Options Trading Education and Research

Bear Call Spread Options

A bear call spread is a credit spread created by buying a higher strike call and simultaneously selling a lower strike call, on the same underlying asset, with the same expiration dates. This strategy is best implemented in a moderately bearish or stable market to provide high leverage over a limited range of stock prices. As the strike price of the call sold is lower than the strike price of the call purchased in a bear call spread, the option premium received for the call sold (i.e. the short call leg) is always more than the premium amount paid for the call purchased (i.e. the long call leg). Since initiation of a bear call spread results in receipt of an upfront premium, it is also known as a credit call spread, or alternately, as a short call spread. This strategy has both limited profit potential and limited downside risk.

Example:
Sell one contract of $200 XYZ calls expiring in one month and trading at $18.
Buy one contract of $210 XYZ calls, also expiring in one month, and trading at $12.
Since each option contract represents 100 shares, the net premium income is = $500.
($18 x 100) – ($12 x 100) = $500
The maximum potential risk is the difference between the strike prices of the options less the premium income realized upfront, which in this case is also $500 per contract. (200-210 x 100) =$1000 – $500 income = $500.

Steps to Placing a Bear Call Spread

1. Look for a moderately bearish market where you anticipate a modest decrease in the price of the underlying stock-not a large move.
2. Check to make sure this stock has options.
3. Review call options premiums per expiration dates and strike prices.
4. Investigate implied volatility values to see if the options are overpriced or undervalued.
5. Explore past price trends and liquidity by reviewing price and volume charts over the last year.
6. Choose a higher strike call to buy and a lower strike call to sell with the same expiration date.
7. Calculate the maximum potential profit by computing the net credit of the two option premiums.
8. Calculate the maximum potential risk by multiplying the number of contracts by 100 shares per contract by the difference in strike prices and subtracting the net credit received.
9. Calculate the breakeven by adding the net credit to the lower strike price.
10. It’s a good idea to write down the trade in your trader’s journal before placing the trade

with your broker to minimize mistakes made in placing the order and to keep a record of the trade.

11. Place the buy and sell orders on the chosen call options with your broker.
12. Watch the market closely as it fluctuates. The profit on this strategy is limited – a loss occurs if the underlying stock rises to or above the breakeven point.
13. To exit or unwind this trade, you need to sell the higher strike put and buy the lower strike put or simply let the options expire.

Options Terminology

One of the main issues new traders need to address is the basic terminology associated with trading options. While many people understand terms dealing with stocks and mutual fund, they are not as familiar with the different terms dealing with the options market.

The following are terms you should understand when trading options:

Option – An option is contract that gives the buyer the right, but not the obligation, to buy or sell the underlying stock at a set price price (“strike price”), for a specific period of time. Each option has a set expiration date where the option may expires worthless. Options come as either calls or puts. You will use calls if you think the stock price is going up or puts if you think the price of the stock is going down.

Contract – The option contract represents 100 shares of the underlying stock for either calls or puts. If you buy a call option you have the right to buy 100 shares of the underlying stock. If you buy a put option you have the right to sell 100 shares of the underlying stock.

Expiration date – Expiration dates are the date that the option contract expires. These are typically going to be the third Friday of the expiration month. Once the option contract expires, the option is no longer valid and the seller of the option has no further obligation.

In-the-money – In-the-money option are options that have “intrinsic value”. For a call option, they are the strike prices that are below the current price of the stock. A put option is in-the-money if the strike price is above the current price of the stock.

At-the-money – At-the-money option are options that may or may not have “intrinsic value”. For a call or put option, they are the strike prices that are at the current price of the stock.

Out-of-the-money – Out-of-the-money option are options that do not have “intrinsic value”. For a call option, they are the strike prices that are above the current price of the stock. A put option is out-of-the-money if the strike price is below the current price of the stock.

Intrinsic value – The intrinsic value is the in-the-money portion of the option’s premium. A call option has intrinsic value if the price of the underlying stock is higher than the option’s strike price. A put option has intrinsic value if the stock price is lower than the strike price of the option.

Premium – The premium is the amount the option will cost the buyer. It is made up of the option’s intrinsic and time value.

Call – A call option contract gives the option purchaser the right, but not the obligation, to buy the underlying stock at a specific price any time prior to the expiration date. Call option buyers are expecting a rise in the price of the underlying stock. Call option sellers or writers of the contract take on an obligation to sell the underlying stock to the buyer should they choose to exercise their right. Call option sellers are anticipating the price of the stock will move lower. Call options can be exercised any time prior to the expiration date.

Put – A put option contract gives the option purchaser the right, but not the obligation, to sell the underlying stock at a specific price anytime prior to the expiration date. Put option buyers are expecting the underlying stock to drop in price. Put option sellers or writers of the put option is obligated to buy the stock at the strike price should the buyer choose to exercise their right. Put option sellers are anticipating the price of the stock will move higher. Put options can be exercised any time prior to the expiration date.

