in the case of a call) or sold (in the case of a put) by the option holder upon exercise of the option contract.

Synthetic Put
A strategy equivalent in risk to purchasing a put option where an investor sells stock short and buys a call.

## Options for Dummies Glossary Term N-P

Learn options for dummies by reading the below terms.

Neutral
Describing an opinion that is neither bearish nor bullish. Neutral option strategies are generally designed to perform best if there is little or no net change in the price of the underlying stock or index

Non-Equity Option
An option whose underlying entity is not common stock; typically refers to options on physical commodities and index options

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

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

Opening Transaction
A trade which adds to the net position of an investor. An opening buy transaction adds more long securities to the account. An opening sell transaction adds more short securities.

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

Options Clearing Corporation (OCC)
The issuer of all listed option contracts that are trading on the national option exchanges.

Out-of-the-money
A call option is out-of-the-money if the strike price is greater than the market price of the underlying security. A put option is out-of-the-money if the strike price is less than the market price of the underlying security.

Over-the-Counter Option (OTC)
An option traded off-exchange, as opposed to a listed stock option. The OTC option has a direct link between buyer and seller, has no secondary market, and has no standardization of striking prices and expiration dates

Position Limit
The maximum number of put or call contracts on the same side of the market that can be held in any one account or group of related accounts. Short puts and long calls are on the same side of the market. Short calls and long puts are on the same side of the market.

The price of an option contract, determined in the competitive marketplace, which the buyer of the option pays to the option writer for the rights conveyed by the option contract.

Put
An option contract that gives the holder the right to sell the underlying security at a specified price for a certain fixed period of time.

## How to Trade Options Glossary Terms G-M

Learn how to trade options by starting with the options glossary terms below.

Gamma
The rate of change in an option

Holder
The purchaser of an option.

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

Implied Volatility
A measure of the volatility of the underlying stock, it is determined by using option prices currently existing in the market at the time rather than using historical data on the price changes of the underlying stock

Index Option
An option whose underlying entity is an index. Most index options are cash-based

In-the-money
A term describing any option that has intrinsic value. A call option is in-the-money if the underlying security is higher than the striking price of the call. A put option is in-the-money if the security is below the striking price.

Intrinsic value
The value of an option if it were to expire immediately with the underlying stock at its current price; the amount by which an option is in-the-money. For call options, this is the difference between the stock price and the striking price, if that difference is a positive number, or zero otherwise.

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

LEAPS®
Long-term Equity Anticipation Securities, or LEAPS®, are long-term stock or index options. LEAPS®, like all options, are available in two types, calls and puts, with expiration dates up to three years in the future.

Leg
A risk-oriented method of establishing a two-sided position. Rather than entering into a simultaneous transaction to establish the position (a spread, for example), the trader first executes one side of the position, hoping to execute the other side at a later time and a better price. The risk materializes from the fact that a better price may never be available, and a worse price must eventually be accepted.

Listed Option
A put or call option that is traded on a national options exchange. Listed options have fixed striking prices and expiration dates

Margin Requirement (for options)
The amount an uncovered (naked) option writer is required to deposit and maintain to cover a position. The margin requirement is calculated daily.

Married Put and Stock
The simultaneous purchase of stock and the corresponding number of put options. This is a limited risk strategy during the life of the puts because the stock can be sold at the strike price of the puts.

Married Put Strategy
A put and stock are considered to be married if they are bought on the same day, and the position is designated at that time as a hedge.

Read more options trading terms as well as the Western and Japanese technical stock terms.

## Options Glossary Terms E-F

Early Exercise (assignment)
The exercise or assignment of an option contract before its expiration date. <P clas

Ex-Dividend
The process whereby a stock’s price is reduced when a dividend is paid. The ex-dividend date (ex-date) is the date on which the price reduction takes place. Investors who own stock on the ex-date will receive the dividend, and those who are short stock must pay out the dividend.

Exercise
To implement the right under which the holder of an option is entitled to buy (in the case of a call) or sell (in the case of a put) the underlying security.

Exercise Limit
The limit on the number of contracts which a holder can exercise in a fixed period of time. Set by the appropriate option exchange, it is designed to prevent an investor or group of investors from “cornering” the market in a stock.

Exercise price
The price at which the option holder may buy or sell the underlying security, as defined in the terms of his option contract. It is the price at which the call holder may exercise to buy the underlying security or the put holder may exercise to sell the underlying security. For listed options, the exercise price is the same as the Striking Price.

Exercise settlement amount
The difference between the exercise price of the option and the exercise settlement value of the index on the day an exercise notice is tendered, multiplied by the index multiplier.

Expiration cycle
An expiration cycle relates to the dates on which options on a particular underlying security expire. A given option, other than LEAPS®, will be assigned to one of three cycles, the January cycle, the February cycle or the March cycle.

