Adapted from Guy Bower's book Options: A Complete Guide for Investors and Traders
Ask volatility: The level of implied volatility such that the fair value of an option equals the ask price.
Arbitrage: A strategy involving the purchase of one position and the sale of a similar position to profit from a pricing difference. A market maker will regularly trade arbitrage strategies.
Arbitrageur: One who trades in arbitrage strategies.
Back month: Refers to options/futures with distant expiries (as opposed to front or near month). A calendar spread involves buying (selling) the front month and selling (buying) the back month.
Bear: (Or bearish) depicts a negative view on the market. For example, ‘I am bearish' is the same as saying ‘I think the market is will fall'. Opposite of bull.
Bear call spread: This is a type of vertical spread (that is both options have the same expiry). It involves selling one call strike and buying a higher call strike. The trade is placed at a credit and therefore also comes under the heading of a credit spread.
Bear put spread: This is a type of vertical spread (that is both options have the same expiry). It involves buying one put strike and selling a lower put strike. The trade is placed at a debit and therefore also comes under the heading of a debit spread.
Bid: The price at which someone is willing to buy an option.
Bid and asked: The most common way a price for an option is quoted. This is the highest bid price and the lowest ask price. For example, ‘the May 750 call is currently 50/55'. This means the highest bid is 50 and the lowest offer is 55.
Bid-asked spread: The difference between the highest bid price and the lowest ask price.
Bid up: When demand pushes the price for an asset higher it is said to be ‘bid up'.
Breakeven: In options, this normally refers to the price of the underlying market at which an options strategy will not lose and not gain. For example, the breakeven price at expiry for a $100 call purchased for $10 is $110.
Breakout: Generally refers to a movement in the underlying market where the price moves higher or lower (that is does not stay the same). Trades such as long straddles and strangles benefit from breakouts.
Broker: A company that is licensed to transact in (option) markets. Quite often the term broker is also applied to the individual adviser or representative of the broking company. Strictly speaking, however, this is not correct.
Bull: (Or bullish) depicts a positive view on the market. For example ‘I am bullish' is the same as saying ‘I think the market is will increase'. Opposite of bear.
Bull put spread: This is a type of vertical spread (that is both options have the same expiry). It involves buying one put strike and selling a higher put strike. The trade is placed at a credit and therefore also comes under the heading of a credit spread.
Butterfly spread: A combination of a long (short) strangle and a short (long) straddle.
Bid volatility: The level of implied volatility such that the fair value of an option equals the bid price.
Calendar spread: A strategy that involves buying (selling) a call (put) with one expiry and selling (buying) another call (put) is a different month.
Call option: A contract that gives the buyer the right to buy the underlying asset within a certain amount of time as a specified priced.
Call premium: The price paid or received for a call option.
Close: The last traded price for a share, futures contract or options contract in a trading session. Most often for options an official settlement price will be quoted as the close since the last traded price may not be up to date.
Closing purchase: This involves buying back a short position in order to exit the position.
Closing sale: This involves selling a long position in order to exit the position.
Commission: The fee paid to the broker for transacting.
Condor: A strategy involving a long (short) strangle at certain strike prices with a short (long) strangle with a wider strike price interval.
Covered call: A strategy involving a long position in the underlying (for example, shares) and a short position in call options.
Covered put: A strategy involving a short position in the underlying (for example, futures) and a short position in put options.
Credit spread: A strategy involving a spread that is placed at a net credit or inflow of funds.
Debit spread: A strategy involving a spread that is placed at a net debit or outflow of funds.
Deep-in-the-money: Refers to an option that has a large intrinsic value. A deep-in-the-money option will have little time value and a very high delta.
Delta: The rate of change in the option premium given a change in the underlying.
Delta neutral: A position where the total delta is zero or near zero. In other words, the position will not lose or gain given a small change in the underlying.
Delta position: The delta for a total position (a position with more than one option). This is calculated simply by adding up the deltas for an individual position.
Discount brokers: A broker than offers execution only (no advice).
Downside: A fall in the market or a reference to the risk in a position.
Equity option: Referring to an option on a parcel of equities.
ETO: Abbreviation of exchange traded option and refers to any option that is made available for trading on a recognized exchange.
European style option: An option that can be exercised at expiry only.
Exchange: The organisation that makes options/futures/shares available for trading.
Execution: A transaction in the market.
Exercise: The conversion of the option into a long or short position in the underlying asset.
Exercise price: The price at which as option can be exercised. Also called strike price.
Expiration cycle: Refers to the frequency of option expiries made available by an exchange. Some options and futures have what is called a quarterly expiration cycle. This means the options expire in March, June, September and December,
Expiration date: The day on which trading for an option ceases. Not all options have the same expiration date, so it pays to check this out before trading.
Fair value: A value for an option that is produced by using an option pricing model such as the Black-Scholes Option Pricing Model.
Fill: An executed order.
Front month: Refers to options/futures with the nearest expiry (as opposed to back). A calendar spread involves buying (selling) the front month and selling (buying) the back month.
Fundamental analysis: A method of analysis that studies supply and demand factors.
Futures contract: An agreement to purchase or sell a given asset at a specific time in the future at a specific price. Future contracts are traded on recognized exchanges with standardized features and transferable ownership.
