Options involve risk and are not suitable for all investors. Please read and the Risk Disclosure for Futures and Options found on tastyworks.com.
A type of corporate action that occurs when one company purchases a majority stake in another company. Acquisitions can be paid for in cash, stock, or a combination of the two.
A Time in Force designation that is similar to Fill-or-Kill (FOC). The difference being that All-or-None (AON) designated orders do not require an immediate fill, but instead remain open until the market closes on the day they are entered. AON orders must be filled in their entirety, and can be cancelled at any point during the trading day.
A type of option contract that can be exercised at any time during its life. The majority of exchange-traded options in the United States are American-Style.
Simultaneously buying and selling similar assets with the intention of profiting from a market inefficiency.
The lowest available price to buy.
Asset classes are groups of assets with similar financial characteristics that are subject to similar laws and regulations. The three main financial asset classes are equities (stocks), fixed income (bonds), and cash/cash equivalents (currency and money market instruments). Other asset classes include real estate, commodities, and fine art/collectibles.
Being forced to fulfill the obligation of an option contract.
At-the-money (ATM) means the strike price of an option is right at (or near) the market price of the underlying security.
A procedure whereby the Options Clearing Corporation (OCC) attempts to protect the holders of certain in-the-money expiring options by automatically exercising the options on behalf of the owner. The OCC will automatically exercise any expiring equity call or put in a customer account that is $0.01 or more in-the-money, and any index option that is $0.01 or more in-the-money. It’s important to keep in mind that a particular brokerage’s threshold for automatic exercise may or may not be the same as the OCC’s.
A term for a securities contract of any expiration month except the front month.
A spread in which more options are purchased than sold.
Relating to futures, a theory that involves the price of futures and the time to expiration. All else being equal, the theory suggests that as a futures contract approaches expiration it will trade at a higher price compared to contracts further from expiration. For example, if the spot price of futures on crude oil is trading $50, while the futures on crude oil for delivery in six months is trading $40, that would be described as backwardation (downward sloping). The opposite phenomenon is referred to as contango.
A type of money market instrument, banker’s acceptances are short-term debt instruments used by companies that are guaranteed by a commercial bank.
The term “basis” has several common uses related to trading. One popular usage refers to the cost of a security as it relates to tax reporting. Basis is also commonly used in the futures market, representing the difference between the cash price and the futures price of a commodity.
The term basis point in finance refers to a unit of measurement. One basis point is equivalent to 0.01%, or .0001. Basis points are often used when percentage differences less than 1% are referenced.
A pessimistic outlook on the price of an asset. Traders who believe that an asset price will depreciate over time are said to be bearish.
Refers to an asset, or group of assets, in which prices are declining or expected to decline.
A spread that profits from a drop in the price of the underlying security.
The difference between the bid and ask price of a security.
Beta measures how closely an individual stock tracks the movement of the broader market. Beta is often used to estimate the systematic risk of a security in comparison to the market as a whole. A beta of 1 indicates the movement of a security closely matches that of the broader market. A beta valued less than 1 theoretically indicates a security is less volatile than the broader market, and a beta valued above 1 theoretically indicates a security is more volatile than the broader market.
Beta-weighting is a technique used to convert deltas from different financial instruments (stocks, options, etc...) into standard units. One purpose of beta-weighting is to allow for the a standardized approach to risk management of positions and portfolios. Click here to learn more.
The strikes are widened close to 1 standard deviation out to take additional risk and can act as a potential substitute for selling strangles. Click here to learn more.
A butterfly strategy in which we select wider strikes to yield a higher probability of success during periods of high IV Rank. Click here to learn more.
A mathematical model expanded and refined by Fischer Black and Myron Scholes that produces a theoretical estimate for the value of a European-style option. The model was originally published in an article entitled “The Pricing of Options and Corporate Liabilities” in 1973 and appeared in the Journal of Political Economy. The model is considered a key concept in modern financial theory and is used extensively in the pricing of equity options.
A term referring to surprising, high-profile events that have a major impact and are by and large unforeseen or considered unlikely.
A term often used synonymously with fixed income security. Traditionally bonds are differentiated from other fixed income securities if they have maturities of one year or more.
The price(s) at which a position generates neither a profit nor a loss.
A combination of a long call butterfly and a short OTM call vertical, or a long put butterfly and a short OTM put vertical, so one side is wider than the other. The short vertical finances the long butterfly, and increases the probability of profit of the strategy.
A person acting as agent in a securities transaction.
An optimistic outlook on the price of an asset. Traders who believe that an asset price will appreciate over time are said to be bullish.
Refers to an asset, or group of assets, in which prices are rising or expected to rise.
A spread that profits from a rise in the price of the underlying security.
A 3-strike price spread that profits from the underlying expiring at a specific price.
A contrarian trading approach that expresses a bullish (long) view when an asset price is declining.
The maximum amount of capital in your account available to make trades. Includes cash and margin.
The simultaneous purchase of stock and sale of a covered call.
An option trade that benefits from the passage of time, also called a time spread.
An option that gives the holder the right to buy stock at a specific price.
A person who sells a call and receives a premium.
A class of marketable securities, capital market securities include common stocks, corporate bonds, and government bonds.
Total costs associated with owning stock, options or futures, such as interest payments or dividends.
In finance, cash (along with cash equivalents) is one of the principal asset classes. Cash (i.e. currency) includes foreign currency.
A regular brokerage account that requires customers to pay for securities within two days of purchase.
The total amount of money in a financial account.