Expiration date
The day on which an option contract becomes void. The expiration date for listed stock options is the Saturday after the third Friday of the expiration month. Holders of options should indicate their desire to exercise, if they wish to do so, by this date.

Expiration time
The time of day by which all exercise notices must be received on the expiration date. Technically, the expiration time is currently 5:00PM on the expiration date, but public holders of option contracts must indicate their desire to exercise no later than 5:30PM on the business day preceding the expiration date. The times are Eastern Time.

Fair Value
Normally, a term used to describe the worth of an option or futures contract as determined by a mathematical model. Also sometimes used to indicate intrinsic value

Float
The number of shares outstanding of a particular common stock.

## Stock Options Trading Terms C-D

Call

An Option contract that gives the holder the right to buy the underlying security at a specified price for a certain, fixed period of time.

Cash-Based
Referring to an option or future that is settled in cash when exercised or assigned. No physical entity, either stock or commodity, is received or delivered.

Cash Settlement
The process by which the terms of an option contract are fulfilled through the payment or receipt in dollars of the amount by which the option is in-the-money as opposed to delivering or receiving the underlying stock.

CBOE
The Chicago Board Options Exchange; the first national exchange to trade listed stock options.

Class
A term used to refer to all put and call contracts on the same underlying security.

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

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

Closing Transaction
A trade that reduced an investor’s position. Closing buy transactions reduce short positions and closing sell transactions reduce long positions.

Combination
Any position involving both put and call options that is not a straddle.

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

Covered
A written option is considered to be covered if the writer also has an opposing market position on a share-for-share basis in the underlying security.

Covered Call
An option strategy in which a call option is written against long stock on a share-for-share basis.

Covered Call Option Writing
A strategy in which one sells call options while simultaneously owning an equivalent position in the underlying security or strategy in which one sells put options and simultaneously is short an equivalent position in the underlying security.

Covered Put Write
A strategy in which one sells put options and simultaneously is short an equal number of shares of the underlying security.

An option strategy in which one call and one put with the same strike price and expiration are written against 100 shares of the underlying stock.

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.

Debit
An expense, or money paid out from an account. A debit transaction is one in which the net cost is greater than the net sale proceeds.

Deliver
To take securities from an individual or firm and transfer them to another individual or firm. A call writer who is assigned must deliver stock to the call holder who exercised. A put holder who exercises must deliver stock to the put writer who is assigned.

Delivery
The process of satisfying an equity call assignment or an equity put exercise. In either case, stock is delivered. For futures, the process of transferring the physical commodity from the seller of the futures contract to the buyer. Equivalent delivery refers to a situation in which delivery may be made in any of various, similar entities that are equivalent to each other (for example, Treasury bonds with differing coupon rates).

Delta
The amount by which an option’s price will change for a one-point change in price by the underlying entity. Call options have positive deltas, while put options have negative deltas. Technically, the delta is an instantaneous measure of the option’s price change, so that the delta will be altered for even fractional changes by the underlying entity.

A ratio spread that is established as a neutral position by utilizing the deltas of the options involved. The neutral ratio is determined by dividing the delta of the purchased option by the delta of the written option.

View some options trading terms below. You can also view other stock trading terms that are helpful in this blog. Happy investing!

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

Assignment

The receipt of an exercise notice by an option writer (seller) that obligates him to sell (in the case of a call) or purchase (in the case of a put) the underlying security at the specified strike price.

At-the-money

An option is at-the-money if the strike price of the option is equal to the market price of the underlying security.

Automatic Exercise

A protection procedure whereby the Options Clearing Corporation attempts to protect the holder of an expiring in-the-money option by automatically exercising the option on behalf of the holder.

Bearish

An adjective describing an opinion or outlook that expects a decline in price, either by the general market or by an underlying stock, or both.

An option strategy that makes its maximum profit when the underlying stock declines and has its maximum risk if the stock rises in price. The strategy can be implemented with either puts or calls. In either case, an option with a higher striking price is purchased and one with a lower striking price is sold, both options generally having the same expiration date.

Beta

A measure of how a stock’s movement correlates to the movement of the entire stock market. The Beta is not the same as volatility.

Bid Price

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

A type of option arbitrage in which both a bull spread and a bear spread are established for a near-riskless position. One spread is established using put options and the other is established using calls. The spread may both be debit spreads (call bull spread vs. put bear spread) or both credit spreads ( call bear spread vs. put bull spread). Break-Even Point–the stock price (or prices) at which a particular strategy neither makes nor loses money. It generally pertains to the result at the expiration date of the options involved in the strategy. A “dynamic” break-even point is one that changes as time passes.

Bullish

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