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Options News Network Glossary

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American-Style Option: An option contract that may be exercised at any time between the date of purchase and the expiration date.
Analyst: Employee of a brokerage or fund management house who studies the performance of companies usually within a specific industry and makes recommendations to buy or sell their stock.
Appreciation: The increase in value of an asset.
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 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.

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Bearish: An adjective describing an opinion or outlook in which an investor or trader expects a decline in price, either by the general market or by an individual security.
Bear Call Spread: An option strategy in which a call option is sold and another call option with a higher strike price, but same expiration month is simultaneously purchased.
Bear Put Spread: An option strategy in which a put option is sold and another put option with a higher strike price, but same expiration month is simultaneously purchased.
Beta: A measure of how a stock’s movement correlates to the movement of the entire stock market.
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-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.
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: An adjective describing an opinion or outlook in which an investor or trader expects a rise in price, either by the general market or by an individual security.
Bull Call Spread: An option strategy in which a call option is bought and another call option with a higher strike price, but same expiration month is simultaneously sold.
Bull Put Spread: An option strategy in which a put option is bought and another put option with a higher strike price, but same expiration month is simultaneously sold.
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.

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Calendar Spread: An option strategy involving two different contract months with the same strike price. For example, a trader could sell the September 25 call (or put) option and buy the December 25 call (or put) option. The strategy is also known as a “time” spread. In the example, the trader would be “long the time spread” because he or she paid more premium, and essentially, bought more time by buying the longer-term option. The trader who sold this calendar spread would be “short the time spread.” (See also, Long Calendar Spread with Puts, Long Calendar Spread with Calls, Reverse Calendar Spread with Calls, and Reverse Calendar Spread with Puts)
California Condor: The California Condor (Gymnogyps californianus) is a North American species of bird in the New World vulture family Cathartidae and the largest North American land bird.
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.
Call Spread: A stock index which is computed by adding the capitalization (float An option strategy in which a call option is while another call option with a different strike price, but same expiration month is simultaneously sold. See also Bear Call Spread and Bull Call Spread)
Capitalization-Weighted Index: A stock index which is computed by adding the capitalization (float times price) of each individual stock 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 Secured Put: An option strategy designed to protect an investor from being naked. The strategy includes selling a put option and having enough cash on hand in case the option is assigned.
Cash-Settled: 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.
Class of Options: Option contracts of the same type (call or put) and Style (American, European or Capped) that cover 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.
Collars: An option strategy which combines a protective put and a covered call. The investor purchases a put option with a lower strike price and sells a call option with a higher strike price on an underlying security which the investor already owns. All options will expire in the same month.
Collateral: The loan value of marginable securities.
Combination: Any position involving both put and call options on the same strike and with the same expiration, that is not a straddle.
Component Securities: Securities whose prices are the basis for a given index.
Contingent Order: An order which can be executed only if another event occurs.
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.
Convertible Security: A security that is convertible into another security. Generally, a convertible bond or convertible preferred stock is convertible into the underlying stock of the same corporation. The rate at which the shares of the bond or preferred stock 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 stock is owned, and a short put is covered (for margin purposes) if the underlying stock 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 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.
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 stock on margin. This method is also known as a covered combination.
Covered Straddle Write: An option 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: 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

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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.
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.
Depreciation: Something that you hope does not happen to your investments.
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 while also 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 or unlimited.
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 stock splits (price-weighted index) or additional issues of stock (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 stock 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 stock 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.

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Early Exercise (or Assignment): The exercise or assignment of an option contract before its expiration date.
Edge: An advantage in knowledge, insight, technology, or strategy that is counted upon to create a trading profit.
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.
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.
Equity Index Options: Options based on an index.
Equity Options: Options based on shares of an individual common stock.
European Exercise: A feature of an option that stipulates that the option may only be exercised at its expiration. There can be no early assignment with this type of option.
European-Style Options: An option contract that may be exercised only during a specified period of time just prior to its expiration.
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 LEAPSÃ‚Â®, will be assigned to one of three cycles, the January cycle, the February cycle or the March cycle. See definition for “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.
Expiration Time: The time of day by which all exercise notices must be received on the expiration date. Officially, the expiration time is 5:30PM Eastern on the business day preceding the expiration date.