Strike price – The strike price is the price at which the option buyer has the right to buy or sell the underlying stock. The buyer of the call option has the right to buy the stock, and the buyer of the put option has the right to sell the stock. For example, if the current price of XYZ is $50 and you think it is going to move higher, you could purchase a call option. If you buy a call option on XYZ with a strike price of $50, you now have the right to purchase the underlying stock at the price of $50 should you decide to exercise the option. If the price of the stock moves to $60 you will have the right to buy XYZ stock for the strike price of $50, you could then sell the stocks at the current price of $60 to create a profit of $10 per share. Since the price of the premium also increased, you could simply sell the option for the higher premium and make a profit.

Time value – The time value of an option is the amount you are paying for the time left in the option. This is the part of the premium that exceeds the intrinsic value or the in-the-money value of the option premium. If the current price of a stock is $50 and you decide to buy a call option with a strike price of $45, this mean your option has an intrinsic value of $5 ($50 – $45 = $5). If the premium for this option contract is $7, this means you are paying $2 above the intrinsic value of $5 ( $7 – $5 = $2) This $2 amount represents the time value of the option. The less time until an option expires, the less time value you will be paying for.

Time Decay – With options, you must understand that time will decay the price of the option premium. This means, that even if the price of the stock moves in your favor, you could see a loss in the price of the option. This happens at an accelerating rate as you approach the last few weeks prior to expiration. Eventually, at expiration, you will have lost all the time value and will only be left with the intrinsic value of the option.

While there are other terms that you may want to become familiar with, these will give you a good start when beginning to trade in the options market. If you know these you will know what type of options you should be trading with.

Glossary

A

Adjustment

The process of buying or selling instruments to bring your portfolio delta back to zero and increase profits.

All Ordinaries Index

The major index of Australian stocks. Established in January 1980 this is the oldest index of Australian stocks. This index represents 500 of the most active listed companies (excluding foreign companies) listed on the Australia Stock Exchange (ASX).

American Stock Exchange (AMEX)

The third largest stock exchange in the United States by trading volume, located in New York City, that handles approximately 10% of all securities trades within the United States.

American Style Option

An option contract that can be exercised at any time between the date of purchase and the expiration date, which is the Friday of the expiration week for weekly options and the third Friday of the month for monthly options. Most exchange-traded options are American style.

Amortization

Paying off a debt in regular installments over a fixed period of time.

Analyst

Employee of a brokerage or fund management house who studies companies and makes buy and sell recommendations on their stocks. Many specialize in a specific industry.

Annual Earnings Change (%)

The historical earnings change between the most recently reported fiscal year earnings and the preceding.

Annual Net Profit Margin (%)

The percentage that the company earned from gross sales for the most recently reported fiscal year.

Annual Percentage Rate (APR)

The annual cost of credit that the consumer pays, expressed as a simple percentage.

Annual Report

A report issued by a company to its shareholders at the end of the fiscal year containing a description of the firm’s operations and financial statements.

Annual Return

The simple rate of return earned by an investment for each year.

Annuity

A series of constant payments at uniform time intervals (for example, periodic interest payments on a bond).

Appreciation

The increase in value of an asset.

Arbitrage

The simultaneous purchase and sale of identical financial instruments or commodity futures in order to make a profit where the selling price is higher than the buying price.

Arbitrageur

An individual or company that takes advantage of momentary disparities in prices between markets which enables them to lock in profits because the selling price is higher than the buying price.

ATM (At the Money)

An option (put or call) is ATM (at the money) when the options strike price is the same as the price of the underlying security.

At-the-Opening Order

This specifies that execution of the order take place at the opening of the market or else it is canceled.

Auction Market

A market in which buyers and sellers enter competitive bids and competitive offers simultaneously. Most stock and bond markets, including those on the NYSE, function this way.

Automatic Exercise

The automatic exercise of an in-the-money option at expiration by the clearing firm.

Average

A mathematical representation of a specific sector or index of the market (for example, the Dow Jones Industrial Average or the S&P 500).

B

Back Months

The futures or options on futures months being traded that are furthest from expiration.

Backspread

A spread in which more options are purchased than sold and where all options have the same underlying expiration date. Backspreads are usually delta neutral.

Back-Testing

The testing of a strategy based on historical data to see if the results are consistent.

Bear

An investor who acts on the belief that a security or the market is falling or is expected to fall.

Bear Call Spread

A strategy in which a trader sells a lower strike call and buys a higher strike call to create a trade with limited profit and limited risk. A fall in the price of the underlying increases the value of the spread. Net credit transaction; Maximum loss = difference between the strike prices less credit; Maximum gain = credit; requires margin.

Bear Market

A declining stock market over a prolonged period usually caused by a weak economy and subsequent decreased corporate profits.

Bear Put Spread

A strategy in which a trader sells a lower strike put and buys a higher strike put to create a trade with limited profit and limited risk. A fall in the price of the underlying increases the value of the spread. Net debit transaction; Maximum loss = difference between strike prices less the debit; no margin.

Bid

The highest price at which a floor broker, trader or dealer is willing to buy a security or commodity for a specified time.

Bid and Ask

The bid (the highest price a buyer is prepared to pay for a trading asset) and the ask (the lowest price acceptable to a prospective seller of the same security) together comprise a quotation, or quote.

Bid-ask Spread

The difference between bid and ask prices constitute the bid-ask spread.

Bid Up

Demand for an asset drives up the price paid by buyers.