Gamma: The rate of change in the delta given a move in the market.
Go long: To buy an asset in expectation of it increasing in value.
Go short: To sell an asset without first owning it with the expectation of it decreasing in value.
Illiquid market: A market in which there is little volume traded.
Index options: Option based on a stock index such at the S&P100.
In-the-money: An option that has intrinsic value.
Leg: One part of a multi option strategy. For example, a bull call spread has two legs-a long call and a short call.
Limit move: Some futures contracts have a maximum daily change allowed by the exchange. Once the market price reaches this maximum amount or limit, all trading ceases. A limit move is where the market trades to that maximum level.
Liquidity: Refers to the degree of volume traded in a market. The more volume a market trades, the more liquid it is.
Long: A bought position in an asset with the expectation that the price will increase.
Make a market: To offer a bid and ask price in a market. This is the job of a market maker.
Margin: The deposit required to trading in futures and futures options.
Margin call: A request for more funds after an open position loses money.
Mark-to-market: The process where the profit or loss from a futures or futures option position is accounted for at the end of each day. Profits are credited to your account and losses are debited.
Market maker: One who regularly offers both buy and sell prices in the market. By offering both a buy price and a sell price, he/she ‘makes a market'. Market makers are normally professionally recognized participants in the market.
Market value: The most recent value for an asset.
Naked position: Usually referring to an outright short position (such as a short call or a short put) without any related hedge or spread component.
Narrowing the spread: This will either refer to the spread between two options (or futures) prices or the spread between the bid and offer prices. The concept of narrowing means a decrease in the absolute value of a spread. For example, ‘the spread between the March and June 2000 calls has narrowed from 50pts to 45pts'.
Near-the-money: An option with a strike price that is close to being at-the-money
OEX: The name and code for the S&P100 index options as traded on the CBOE.
Offer: The lowest price at which someone is willing to sell. Also known as ‘ask'.
Opening transaction: A transaction in which the intention is to create or increase a position in a given series of options. Opposite of closing transaction.
Open interest: The total number of option contracts that exist in the market. The term also applies to futures contracts.
Option holder: One who is long an option.
Option writer: One who is short an option.
Out-of-the-money: An option with no intrinsic value.
Premium: The price paid or payable for an option.
Put option: A contract that gives the buyer the right to sell the underlying asset within a certain amount of time at a specified priced.
Quote: The current price of an option, normally given as both the bid and ask prices. For example, a quote for the March 1500 call might be 40/50-meaning 40 bid and 50 offered. Most brokers will say something like ‘40 bid, 50 offered', or, more simply, ‘40,50'.
Ratio backspread: The opposite of a regular ration call or put spread. That is you sell a call (put) then buy two or more calls (puts).
Ratio call spread: A strategy where you buy a near-the-money call and sell two or more further out-of-the-money calls.
Ratio put spread: A strategy where you buy a near-the-money put and sell two or more further out-of-the-money puts.
Short: To sell an asset without first owning it with the intention of profiting from a fall in the value of that asset.
Spread: This refers to the difference between two options (or futures) prices or the spread between the bid and offer prices.
Straddle: A strategy involving the purchase or sale of a call and put at the same strike price with the same expiry.
Stop-loss: The point at which a losing position is closed or is to be closed.
Strangle: A strategy involving the sale of a call and put at different strike prices with the same expiry.
Strike price (exercise price): The price of the underlying at which an option can be bought or sold when exercised.
Style: Refers to the expiration style of an option-American or European.
Synthetic long call: A combination of a long put and long underlying.
Synthetic long put: A combination of long call and short underlying.
Synthetic long underlying: A combination of a long call and a short put with the same expiry and strike price.
Synthetic short call: A combination of short put and short underlying.
Synthetic short put: A combination of short call and long underlying.
Synthetic short underlying: A combination of short call and long put.
Technical analysis: Market analysis involving the study of past data such as charts patterns and moving averages.
Theoretical value: The value of an option that is calculated using an option pricing model. Also called fair value.
Theta: The chance in the option premium given the passing of one day.
Tick: The smallest possible movement in an asset.
Time decay: The erosion of time premium given the passing of time.
Time premium: The value of an option excluding intrinsic value. All options will have some theoretical or actual time value given a certain time to expiration. Time value is at its greatest for options at-the-money and options with a longer time to expiry.
Time value: The value of the option premium excluding intrinsic value. Also, but rarely, called extrinsic value.
Trigger point: The point in the underlying market where you would act to either close or adjust a position.
Triple witching day: A day where there are expirations in three different futures/options contracts. The third Friday of every quarterly month (March, June, Sep, Dec) has the expiries of index options and index futures and index futures options. Just recently this has come to be known as ‘quadruple witching' since the recently introduced single stock futures also expire on the 3rd Friday.
Type: Call or put.
Uncovered option: An unhedged option position.
Vega: The change in the option premium given a change in interest rates (cost of carry).
Volatility: The degree of variability in an asset. This is measured using past data or estimated/implied using option prices and other information.
Volatility skew: Compares implied volatility across different strike prices (either puts or calls with the same expiry month). 99.9% of the time, these volatilities will not be the same and therefore the range of volatilities are skewed in one direction or the other.
