Glossary

  • American Options – options that can be exercised on any day prior to or on the expiration date
  • At-The-Money (ATM) – the option whose strike is closest to the current price of the underlying
  • Buy-Write - strategy that attempts to create income by harnessing premium generated from selling call options against long stock positions. Click for more info.
  • Call – an option to buy the underlying
  • Conversion - buying the put and selling the call on the same option strike, while buying the underlying stock
  • Conversion Reversal (or Reversal) - buying the call and selling the put on the same option strike, while selling the underlying stock
  • Cost-of-Carry - effectively, the cost required by a trader to carry a position in a stock for a length of time. It is a combination of interest rate, dividend, and hard-to-borrow rate, and it affects option pricing
  • Covered Call – see Buy-Write
  • Deliverable – the security(ies) that are transacted upon option exercise
  • Delta – the amount of change of premium resulting from a unit change in underlying price. Click for more info
  • Exercise – for an option holder, the act of electing to buy or sell the underlying
  • Expiration Date – After this date, the option can no longer be exercised and loses all value
  • European Options - options that can be exercised on expiration date only
  • Gamma – change in Delta in response to a unit change in the price of the underlying. Click for more info
  • Hard-to-Borrow Rate - when shares of stock are not widely available for lenders to loan out to traders who want to short the stock, they can charge an increased fee to enable shorting, and this fee will factor into the cost-of-carry for options pricing
  • Historical Volatility – see Stock Volatility
  • Implied Volatility – a measure of how much the stock price is expected to move around based on option premiums. Click for more info
  • In-The-Money - calls with strikes lower than the price of the underlying or puts with strikes higher than the price of the underlying
  • NBBO - National Best Bid and Offer - The NBBO represents the highest bid and lowest offer for a given security, calculated and disseminated on a continuous basis by SIAC from among the BBO reported by each of the participating exchanges.
  • Notional Value – the total amount of a security’s underlying asset at its spot price, that is, how much total value a security theoretically controls. For a standard option, notional value equals contract size (x 100) multiplied by the underlying stock price. A distinction between how much money is invested in buying/selling a contract verses the amount associated with the entire transaction.
  • Open Interest – total number of contracts held by all types investors for a given contract. See Open Interest
  • Option – a contract that given the right to buy or sell a specified security and a specific price on or before a specific date
  • Out-Of-The-Money – calls with strikes higher than the price of the underlying or puts with strikes lower than the price of the underlying
  • PNL (or P&L) - an acronym for "Profit and Loss"
  • Premium – the price of an option contract
  • Put – an option to sell the underlying
  • Put-Call Parity - a relationship between options and stock which states that buying a call and selling a put for the same strike should have the same forward value as holding a long position in the stock
  • Put Protection – trading strategy that protects the holder of stock against loss caused by stock price declines below a certain level. Click for more info
  • Rho – a measure of the sensitivity of option prices to interest rate changes. Click for more info
  • Risk Reversal – trading strategy for expressing bullish or bearish view on a stock, involved buying out-of-the money calls and selling out-of-the-money puts (bullish) or doing the opposite (bearish). Click for more info
  • Skew - implied volatility disparity between different strike prices within the same expiration. Click for more info
  • Standardized option – an option whose characteristics are defined by a regulatory body or other entity with appropriate authority
  • Stock Volatility - a measure of how much the stock price has moved around based on historical stock prices. Click for more info
  • Strike Price – the price that the underlying can sold or purchased at
  • Theta – a measure of the effect of time decay on an option’s premium. Click for more info
  • Underlying Asset – the security that the option’s price is based upon
  • Vega – a measure of how much the Implied Volatility of a stock price affects option premiums. Click for more info
  • Wings – see Out-of-the-money

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