Block Trade

A trade so large (for example, 10,000 shares of stock or $200,000 worth of bonds) that the normal auction market cannot absorb it in a reasonable time at a reasonable price.

Blow-Off Top

A steep and rapid increase in price followed by a steep and rapid drop in price. This indicator is often used in technical analysis.

Blue Chips

This term is derived from poker where blue chips hold the most value. Blue chips in the stock market are stocks with the best market capitalization in the marketplace.

Blue Chip Stock

A stock with solid value, good security, and a record of dividend payments or other desirable investment characteristics. Often, they have a record of consistent dividend payments, receive extensive media coverage and offer a host of other beneficial investment attributes. On the downside, blue chip stocks tend to be quite expensive and often have less room for growth.

Board Lot

The smallest quantity of shares traded on an exchange at standard commission rates.

Bond

Financial instruments representing debt obligations issued by the government or corporations traded in the futures market. A bond promises to pay its holders periodic interest at a fixed rate (the coupon), and to repay the principal of the loan at maturity. Bonds are issued with a par or face value of $1,000. Bonds are traded based upon their interest rates – if the bond pays more interest than available elsewhere, it’s worth increases.

Break-even

The point at which gains equal losses.

The market price that a stock or future must reach for an option to avoid loss if exercised.

For a call, the break-even equals the strike price plus the premium paid.

For a put, the break-even equals the strike price minus the premium paid.

Breakout

A rise in the price of an underlying instrument above its resistance level or a drop below the support level.

Broad-based Index

An index designed to reflect the movement of the market as a whole. (For example, the S&P; 100, the S&P; 500,and the Russell 2000).

Broker

An individual or firm which charges a commission for executing buy and sell orders.

Bull

An investor who believes that a market is rising or is expected to rise.

Bull Call Spread

A strategy in which a trader buys a lower strike call and sells a higher strike call to create a trade with limited profit and limited risk. A rise in the price of the underlying increases the value of the spread. Net debit transaction; Maximum loss = debit; Maximum gain = difference between strike prices less the debit; no margin.

Bull Market

A rising stock market over a prolonged period usually caused by a strong economy and subsequent increased corporate profits.

Bull Put Spread

A strategy in which a trader sells a higher strike put and buys a lower strike put to create a trade with limited profit and limited risk. A rise in the price of the underlying increases the value of the spread. Net credit transaction; Maximum loss = difference between strike prices less credit; Maximum gain = credit; requires margin.

Butterfly Spread

The sale (purchase) of two identical options, together with the purchase (sale) of one option with an immediately higher strike, and one option with an immediately lower strike. All options must be the same type, have the same underlying and have the same expiration date.

Buy IV Sell IV

Many options are spreads that have a buy option leg and a sell option leg. Buy IV is the implied volatility of the option leg with a buy component. Sell IV is the implied volatility of the option leg with a sell component.

Buy on Close

To buy at the end of a trading session at a price within the closing range.

Buy on Opening

To buy at the beginning of a trading session at a price within the opening range.

Buy Stop Order

An order to purchase a security entered at a price above the current offering price triggered when the market hits a specified price.

C

CAC 40 Index

A broad-based index of 40 common stocks on the Paris Bourse.

Calendar Spread

A spread consisting of one long and one short option of the same type with the same exercise price, but which expire in different months.

Call Option

An option contract which gives the holder the right, but not the obligation, to buy a specified amount of an underlying security at a specified price within a specified time in exchange for a paying a premium.

Call Premium

The amount of money required to pay for a call option.

Capital

The amount of money a business or individual has available.

Capital Gain

The profit gained when a capital asset is sold for a higher price than the purchase price.

Capital Loss

The loss incurred when a capital asset is sold for a lower price than the purchase price.

Capitalization

Capitalization refers to the current value of a company’s outstanding shares in dollars.

Capped-style Option

An option with an set profit cap or cap price.

Cash Account

An account in which the customer is required to pay for all purchased securities without any margin.

Cash Dividend

A dividend paid in cash to a shareholder out of a company’s profits.

Chicago Board Options Exchange (CBOE)

The main options exchange in the United States.

Chicago Board of Trade (CBOT)

Established in 1886, the CBOT is the oldest commodity exchange in the United States and primarily lists grains, T-Bonds and notes, precious metals and indexes.

Class of Options

Option contracts of the same type (call or put), style and underlying security.

Clearinghouse

An institution established separately from the exchanges to ensure timely transactions of securities.

Closing Price

The price of the last transaction for a particular security each day.

Closing Purchase

A transaction to close a short position.

Closing Range

The high and low prices recorded during the period designated as the official close.

Closing Sale

A transaction to close a long position.

Commission

A fee assessed by a broker charged for arranging the purchase or sale of a security.

Commodity

Any bulk good traded on an exchange (for example, grains, meats and precious metals).

Commodity Futures Trading Commission (CFTC)

The CFTC was created by the Commodity Futures Trading Commission Act of 1974 to ensure open and efficient operations of the futures markets.

Condor

The sale or purchase of 2 options with consecutive exercise prices, together with the sale or purchase of 1 option with an immediately lower exercise price and 1 option with an immediately higher exercise price.

Consumer Price Index (CPI)

The change in price of consumer goods and services. This index is used to identify periods of economic inflation or deflation.

