Glossary

A

An option contract that may be exercised at any time between the date of purchase and the expiration date. Most exchange-traded options are American-style.

Arbitrage

The process in which professional traders simultaneously buy and sell the same or equivalent securities for a risk less profit.

Ask Price

The price at which a seller is offering to sell an commodity.

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.

Average Down

To buy more of a security at a lower price, thereby reducing the holder's average cost. (Average Up: to buy more at a higher price.)

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.

Bear Spread

An option strategy that makes its maximum profit when the underlying commodity declines and has its maximum risk if the commodity 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 commodity 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.

Box Spread

A type of option arbitrage in which both a bull spread and a bear spread are established for a near-risk less 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 commodity 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.

Broad-Based

Generally referring to an index, it indicates that the index is composed of a sufficient number of stocks or of stocks in a variety of industry groups.

Bullish

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

Bull Spread

An option strategy that achieves its maximum potential if the underlying security rises far enough, and has its maximum risk if the security falls far enough. An option with a lower striking price is bought and one with a higher striking price is sold, both generally having the same expiration date. Either puts or calls may be used for the strategy.

Butterfly Spread

An option strategy that has both limited risk and limited profit potential, constructed by combining a bull spread and a bear spread. Three striking prices are involved, with the lower two being utilized in one spread and the higher two in the opposite spread. The strategy can be established with either puts or calls; there are four different ways of combining options to construct the same basic position.

Buy-write

See Covered Call.

C

Calendar Spread

An option strategy in which a short-term option is sold and a longer-term option is bought, both having the same striking price. Either puts or calls may be used.

Calendar Straddle or Combination

See Calendar Spread.

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.

Capitalization-Weighted Index

A commodity index which is computed by adding the capitalization (float times price) of each individual commodity in the index, and then dividing by the divisor. The stocks with the largest market values have the heaviest weighting in the index.

Capped-Style Option

A capped option is an option with an established profit cap or cap price. The cap price is equal to the option's strike price plus a cap interval for a call option or the strike price minus a cap interval for a put option. A capped option is automatically exercised when the underlying security closes at or above (for a call) or at or below (for a put) the Option's cap price.

Carrying Cost

The interest expense on a debit balance created by establishing a position.

Cash-Based

Referring to an option or future that is settled in cash when exercised or assigned. No physical entity, 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.

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.

Collateral

The loan value of marginable securities; generally used to finance the writing of uncovered options.

Combination

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

Commodities

Contingent Order

Conversion Arbitrage

A riskless transaction in which the arbitrageur buys the underlying security, buys a put, and sells a call. The options have the same terms.

Conversion Ratio

See Convertible Security.

Converted Put

See Synthetic Put.

Convertible Security

A security that is convertible into another security. Generally, a convertible bond or convertible preferred commodity is convertible into the underlying commodity of the same corporation. The rate at which the shares of the bond or preferred commodity are convertible into the common is called the conversion ratio.

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. That is, a short call is covered if the underlying commodity is owned, and a short put is covered (for margin purposes) if the underlying commodity is also short in the account. In addition, a short call is covered if the account is also long another call on the same security, with a striking price equal to or less than the striking price of the short call. A short put is covered if there is also a long put in the account with a striking price equal to or greater than the striking price of the short put.

Covered Call

An option strategy in which a call option is written against long commodity 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.

Covered Straddle

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. In actuality, this is not a "covered" strategy because assignment on the short put would require purchase of commodity on margin. This method is also known as a covered combination.

Covered Straddle Write

The term used to describe the strategy in which an investor owns the underlying security and also writes a straddle on that security. This is not really a covered position.

Credit

Money received in an account. A credit transaction is one in which the net sale proceeds are larger than the net buy proceeds (cost), thereby bringing money into the account.

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 commodity to the call holder who exercised. A put holder who exercises must deliver commodity to the put writer who is assigned.

Delivery

The process of satisfying an equity call assignment or an equity put exercise. In either case, commodity 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.

Delta Spread

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.

Depository Trust Corporation (DTC)

A corporation that will hold securities for member institutions. Generally used by option writers, the DTC facilitates and guarantees delivery of underlying securities if assignment is made against securities held in DTC.

Derivative security

A financial security whose value is determined in part from the value and characteristics of another security, the underlying security.

Diagonal Spread

Any spread in which the purchased options have a longer maturity than do the written options as well as having different striking prices. Typical types of diagonal spreads are diagonal bull spreads, diagonal bear spreads, and diagonal butterfly spreads.

Discount

An option is trading at a discount if it is trading for less than its intrinsic value. A future is trading at a discount if it is trading at a price less than the cash price of its underlying index or commodity.

