At-the-Money
An option with a strike price equal to the current price of the underlying stock.
An option with a strike price equal to the current price of the underlying stock.
Backspread
A type of options spread in which a trader retains more long positions than short positions. The premium received from the sale of the short option is used to help finance the purchase of the long options. This type of spread allows the trader to have considerable exposure to expected moves in the underlying asset while reducing the amount of loss in the event prices do not move in the direction the trader had anticipated. This spread can be created using either all call options or all put options. In this strategy, all options have the same expiration date and underlying stock.
A type of options spread in which a trader retains more long positions than short positions. The premium received from the sale of the short option is used to help finance the purchase of the long options. This type of spread allows the trader to have considerable exposure to expected moves in the underlying asset while reducing the amount of loss in the event prices do not move in the direction the trader had anticipated. This spread can be created using either all call options or all put options. In this strategy, all options have the same expiration date and underlying stock.
Bear Call Spread
A strategy in which a trader sells a lower strike call and buys a higher strike call to create a combination with limited profit and limited risk.
Bear Put Spread
A strategy in which a trader sells a lower strike put and buys a higher strike put to create a combination with limited profit and limited risk.
Bear Spread
An option strategy that is profitable when the price of underlying stock declines. The strategy can be implemented with either calls or puts. In either case, an option with a higher strike is purchased and one with a lower strike is sold, both options generally having the same expiration date.
Beta
A measure of correlation between the movement of a particular stock and the movement of the entire stock market.
Break-even
The point at which gains equal losses, and vice versa. For a call, the break-even equals the strike plus the premium paid. For a put, the break-even equals the strike minus the premium paid. It generally pertains to the result at the expiration date of the options involved.
Bull Call Spread
A strategy in which a trader buys a lower strike call and sells a higher strike call to create a combination with limited profit and limited risk.
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.
Bull Spread
An option strategy that is profitable when the price of underlying stock rises. The strategy can be implemented with either calls or puts. In either case, an option with a lower strike is purchased and one with a higher strike is sold, both options generally having the same expiration date.
Bullish
The belief that individual stock/index or the entire market will rise.
Butterfly Spread
An advanced option strategy combining a bull and bear spread. It utilizes three strike prices. The lower two strike prices are used in the bull spread, and the higher strike price in the bear spread. Both puts and calls can be used.
Calendar Spread
A spread consisting of one long and one short option of the same type with the same strike, but which expire in different months. Either puts or calls may be used. A calendar straddle would consist of selling a near-term straddle and buying a longer-term straddle, both with the same strike.
Call Option
The right, but not the obligation, to purchase the stock at a predetermined price (also known as the strike) at any time before the expiration date.
Carrying Cost
The interest on a debit balance created by opening a position. If long, the carrying cost is the cost of interest paid on a margin account. Conversely, if short, the carrying cost is the cost of paying dividends, or rather the opportunity cost (i.e. the cost of purchasing a particular security rather than an alternative).
Collateral
Properties or assets that are offered to secure a loan or other credit. Collateral becomes subject to seizure on default.
Contract
A unit of trading for an option (typically 100 shares).
Covered Call
Covered call is a strategy in which an investor writes a call option contract while at the same time owning an equivalent number of shares of the underlying stock.
Covered Put
Covered put is an option strategy in which a put option is written against a sufficient amount of cash (or T-bills to pay for the stock purchase if the short option is assigned).
Covered
A written option is covered if the trader also has an opposing position in the stock. A short call is covered if the underlying stock is owned, and a short put is covered if the underlying stock is also short. In addition, a short call is covered if the account is also long another call on the same security, with a strike equal to or less than the strike of the short call. A short put is covered if there is also a long put in the account with a strike equal to or greater than the strike of the short put.
Debit Spread
A spread in which the value of the long position exceeds the value of the short position.
Deep-in-the-Money
A deep-in-the-money call/put option has a strike well below/above the current price of the stock.
Delta Neutral
An arranged position set up by selecting a calculated ratio of short and long positions that balance out to an overall position delta of zero.
Delta
The change in option price relative to one unit change of the price of underlying stock or index. For example, a delta of 0.6 means that the option price will change by $0.6 for each $1 change in the price of the underlying stock or index. Call options have positive deltas, while put options have negative deltas.
Delta-Hedged
An options strategy designed to reduce or hedge the risk linked to price movements in the underlying asset by equalizing long and short positions. For example, a long call position may be delta hedged by shorting the underlying stock. This strategy is based on the change in premium caused by a change in the price of the underlying security. The change in premium for each unit change in price of the underlying is the delta and the relationship between the two movements is the hedge ratio.
Diagonal Spread
An options strategy set up by concurrently entering into a long and short position in two options of the same type (two call options or two put options) but with different strike prices and expiration dates.
Downside Protection
An investment position that seeks to reduce losses resulting from the decline of a stock or a fall in the overall market. For instance, put options provide downside protection against a decline in the price of the underlying stock. Similarly, writing covered call options can provide partial downside protection against price declines.
More to come…