Contract

A unit of trading for a commodity or financial future, or option.

Correction

A decline in the price of a security after a period of market strength.

Covered Call

A short call option position against a long position in an underlying stock or futures.

Covered Put

A short put option position against a short position in an underlying stock or futures.

Credit Spread

The difference in value between 2 options, where the value of the short position is greater than value of the long position.

Cross Currency Rate

The current exchange rate between different currencies.

D

Daily Range

The daily range is the range between the highest price and lowest price of the trading day.

Day Order

This is a trading order type that expires at the end of the trading day if not filled.

Day Trade

This is a trade that is opened and closed on the same day.

Day Trading

This is a style of trading that has the trader entering and exiting the trade on the same day.

Debit Spread

This type of spread is created when the price of the option you purchase cost more that the price of the option you sell. This creates a debit in the account.

Deep-in-the-Money

A deep-in-the-money call option has a strike price that is several strike prices below the current price of the underlying stock. A deep-in-the-money put option has a strike price that is several strike prices above the current price of the underlying stock. The premium consists primarily of intrinsic value.

Delayed Time

This refers to quotes from a data provider which are delayed up to 20 minutes from the real time quotes.

Delta

The expected amount an option price changes for every dollar move in the underlying stock.

Delta-Hedged

A strategy where options are protected against price changes in the option’s underlying stock by balancing the overall delta position to zero.

Delta Neutral

When a portfolio has been created by trading a calculated ratios of short and long positions that balance out to the overall position to a zero delta.

Delta Position

Measures the delta of option or underlying securities.

Derivative

When a financial instrument is based off of the value of the underlying asset

Discount Brokers

A Brokerage firm that offer lower commissions than a full service broker. They generally also offer fewer services such as advice, research and portfolio planning.

Divergence

When 2 or more indicators, markets or instruments fail to show confirming trends or direction.

Dividend

The amount of money paid out to a shareholder from the company’s profits.

Dow Jones Industrial Average (DJIA)

A commonly used indicator to show the overall performance of the market, this average is composed of 30 industrial stock which are traded daily on the New York Stock Exchange.

Downside

The amount the price is likely to move down.

Downside Risk

The risk one potentially could take if the prices moves lower.

E

Each Way

Commission paid to a broker when there is a buy and sell of the trade.

End of Day

After the price settles when the trading day is over.

Equilibrium

When price is trading at a mid-point between support and resistance levels.

Eurodollar

US Dollars deposited at banks outside the United States, not under the jurisdiction of the Federal Reserve.

European Style Option

Option contracts that can only be exercised on the expiration date.

Exchange

A location where stocks, options, futures and other assets are bought and sold.

Exchange Rate

The price where one country’s currency can be exchanged into another country’s currency.

Execution

When orders to buy or sell are completed.

Exercise

When the owner of the option contract chooses to buy or sell the underlying stock.

Exercise Price

The contract price of the option for which the underlying stock can be bought or sold.

Expiration Date

The date that the option will no longer be valid and cannot be exercised.

Extrinsic Value

The part of the options premium that is considered out-of-the-money and consists mostly of the time value left in the option. It is the price of the option less the intrinsic value.

F

Fade

Buying when price is falling or Selling (shorting) when price is rising.

Fair Market Value

The price or value of a stock or other asset under normal conditions.

Fair Values

The options theoretical value of what it should be worth based off an option pricing model such as Black-Scholes.

Fast Market

A stock that moves so quickly with high volume that the order entry systems have difficulty processing all of the orders.

Fill

When the order is executed.

Fill Order

When an order must be filled or canceled immediately.

Fill or Kill

Placing an order to buy or sell an exact number of shares or none at all.

Financial Instruments

The term used for debt instruments.

Fixed Delta

When the delta figure does not change with the change in the underlying. A futures contract has a fixed delta of plus or minus 100.

Floor Broker

A member of the exchange who is paid a fee for executing orders.

Floor Ticket

The summary of an order ticket.

Floor Trader

An member of an exchange who executes orders from the floor only for his/her own account.

Fluctuation

The price variation of a security.

Front Month

The first options expiration month in a series of months.

Fundamental Analysis

An approach to researching stocks to predict price movements based on the balance sheets and income statements, past records of earnings, sales, assets, management, products and services.

Futures

All contracts covering the purchase and sale of financial instruments or physical commodities for future delivery. These orders are transacted on a commodity futures exchange.

Futures Contract

A contract to buy or sell a specific number of shares of a commodity or financial instruments in a future month at a specified price.

Gamma

The amount of change in the delta created by a corresponding change in the price of the underlying instrument.

Gap

A happens when the closing price of the prior candle is higher or lower than the opening price of the current candle.

Going Ahead

The unethical practice where a broker trades their own account before filling the customer’s order.

Go Long

To buy stocks, options or futures with the expectation of price moving higher.

Good Til’ Canceled Order (GTC)

An order to buy or sell stock that is valid until you cancel the order.

Go Short

To sell stocks, options or futures with the expectation of price moving lower.

Hammering the Market

The extreme selling of stocks by traders who think the market is going to drop because of inflated prices.

Hedge

A strategy that helps lower the risk of loss by taking a position opposite to the current position being held.