Discount Arbitrage

A riskless arbitrage in which a discount option is purchased and an opposite position is taken in the underlying security. The arbitrageur may either buy a call at a discount and simultaneously sell the underlying security (basic call arbitrage) or may buy a put at a discount and simultaneously buy the underlying security (basic put arbitrage).

Discretion

Freedom given to the floor broker by an investor to use his judgment regarding the execution of an order. Discretion can be limited, as in the case of a limit order that gives the floor broker.125 or.25 point from the stated limit price to use his judgment in executing the order. Discretion can also be unlimited, as in the case of a market-not-held order.

Divisor

A mathematical quantity used to compute an index. It is initially an arbitrary number that reduces the index value to a small, workable number. Thereafter, the divisor is adjusted for commodity splits (price-weighted index) or additional issues of commodity (capitalization-weighted index).

Downside Protection

Generally used in connection with covered call writing, this is the cushion against loss, in case of a price decline by the underlying security, that is afforded by the written call option. Alternatively, it may be expressed in terms of the distance the commodity could fall before the total position becomes a loss (an amount equal to the option premium), or it can be expressed as percentage of the current commodity price.

Dynamic

For option strategies, describing analyses made during the course of changing security prices and during the passage of time. This is as opposed to an analysis made at expiration of the options used in the strategy. A dynamic break-even point is one that changes as time passes. A dynamic follow-up action is one that will change as either the security price changes or the option price changes or time passes.

Early Exercise (assignment)

The exercise or assignment of an option contract before its expiration date.

Escrow Receipt

A receipt issued by a bank in order to verify that a customer (who has written a call) in fact owns the stock and therefore the call is considered covered.

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 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.

Expected Return

A rather complex mathematical analysis involving statistical distribution of commodity prices, it is the return which an investor might expect to make on an investment if he were to make exactly the same investment many times throughout history.

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 commodity 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.

Facilitation

The process of providing a market for a security. Normally, this refers to bids and offers made for large blocks of securities, such as those traded by institutions. Listed options may be used to offset part of the risk assumed by the trader who is facilitating the large block order.

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.

Floor Broker

A broker on the exchange floor who executes the orders of public customers or other investors who do not have physical access to the trading area.

Fundamental Analysis

A method of analyzing the prospects of a security by observing accepted accounting measures such as earnings, sales, assets, and so on.

Gamma

The rate of change in an option's delta for a one-unit change in the price of the underlying security.

Good Until Canceled (GTC)

A designation applied to some types of orders, meaning the order remains in effect until it is either filled or canceled.

Hedge

A conservative strategy used to limit investment loss by effecting a transaction which offsets an existing position.

Hedge Ratio

The mathematical quantity that is equal to the delta of an option. It is useful in that a theoretically neutral hedge can be established by taking offsetting positions in the underlying commodity and its call options.

Holder

The purchaser of an option.

Horizontal Spread

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.

Incremental Return Concept

A strategy of covered call writing in which the investor is striving to earn an additional return from option writing against a commodity position which he (she) has targeted to sell -- possibly at substantially higher prices.

Index

A compilation of the prices of several common entities into a single number.

Institution

An organization, probably very large, engaged in professional investing in securities. Normally a bank, insurance company, or mutual fund.

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 commodity at its current price; the amount by which an option is in-the-money. For call options, this is the difference between the commodity price and the striking price, if that difference is a positive number, or zero otherwise. For put options it is the difference between the striking price and the commodity price, if that difference is positive, and zero otherwise.

There are no glossary terms on this letter.

There are no glossary terms for on this letter.

Last Trading Day

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

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.

Letter of Guarantee

A letter from a bank to a brokerage firm which states that a customer (who has written a call option) does indeed own the underlying commodity and the bank will guarantee delivery if the call is assigned. Thus the call can be considered covered. Not all brokerage firms accept letters of guarantee. Also: letter issued to O.C.C. by member firms covering a guarantee of any trades made by one of its customers, (a trader or broker on the exchange floor).

Leverage

In investments, the attainment of greater percentage profit and risk potential. A call holder has leverage with respect to a commodity holder - the former will have greater percentage profits and losses than the latter, for the same movement in the underlying stock.

Limit

See Trading Limit.

Limit Order

An order to buy or sell securities at a specified price (the limit). A limit order may also be placed "with discretion". In this case, the floor broker executing the order may use his (her) discretion to buy or sell at a set amount beyond the limit if he (she) feels it is necessary to fill the order.

Local

A trader on a futures exchange who buys and sells for his own account and may sometimes also fill public orders.

Lognormal Distribution

A statistical distribution that is often applied to the movement of commodity prices. It is a convenient and logical distribution because it implies that commodity prices can theoretically rise forever but cannot fall below zero.