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Facilitation: The process of providing a market for a security.
Fair Value: Normally, a term used to describe the worth of an option or futures contract as determined by a mathematical model.
FLEX Options: Exchange traded equity or index options, where the investor can specify within certain limits the terms of the options, such as exercise price, expiration date, exercise type, and settlement calculation.
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.
Futures Contract: A standardized contract calling for the delivery of a specified quantity of a commodity at a specified date in the future.

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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.

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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 stock and its call option.
Holder: The purchaser of an option.
Horizontal Spread: An option strategy in which the options have the same strike price, but different expiration dates.

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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 stock position which they have targeted to sell.
Index: A compilation of the prices of several common entities into a single number used as a benchmark against which financial or economic performance is measured.
Index Option: An option whose underlying entity is an index.
Inverse Relationship: Two markets which act opposite one another producing a negative correlation.
Illiquid Market: A market with large slippage due to the lack of trading volume.
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 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. For put options it is the difference between the striking price and the stock price, if that difference is positive, and zero otherwise.
Iron Butterfly: See Short Iron Butterfly, Long Iron Butterfly or psychedelic rock band of the 60’s.
Iron Condor: See Short Iron Condor and Long Iron Condor
Iron Maiden: Iron Maiden are an English heavy metal band from Leyton in East London, formed in 1975.

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Last Trading Day: The very last full day of open trading before an options expiration day, usually the third Friday of the expiration month.
LEAPSÃ‚Â®: Long-term Equity Anticipation Securities are long-term stock or index options with expiration dates up to three years in the future.
Leg: As a noun, one side of a spread transaction. As a verb, 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 to offset the greater risk of having only one leg of the spread position established.
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 stock 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
Leverage: In investments, the attainment of greater percentage profit and risk potential. A call holder has leverage with respect to a stock holder – the former will have greater percentage profits and losses than the latter, for the same movement in the underlying stock.
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.
Liquidity: The ease with which an asset can be converted to cash in the market place. A large number of buyers and sellers and high volume of trading activity provides high liquidity.
Listed Option: A standardized put or call option contract that is traded on a national, regulated options exchange, as opposed to “over-the-counter” options (OTC) which are privately negotiated agreements between counter-parties. Listed options have fixed striking prices and expiration dates.
Local: A trader on a futures exchange who buys and sells for his own account and may sometimes also fill public orders.
Locked Market: A market where trading has been halted because prices have reached their daily trading limit.
Lognormal Distribution: A statistical distribution that is often applied to the movement of stock prices. It is a convenient and logical distribution because it implies that stock prices can theoretically rise forever but cannot fall below zero.
Long Calendar Spread with Calls: An option strategy involving two different contract months with the same strike. The front-month call option is sold while the back-month call option is simultaneously purchased.
Long Calendar Spread with Puts: An option strategy involving two different contract months with the same strike. The front-month put option is sold while the back-month put option is simultaneously purchased.
Long Iron Butterfly: An option strategy combining a long straddle and a short strangle with the same underlying and expiration date.
Long Iron Condor: A long Iron Condor is an option trading strategy that utilizes two vertical spreads, a Bear Call Spread and a Bull Put Spread with the same expiration. The number of put spreads is equal to the number of call spreads.
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).
Long Straddle: A The purchase of an equal number of puts and calls having the same terms.
Long Strangle: The purchase of a put and a call with different strike prices. The put will have a lower strike price than the call. Both options will expire in the same month.

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Margin: (1) To buy a security by borrowing funds from a brokerage. (2) Margin requirement – the maximum percentage of the investment that can be loaned by the brokerage — 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 they are holding a “market not held buy order”, they 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 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.
Model: A mathematical formula designed to price an option as a function of certain variables – generally stock 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.

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Naked Option: A written option is considered to be naked (uncovered) if the investor does not have an offsetting position in the underlying security.
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 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.
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.

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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.
Option Pricing Curve: A graphical representation of the projected price of an option at a fixed point in time. It reflects the amount of time value premium in the option for various stock prices, as well. The curve is generated by using a mathematical model. The delta (or hedge ratio) is the slope of a tangent line to the curve at a fixed stock price.
Options Clearing Corporation (OCC): The issuer of all listed option contracts that are trading on the national option exchanges.
Order Book Official: The exchange employee in charge of keeping a book of public limit 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 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.
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.