High

The highest price that was paid for a stock during a certain period.

High IV

This highest level of the ATM IV found over a historical time period for a specific stock.

High and Low

This is high and low prices that occur each trading day or other specific time frame.

High Flyer

A speculative stock that moves up and down sharply over a short period of time.

High-tech Stock

Stocks of companies that are involved in high-technology industries, such as computers, biotechnology, robotics, electronics, and semiconductors.

Historic Volatility

A measurement of how much a contract’s price has changed over a specific time period.

Holder

The person who has purchased an option contract and has the rights to the underlying stock..

I

Illiquid Market

A market which has very little trading volume and can cause slippage due to lack of trading volume.

Immediate/Cancel

This is a type of order that must be filled immediately or canceled.

Index

A group of stocks which are put together to be traded as one portfolio, such as the Nasdaq-100, SP-500 or the DJ-30. Broader-based indexes will cover a wider range of companies and narrow-based indexes will cover stocks in only one industry or economic sector.

Index Options

These are call and put options on indexes of stocks that are created to reflect and fluctuate with market conditions. Index options allow investors to trade in a specific industry group or market without having to buy the individual stocks.

Interest Rate

The amount charged for the privilege of borrowing money, generally expressed as an percentage rate annually.

Inter-market Analysis

When analyzing the price movement in one market to help see potential movement in another market.

In-the-Money

If you could exercise an option and it would general a profit at the time, it is considered in the money.

In-the-Money Option

A “call” option is in-the-money when the strike price of the option is below the market price of the underlying stock. A “put” option is in-the-money when the strike price is above the market price of the underlying stock.

Intrinsic Value

This is the amount that the option is in-the-money. For call options = underlying -strike price. For put options = strike price – underlying.

Inverse Relationship

When there are two or more markets or stocks that act totally opposite of one another producing negative correlations.

Investment

Any purchase of an asset to increase future income.

Iron Butterfly

The combination of a long (short) straddle and a short (long) strangle. All options must have the same underlying and have the same expiration.

L

LEAPS

These are longer term option with expiration dates up to 3 years out. LEAPS stand for Long-Term Equity AnticiPation Securities.

Leg

This term is used to identify one side of an option spread trade.

Limit Move

The maximum daily price limit for an exchange traded contract.

Limit Order

A type of order that allows you to buy a stock at or below a specified price (Buy Limit) or to sell a stock at or above a specified price (Sell Limit).

Limit Up, Limit Down

These are restrictions on the Commodity exchange that limit the maximum upward or downward movements allowed in the price for a commodity during any trading session day.

Liquidity

A situation created by higher numbers of traders that cause asset to easily be converted to cash in the marketplace. A large number of buyers and sellers and a high volume of trading activity provide this situation.

Locked Market

This is when market trading has been halted because prices have reached their daily trading limit.

Long

The term used to describe the buying a stock or option.

Low (lo)

This is the lowest price that a particular trading instrument traded on a specific time period.

Low IV

The lowest Implied Volatility found on an ATM option over a historical time period of six months.

Low Risk Investing

This is a concept where investors use relatively “safe” investments or use protective strategies to limit risk in a portfolio.

Make a Market

This is where the market maker stands ready to buy or sell a security for his/her own account to help keep the market liquid.

Margin

A deposit required by the broker as a percentage of the current market value of the securities held in a margin account.

Margin Account

An account where a brokerage firm lends the customer part of the purchase price of a trade.

Margin Call

When a broker call telling a trader to deposit additional money into a margin account to maintain a trade.

Margin Requirements (Options)

The amount of required cash to cover an uncovered (naked) option that a writer is required to deposit and maintain the daily position price changes.

Mark-to-Market

This is a daily adjustment of the margin accounts to show profits and losses. This minimizes the potential losses in accounts

Market

An exchange where specific assets, stocks, options or commodities are traded.

Market-If-Touched (M.I.T.)

This is an order that is triggered once a specific price is touched. The order will become a market order.

Market Maker

This is a person who is an independent trader or trading firm that buys and sells shares or option contracts in a specific market. The market makers make a 2-sided market, both a bid and ask, in order to facilitate trading.

Market on Close

This type of order requires the broker to get the best price available on the close of trading.

Market Order

Buying or selling securities at the current price of the market. A market order is to be executed immediately at the next available price, and is the only order that guarantees entry or exit.

Market Price

The last price at which a security trade took place.

Market Value

This is the price where investors can buy or sell a share of common stock or a bond at a specific time. Market value is determined by the balance between buyers and sellers.

Max Loss

This is the most loss possible from a stock or option position. This can be determined by the price paid or where a stop loss has been placed.

Max Profit

This is the most amount that can be made when entering a stock or option trade and can be determined where a profit target is placed.

Mid-cap Stocks

Generally defined as medium growth firms with less than 100 billion in assets. They may have better growth potential than blue-chip stocks.

Momentum

This is the price action that happens on the chart when it continues in the same direction for a time frame.

Momentum Indicator

This is a technical indicator that uses price action and/or volume statistics for predicting the strength or weakness of a current movement.

Momentum Trading

Using the momentum of the price to invest with or counter to the momentum of the market to from it.