Long Position

A position wherein an investor's interest in a particular series of options is as a net holder (i.e., the number of contracts bought exceeds the number of contracts sold).

Margin

To buy a security by borrowing funds from a brokerage house. The margin requirement - the maximum percentage of the investment that can be loaned by the brokerage firm -- is set by the Federal Reserve Board.

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.

Mark-To-Market

An accounting process by which the price of securities held in account are valued each day to reflect the last sale price or market quote if the last sale is outside of the market quote. The result of this process is that the equity in an account is updated daily to properly reflect current security prices.

Market Basket

A portfolio of common stocks whose performance is intended to simulate the performance of a specific index.

Market-Maker

An exchange member whose function is to aid in the making of a market, by making bids and offers for his account in the absence of public buy or sell orders. Several market-makers are normally assigned to a particular security. The market-maker system encompasses the market-makers, floor brokers, and order book officials.

Market Not Held Order

Also a market order, but the investor is allowing the floor broker who is executing the order to use his own discretion as to the exact timing of the execution. If the floor broker expects a decline in price and he is holding a "market not held buy order", he (she) may wait to buy, figuring that a better price will soon be available. There is no guarantee that a "market not held order" will be filled.

Market Order

An order to buy or sell securities at the current market. The order will be filled as long as there is a market for the security.

Married Put and Stock

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

Married Put Strategy

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

Model

A mathematical formula designed to price an option as a function of certain variables - generally commodity price, striking price, volatility, time to expiration, dividends to be paid, and the current risk-free interest rate. The Black-Scholes model is one of the more widely used models.

Naked Option

See Uncovered Option.

Naked writer

See Uncovered call writing and Uncovered put writing.

Narrow-Based

Generally referring to an index, it indicates that the index is composed of only a few stocks, generally in a specific industry group.

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 commodity or index.

Non-Equity Option

An option whose underlying entity is not common stock; typically refers to options on physical commodities and index options.

"Not Held"

See Market Not Held Order.

Notice Period

The time during which the buyer of a futures contract can be called upon to accept delivery. Typically, the 3 to 6 weeks preceding the expiration of the contract.

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.

Order Book Official

The exchange employee in charge of keeping a book of public limit orders on exchanges utilizing the "maker-maker" system, as opposed to the "specialist system", of executing orders.

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 commodity 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.

Overvalued

Describing a security trading at a higher price than it logically should. Normally associated with the results of option price predictions by mathematical models. If an option is trading in the market for a higher price than the model indicates, the option is said to be overvalued.

Parity

Describing an in-the-money option trading for its intrinsic value; that is, an option trading at parity with the underlying stock. Also used as a point of reference - an option is sometimes said to be trading at a half-point over parity or at a quarter-point under parity. An option trading under parity is a discount option.

Physical Option

An option whose underlying security is a physical commodity that is not commodity or futures. The physical commodity itself (a currency, treasury debt issue, commodity) - underlies that option contract.

Position

As a noun, specific securities in an account or strategy. (A covered call writing position might be long 1,000 XYZ and short 10 XYZ January 30 calls). As a verb, to facilitate; to buy or sell - generally a block of securities - thereby establishing a position.

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.

Premium

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.

Price-Weighted Index

A commodity index which is computed by adding the prices of each commodity in the index, and then dividing by the divisor.

Payoff Diagram

See Profit Graph.

Profit Graph

A graphical representation of the potential outcomes of a strategy. Dollars of profit or loss are graphed on the vertical axis, and various commodity prices are graphed on the horizontal axis. Results may be depicted at any point in time, although the graph usually depicts the results at expiration of the options involved in the strategy.

Profit Range

The range within which a particular position makes a profit. Generally used in reference to strategies that have two break-even points - an upside break-even and a downside break-even. The price range between the two break-even points would be the profit range.

Profit Table

A table of results of a particular strategy at some point in time. This is usually a tabular compilation of the data drawn on a profit graph.

Protected Strategy

A position that has limited risk. A protected short sale (short stock, long call) has limited risk, as does a protected straddle write (short straddle, long out-of-the-money combination).

Public Book (of orders)

The orders to buy or sell, entered by the public, that are generally away from the current market. The order book official or specialist keeps the public book. Market-Makers on the CBOE can see the highest bid and lowest offer at any time. The specialist's book is closed (only he knows at what price and in what quantity the nearest public orders are).

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.

Ratio Calendar Combination

A strategy consisting of a simultaneous position of a ratio calendar spread using calls and a similar position using puts, where the striking price of the calls is greater than the striking price of the puts.

Ratio Calendar Spread

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

Ratio Spread

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 commodity that is owned.

Resistance

A term in technical analysis indicating a price area higher than the current commodity price where an abundance of supply exists for the commodity and therefore the commodity may have trouble rising through the price.