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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 stock 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. 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 stock index which is computed by adding the prices of each stock in the index, and then dividing by the divisor.
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 stock prices are graphed on the horizontal axis
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 Puts: A position that has limited risk. A protected short sale (short stAn option strategy designed to protect an investment in the underlying stock. The strategy includes owning the underlying stock and purchasing a put option on the underlying stock.
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). See also Protected Puts)
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 they know 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.
Put Spread: An option strategy in which a put option is while another put option with a different strike price, but same expiration month is simultaneously sold. (see also Bear Put Spread, and Bull Put Spread)

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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. (See also Long Ratio Vertical Spread with Puts and Long Ratio Vertical Spread, Short Ratio Vertical Put Spread)
Ratio Strategy: A strategy in which one has an unequal number of long securities and short securities.
Ratio Write: Selling of call options in a ratio higher than 1 to 1 against the stock that is owned.
Resistance: A term in technical analysis indicating a price area higher than the current stock price where an abundance of supply exists for the stock and therefore the stock may have trouble rising through the price.
Return (on investment): The percentage profit that one makes, or might make, on an investment.
Return if Exercised: The return that a covered call writer would make if the underlying stock were called away.
Reverse Calendar Spread with Calls: An option strategy involving two different contract months with the same strike. The front-month call option is purchased while the back-month call option is simultaneously sold.
Reverse Calendar Spread with Puts: An option strategy involving two different contract months with the same strike. The front-month put option is purchased while the back-month put option is simultaneously sold.
Reversal Arbitrage: A riskless arbitrage that involves selling the stock 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 stock of the company about to be taken over and sells the stock of the company that is affecting 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.

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SEC: The Securities and Exchange Commission was created by Congress to regulate the securities markets and protect investors.
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).
Short Iron Butterfly: An option strategy combining a short straddle and a long strangle with the same underlying and expiration date.
Short Iron Condor: A short Iron Condor is an option trading strategy that utilizes two vertical spreads, a Bear Put Spread and a Bull Call Spread with the same expiration. The number of put spreads is equal to the number of call spreads.
Short Straddle: The sale of an equal number of puts and calls having the same terms.
Short Strangle: The sale of a put and a call with different strike prices. The put will have a lower strike price than the call. Both options will expire in the same month.
Slippage: In illiquid, highly volatile, or fast-moving markets, a market order may be filled farther away than expected from the last quoted bid/ask available. Slippage is the term used to describe the loss that is the difference between an expected fill price and the actual fill price.
Specialist: An exchange member whose function 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 stock 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 stock 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 $25 per share, and 10 points (or greater) is acceptable for stocks over $200 per share.
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 their 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 stock 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 stock 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.

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Technical Analysis: The method of predicting future stock price movements based on observation of historical stock price movements.
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 decay is especially quantified by Theta.
Time 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.
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 their funds in risk-free, interest-bearing assets such as Treasury bills, and buys options with the remainder of their assets.
Type: The classification of an option contract as either a put or a call.

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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 stock is 1 round lot or 100 shares. The normal minimum for options is one contract (which normally covers 100 shares of stock).

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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 Put Spread: Selling a larger number of puts with a lower strike price and the purchase of a smaller number of puts with a higher strike price, all other terms the same.
Volatility: A measure of the fluctuation in the market price of the underlying security. Mathematically, volatility is the annualized standard deviation of returns.
Volatility Skew: The theory that options that are deeply out-of-the-money tend to have higher implied volatility levels than at-the-money options. Volatility skew measures and accounts for the limitation found in most options pricing models and uses it to give the trader an edge in estimating an option’s value.
Volume: The amount of shares bought and sold on a stock exchange.

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Witching Day: A day when two or more classes of options and futures expire.
Write: To sell an option. The investor who sells is called the writer.

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Yield: (1) The rate of return on an investment. (2) The production of a piece of land; i.e. bushels/acre

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Zeta: The percentage change in an option’s price per 1% change in implied volatility.

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