Moving Averages

A moving average is one of the most popular, and versatile, technical indicator. A mathematical procedure in which the sum of a value plus a selected number of previous values are divided by the total number of values. It can be used to smooth or minimize the fluctuations in price action and to assist in determining when to enter and exit trades.

Mutual Fund

An open end investment company that pools together investors’ money to invest in a multiple stocks, bonds, or other securities.

N

Naked Option

This is done when a option writer sells an option without an underlying hedge position.

Naked Position

A stock or other security position not hedged from market risk.

Narrowing the Spread

This happens when the spread between the bid and asked prices of a security become closer as the result of bidding and offering.

NASDAQ

National Association of Securities Dealers Automated Quotations system — a computerized system providing brokers and dealers with price quotations for securities traded over-the-counter as well as for many New York Stock Exchange listed securities.

Near-the-Money

An option with a strike price close or near to the current underlying stock price.

Net Change

The change of price over a specific time frame that shows if there has been a profit or loss on the time period.

Net Profit

The overall profit of a trade.

New York Stock Exchange (NYSE)

The largest stock exchange in the United States.

Note

A short-term debt security which usually matures in five years or less.

O

OEX

This Symbol, pronounced as three separate letters, is Wall Street shorthand for Standard & Poor’s 100 stock index, also referred to as the S&P 100. The S&P 100 index is a subset for the 100 largest cap companies in the famous S&P 500 stock index.

Odds

Odds is the predicted profits divided by the predicted losses obtained by projecting the stock price randomly into the future using the Statistical Volatility (SV). The prediction stops at the expiration of the earliest expiring option leg.

Offer Down

The downward change of the offer of the market related to a lowered price movement at that specific time.

Offer

The lowest price at which a person is willing to sell a security.

Off-floor Trader

A trader who does not trade on the actual floor of an organized futures of stock exchange.

Offset Trade

To liquidate a futures position by entering an equivalent but opposite transaction. To offset a long position, a sale is made; to offset a short position, a purchase is made.

On-the-Money

The option in question is trading at its exercise price (also referred to as at-the-money).

Open Order

An order to buy or sell a security at a specified price, valid until executed or canceled.

Open Outcry

A system of trading where an auction of verbal bids and offers is performed on the trading floor. This method is slowly disappearing as exchanges become automated.

Open Trades

A current trades that is still held active in a customer’s account.

Opening

The period at the beginning of the trading session at an exchange.

Opening Call

A period at the opening of a futures market in which the price for each contract is established by outcry.

Opening Price

The range of prices at which the first bids and offers were made or first transactions were completed.

Opportunity Costs

The theoretical cost of using your capital for one investment versus another.

Option

A security that represents the right, but not the obligation, to buy or sell a specified amount of an underlying security (stock, bond, futures contract, etc.) at a specified price within a specified time.

Option Holder

The buyer of either a call or put option.

Option Premium

This is the price of an option.

Option Writer

The seller of either a call or put option.

Order

A ticket or voucher representing long or short securities and options.

Order Flow

The volume of orders being bought or sold on the exchanges.

Out-of-the-Money

An option whose exercise price has no intrinsic value.

Out-of-the-Money Option (OTM)

A call option is out-of-the-money if its exercise or strike price is above the current market price of the underlying security. A put option is out-of-the-money if its exercise or strike price is below the current market price of the underlying security.

Overvalued

A term used to describe a security or option whose current price is not justified.

P

Paper Trading

The ability to simulate a trade without actually putting up the money for the purpose of gaining additional trading experience (also referred to as Virtual Trading).

Par Value

The stated or “nominal” value of a bond (typically $1,000) that is paid to the bondholder at maturity.

Perceived Risk

The theoretical risk of a trade in a specific time frame.

Performance Based

A system of compensation in which a broker receives fees based on their performance in the marketplace.

Points

Points apply to security prices. In the case of shares, one point indicates $1.00 per share. For bonds, one point means 1% of par value. Commodities differ from market to market.

Point Spread

The price movement required for a security to go from one “full point” level to another (i.e. stock goes up or down $1).

Position Size

The total of a trader’s open contracts.

Position Delta

The sum of all positive and negative deltas in a hedged position.

Position Limit

The maximum number of open contracts in a single underlying instrument.

Premium

The amount of cash that an option buyer pays to an option seller

Price

Price of a share of common stock on the date shown. Highs and lows are based on the highest and lowest intra-day trading price.

Price/Earnings Ratio (PE)

A fundamental ratio for comparing the prices of different common stocks by assessing how much the market is willing to pay for a share of each corporation’s earnings. PE is calculated by dividing the current market price of a stock by the earnings per share.

Principal

The initial purchase price of a bond on which interest is earned.

Private Company

A company that issues private stock that is not publicly traded.

Probability of Profit

Probability of Profit is the probability that the predicted stock price falls within the option trade’s profit zones. The predicted stock price distribution is computed by projecting the stock price randomly into the future using the SV. The prediction stops at the expiration of the earliest expiring option leg.

Public Company

A company that issues stocks to be traded on the public market.

Put Option

An option contract giving the owner the right, but not the obligation, to sell a specified amount of an underlying security at a specified price within a specified time. The put option buyer hopes the price of the shares will drop by a specific date while the put option seller (or writer) hopes that the price of the shares will rise, remain stable, or drop by an amount less than their profit on the premium by the specified date.