Return (on investment)

The percentage profit that one makes, or might make, on his investment.

Return if Exercised

The return that a covered call writer would make if the underlying commodity were called away.

Reversal Arbitrage

A risk less arbitrage that involves selling the commodity short, writing a put, and buying a call. The options have the same terms.

Rho

The expected change in an option's theoretical value for a 1 percent change in interest rates.

Risk Arbitrage

A form of arbitrage that has some risk associated with it. Commonly refers to potential takeover situations where the arbitrageur buys the commodity of the company about to be taken over and sells the commodity of the company that is effecting the takeover.

Roll Down

Close out options at one strike and simultaneously open other options at a lower strike.

Roll Forward (Out)

Close-out options at a near-term expiration date and open options at a longer-term expiration date.

Rolling

A follow-up action in which the strategist closes options currently in the position and opens other options with different terms, on the same underlying stock.

Roll Up

Close out options at a lower strike and open options at a higher strike.

Secondary Market

A market that provides for the purchase or sale of previously sold or bought options through closing transactions.

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 (i.e., the number of contracts sold exceeds the number of contracts bought).

Specialist

An exchange member whose function it is to both make markets--buy and sell for his own account in the absence of public orders--and to keep the book of public orders. Most commodity exchanges and some option exchanges utilize the specialist system of trading.

Spread Order

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. They cannot be stop orders, however.

Spread Strategy

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

Standard Deviation

A measure of the volatility of a stock. It is a statistical quantity measuring the magnitude of the daily price changes of that stock.

"Static" Return

The return that an investor would make on a particular position if the underlying commodity were unchanged in price at the expiration of the options in the position.

Stop-Limit Order

Similar to a stop order, the stop-limit order becomes a limit order, rather than a market order, when the security trades at the price specified on the stop.

Stop Order

An order, placed away from the current market, that becomes a market order if the security trades at the price specified on the stop order. Buy stop orders are placed above the market while sell stop orders are placed below.

Straddle

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

Strategy

With respect to option investments, a preconceived, logical plan of position selection and follow-up action.

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.

Striking Price Interval

The distance between striking prices on a particular underlying security. Normally, the interval is 2.50 points for stocks under $25, 5 points for stocks selling over NPR25 per share, and 10 points (or greater) is acceptable for stocks over NPR200 per share. There are, however, exceptions to this general guideline.

Sub-Index

See narrow-based index.

Suitability

A requirement that any investing strategy fall within the financial means and investment objectives of an investor.

Suitable

Describing a strategy or trading philosophy in which the investor is operating in accordance with his (her) financial means and investment objectives.

Support

A term in technical analysis indicating a price area lower than the current price of the stock, where demand is thought to exist. Thus a commodity would stop declining when it reached a support area.

Synthetic Put

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

Synthetic Stock

An option strategy that is equivalent to the underlying stock. A long call and a short put is synthetic long stock. A long put and a short call is synthetic short stock.

Technical Analysis

The method of predicting future commodity price movements based on observation of historical commodity price movements.

Terms

The collective name denoting the expiration date, striking price, and underlying commodity 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 Spread

See Calendar Spread.

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.

Time Value Premium

The amount by which an option's total premium exceeds its intrinsic value.

Total Return Concept

A covered call writing strategy in which one views the potential profit of the strategy as the sum of capital gains, dividends, and option premium income, rather than viewing each one of the three separately.

Tracking Error

The amount of difference between the performance of a specific portfolio of stocks and a broad-based index with which they are being compared.

Trader

An investor or professional who makes frequent purchases and sales.

Trading Limit

The exchange-imposed maximum daily price change that a futures contract or futures option contract can undergo.

Treasury Bill/Option Strategy

(90/10 strategy) a method of investment in which one places approximately 90% of his funds in risk-free, interest-bearing assets such as Treasury bills, and buys options with the remainder of his assets.

Type

The classification of an option contract as either a put or a call.

Uncovered Call Writing

A short call option position in which the writer does not own an equivalent position in the underlying security represented by his option contracts.

Uncovered Option

A written option is considered to be uncovered if the investor does not have an offsetting position in the underlying security.

Uncovered Put Writing

A short put option position in which the writer does not have a corresponding short position in the underlying security or has not deposited, in a cash account, cash or cash equivalents equal to the exercise value of the put.

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.

Unit of Trading

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

Variable Ratio Write

An option strategy in which the investor owns 100 shares of the underlying security and writes two call options against it, each option having a different striking price.

Vega

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

Vertical Spread

(1)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. (2)It is 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.

There are no glossary terms for this letter.

There are no glossary terms for this letter.

There are no glossary terms for this letter.