Q

Quarterly Earnings Report

The earnings report filed each quarter by public companies to report their earnings performance.

Qualified Distribution

Quote

The price for a security being offered or bid by a market maker or broker-dealer.

Quoted Last Price

Refers to the price at which the last transition of a particular security or commodity took place.

R

Ratio Backspread

A delta neutral spread where an uneven number of contracts are bought and sold with a ratio less than 2 to 3. Optimally no net credit or net debit occurs.

Ratio Call Spread

A bearish or stable strategy in which a trader buys 2 higher strike calls and sell1 lower strike call. This strategy offers limited risk and unlimited profit potential.

Ratio Put Spread

A bullish or stable strategy in which a trader buys 1 higher strike put and sells two lower strike puts. This strategy offers limited risk and unlimited profit potential.

Real-time

Data received from a quote service as the prices change.

Relative Strength

A stock’s price movement over the past year as compared to a market index.

Relative Strength Index (RSI)

An indicator used to identify price tops and bottoms.

Resistance

A price level or ceiling the market has a hard time breaking through to go higher.

Return

The gain or profit made on an investment.

Reward-Risk Ratio

The mathematical relationship between the total potential risk and the total potential reward of a trade.

Reversal Stop

A stop that, when hit, is a signal to reverse the current trading position, i.e., from long to short. Also referred to as stop and reverse.

Rich

A security priced higher than what the market expected.

Risk

The potential loss inherent in the investment.

Risk Graph

A graphic representation of risk and reward on a given trade as prices change.

Risk Manager

A person who manages risk of trades in a portfolio by hedging their trades.

Risk Profile

A graphic determination of risk on a trade. This would include the profit and loss of a trade at any given point for any given time frame.

Round-turn

A trade where a long or short position is offset by an opposite transaction.

Rule of 72

The Rule is a shortcut to estimate the number of years required to double your money at a given annual rate of return.

S

Seasonal Market

A market with a short-lived rise or drop in market activity due to consistent predictable changes in climate or calendar.

Seat

The term for a membership in a stock exchange.

Securities and Commodities Exchanges

Organized exchanges where stocks, options and futures contracts are traded.

Securities and Exchange Commission (SEC)

The commission created by Congress to regulate the securities markets and protect investors.

Security

A trading instrument such as stocks, bonds, and short-term investments traded on an exchange.

Selling Short

The practice of borrowing a stock, future or option from a broker and selling it because the investor forecasts that the price of a stock is going down on the near future.

Series (Options)

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

Share Certificates

Certificates representing ownership of stock in a corporation or company.

Short Premium

Expectation that a move of the underlying security will result in a theoretical decrease of the value of an option.

Short Selling

The sale of shares or futures contracts that a seller does not currently own. The seller borrows them from a broker and sells them with the intent to replace what has been sold through later repurchase in the market at a lower price.

Small-cap Stocks

Smaller companies that offer bigger upside with higher rewards and higher risks. They tend to cost less than mid-caps and have lower liquidity. However, small amounts of media coverage can prompt big gains.

Smoothing

A mathematical technique that removes excess data to simplify but maintain a correct evaluation of the underlying trend.

Specialist

A trader on the exchange floor assigned to fill bids/orders in a specific stock out of his/her own account.

Speculator

A trader who hopes to profit from a directional move of an underlying security. The speculator has no interest in making or taking delivery of the underlying asset.

Spike

A sharp price rise in one or two days indicating the time for an immediate sale.

Spread

The difference between the bid and the ask prices of a security.

Standard & Poor’s Corporation (S&P)

A company that rates stocks and corporate and municipal bonds according to risk profiles, also produces and tracks the S&P equity indexes.

Stochastic Indicator

Developed by George C. Lane in the late 1950s, the Stochastic Oscillator is a momentum indicator that shows the location of the close relative to the high-low range over a set number of periods.

Stock Shares

A share of a company’s stock translates into ownership of part the company.

Stock Exchange or Stock Market

Organized marketplace, either physical or electronic, where buyers and sellers are brought together to buy and sell stocks.

Stock Split

An increase in the number of a stock’s shares that results in a corresponding decrease in the par value of its stock.

Stop Entry

Buy stops are entry orders that are placed at a specified price over the current price of the market. Sell stops are short entry orders that are placed with a specified price below the current price.

Straddle

A position consisting of a long/short call option and a long/short put option, where both options have the same strike price and expiration date.

Strangle

A position consisting of a long/short call and a long/short put where both options have the same underlying, the same expiration date, but different strike prices. Most strangles involve Out of the Money options.

Strike Price (Exercise Price)

A price at which the stock or commodity underlying a call or put option can be purchased (call) or sold (put) over the specified period.

Support

A historical price level at which falling prices have stopped falling and either moved sideways or reversed direction.

Swings

Price movements between extreme highs and lows.

Syndicate

A temporary alliance of financial firms, formed for the purpose of handling a large transaction that would be difficult to handle as an individual firm.

Synthetic Long Call

A long put and a long stock or future.

Synthetic Long Put

A long call and a short stock or future.

Synthetic Long Stock

A short put and a long call.

Synthetic Short Call

A short put and a short stock or future.

Synthetic Short Put

A short call and a long stock or future.

Synthetic Short Stock

A short call and a long put.

Synthetic Straddle

Futures and options combined to create a delta neutral trade.

T

Technical Analysis

The process of evaluating stock charts by analyzing statistics generated by price action, such as past prices, volume, momentum and other technical indicators like moving averages or MACD.

Theoretical value

The value of an option generated by a mathematical pricing model to determine the true value of an option.

Theta

One of the Greeks that measure the time decay of an option.

Time Decay

This is the amount of the time premium lost during a certain time frame on an option as it approaches the expiration of the option.

Time Premium

The additional value of an option due to the volatility of the market and the time remaining until expiration.

Time Value (Extrinsic Value)

This is the amount that the current premium of the option exceeds the intrinsic value.

Trader

A person who buys and sells stocks, options and other securities with the objective of shorter-term profits.

Trading Account

An place where you will trade stocks, options and other securities usually opened with a brokerage firm.

Treasury Bill (T-Bill)

A short-term government security that matures in no more than one year.

Treasury Bond (T-Bond)

A fixed-interest U.S. government debt security that has a maturity of 10 years or more..

Treasury Note (T- Note)

A fixed-interest U.S. government debt security that has a maturity of between one and ten years.

Triple Witching

The day when U.S. options, index options and futures contracts expire on the same day. This is usually the third Friday in March, June, September and December.

Type

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

U

Uncovered Option

This is a “naked” option which is a short option position in which the writer does not own shares of underlying stock.

Underlying Instrument

This is the stock required to purchase upon the exercise of an option contract.

Undervalued

This is when a stock is selling below the theoretical value of the market value.

Upside

The potential amount the price of the stock has for upward movement.

Upside break-even

The upper price where a trade is at a breaks-even point.

V

Variable Delta

When a delta changes due to the change of the underlying asset or a change in time expiration of an option.

Vega

This is a measurement of the option’s sensitivity to changes in the volatility of a stock. It represents the amount the premium of the option changes in a 1% change in the implied volatility of the stock.

Volatility

Volatility measures the amount by which a stock is expected to move, up and down, in a given period of time. Volatility is one of the ways to determine the valuation of the options premiums and time value. There are two basic kinds of volatility, implied and historical.

Volatility Skew

This is the theory that options that are deep out-of-the-money will have have higher implied volatility levels that at-the-money options. The skew measures and will account for the limitation found in many pricing models.

Volume (Vol)

This is the number of shares purchased and sold on a stock exchange.

Whipsaw

This happens in a volatile market where the price swings quickly up and down causing a high possibility of losing money on both sides.

Wilshire 5000 Equity Index

The Wilshire 5000 Total Market Index, or more simply the Wilshire 5000, is a market-capitalization-weighted index of the market value of all stocks actively traded in the United States.

Witching Day

The day where two or more classes of options and futures expire.

Writer

This is someone who creates an option contract by selling the option.

Yellow Sheets

A daily publication of the National Quotation Bureau providing the updated bid and asked prices of over-the-counter (OTC) corporate bonds.

Yield

The rate of return for an investment.

Z

Zone of Resistance

A price zone in which a stock finds resistance and begins to trade downward. In technical analysis, resistance occurs not at a specific point, but in a zone.

Zone of Support

A price zone in which a stock finds support and begins to trade up. In technical analysis, support occurs not at a specific point, but in a zone.

Option Symbology Rules: (Post 2010)

All option symbols must conform to the Options Clearing Corporation (OCC) standard rules. The basic parts for the option symbols are:

Root Symbol + Expiration Year(yy) + Expiration Month(mm) + Expiration Day(dd) + Call/Put Indicator (C or P) + Strike Price Dollars + Strike Price Fraction of Dollars (which can include decimals).

Let’s break it down by parts.

Root Symbols– The ticker symbol of the underlying stock itself is the root symbol for the option.

Expiration Year – This is the 2-digit year, for example 2018 is “18” in the symbol.

Expiration Month – This is the 2-digit month, for example December is “12.”

Expiration Day – This is the 2-digit day of expiration, for example monthly option expire on the 3rd Friday of each month. Weekly options expire on the 1, 2 or 4 Fridays of the month, etc.

Call or Put – This is designated by a “C” or “P” respectively.

Strike Price Dollars – The next part of the option symbol is used to designate the round dollar portion of the options strike price. A 5-digit field is set aside for this. So, an option with a strike price of $40 would read 00040 and a strike price of $35 would read 00035 and options with a stick price of $200 would read 00200 in this field.

Strike Price Fraction of Dollars – The last part of the option symbol is used to designate if any fractions of a dollar are included in the strike price. 3-digit field is set aside for this section. So, if an option has a strike price of 87.50, this field would read 500. The last 2 digits are used in cases where a stock split has occurred, and the option strike prices have split. For example, a 3 for 1 stock split with a 40 strike price would have a new strike price of 13.333. So, the last 3 digits of the symbol would be 333 in this case.

Putting this all together, here is the ticker symbol for the MSFT Monthly Feb 87.5 Call:

MSFT180216C00087500.