In finance, cash equivalents (along with cash itself) are one of the principal asset classes. Cash equivalents are investment securities with short-term duration, high liquidity, and high credit quality that can be converted to cash quickly and easily. Cash equivalents must have maturities of three months or less. Money market instruments (a type of marketable security) often qualify as cash equivalents because they are liquid, short-term, and not subject to material fluctuations in value.
A type of security (typically an option or future) that employs a method of settling payment between the buyer and seller using cash, as opposed to the physical exchange/delivery of the underlying asset. Click here to learn more.
The short strikes are closer to the ATM strike to collect more premium (45-50% the width of the strikes); this increases potential profit and ROC. Click here to learn more.
Clearing houses act as intermediaries between counterparties (buyers and sellers) in financial transactions. In the securities industry, this structure is often referred to as central counterparty clearing (CCP). A central counterparty (such as the OCC), is a financial institution that provides clearing and settlement services for trades in securities, derivatives, and foreign exchange.
Financial assets against which loans are made.
A combination of options positions that replicates owning the underlying stock.
A type of money market instrument, commercial paper is an unsecured, short-term debt security issued by corporations with maturities of 270 days or less.
A type of equity, common stock is a class of ownership in a company. Common stock gives shareholders the right to elect the board of directors, to vote on company policies, and to share in company profits. In the event of liquidation, common stockholders have rights to a company’s assets after bondholders, prefered shareholders, and other debtholders have been paid in full.
Relating to futures, a theory that involves the price of futures and the time to expiration. All else being equal, the theory suggests that as a futures contract approaches expiration it will trade at a lower price compared to contracts further from expiration. For example, if the spot price of futures on crude oil is trading $40, while the futures on crude oil for delivery in six months is trading $50, that would be described as contango (upward sloping). The opposite phenomenon is referred to as backwardation.
The month in which a securities contract expires.
The amount of an underlying asset covered by an option contract. For equity options, the contract size is typically 100 shares per contract.
The week in which a securities contract expires.
Having a contrarian viewpoint means that you reject the opinion of the masses. This is where buying into strength, selling into weakness comes from - it is a contrarian way of thinking. Despite market trends, contrarians like to buy when the market is performing poorly and sell when the market is performing well.
An event or process initiated by a company that affects securities it has issued.
Original price paid for a stock, plus any commissions or fees.
Limiting profitability on a trade to increase probability of success and reduce the cost of entering a trade.Click here to learn more.
A term referring to the periodic interest paid to investors of fixed income securities. Originated from early certificates of fixed income securities, which often came with detachable “coupons” that investors presented to issuers in order to receive interest payments. For this reason, fixed income securities that do not pay interest are often called zero-coupon bonds.
The annual rate of interest paid on a fixed income security. For example, an investor holding a $1,000 bond paying interest annually with a coupon rate of 5% would receive $50 per year through maturity ($1,000 x .05 = $50).
To close out an existing position.
A combination of a long stock position with a short call.
A term that indicates cash will be credited to your trading account when executing a spread. Spreads may also be done for even (no cash is exchanged), or for a debit (cash is debited from your trading account). Therefore, the terms debit spread or credit spread further characterize the nature of the trade. For example, a credit vertical call spread would indicate that the trader sold the lower priced strike and bought the higher priced strike, because he/she received money to execute the trade.
The expiration dates (months) applicable to various classes of options.
A Time in Force designation - Day Orders expire after the market closes on the day they are entered.
The number of days until an option or futures contract expires. Click here to learn more.
A trade that is opened and closed in the same trading session.
Traditionally a person that attempts to profit on intraday movements in stocks through long and short positions. Day traders typically do not hold positions overnight.
A term that indicates cash will be debited from your trading account when executing a spread. Spreads may also be done for even (no cash is exchanged), or for a credit (cash is credited to the trading account). Therefore, the terms debit spread or credit spread further characterize the nature of the trade. For example, a debit vertical call spread would indicate the trader purchased the lower priced strike and sold the higher priced strike, because he/she paid money to execute the trade.
A term used to describe how the theoretical value of an option erodes with the passage of time. May also be referred to as “time decay.” Decay is quantified by the Greek - theta.
The date when details of a dividend (timing and amount) are announced to the public.
A retirement plan that calculates employee benefits using a formula that accounts for length of service and salary history. Defined benefit plans include traditional “pension plans.” Under such plans the employer is responsible for managing the assets, and therefore assumes all of the investment risk.
A retirement plan in which a certain amount (or percentage) is set aside each year by a company for the benefit of each employee.
One of the Greeks, delta measures the rate of change in an option’s theoretical value for a $1 change in the price of the underlying security.
Delta neutral refers to a trading approach/strategy wherein the delta exposure (directional bias) of an options position is reduced through an offsetting position in the underlying security. A delta neutral trading philosophy seeks to isolate the theoretical edge from volatility (i.e. mean reversion), while minimizing the directional bias of the portfolio.Click here to learn more.
A class of marketable securities, derivatives have a price that is dependent upon (or derived from) an underlying asset. Examples of derivatives include options, futures, and warrants.
Leeway given by an investor to his/her account executive regarding certain aspects of order execution.
A dividend is a payment made by a company to its shareholders, typically as a distribution of profits. Dividends are set by a company’s Board of Directors, and may be issued as cash, stock, or other property. A dividend is allocated as a fixed amount per share, with shareholders receiving a proportionate amount of their ownership in the company. Companies often pay dividends on a fixed schedule (quarterly, bi-annually, annually), but may declare a dividend at any time. Unscheduled dividends are often called Special Dividends. Click here to learn more.
The total annual dividend divided by the price of the stock
A term referring to the underperformance typically observed in financial instruments that attempt to replicate the returns of other products. Drag, or underperformance, typically appears over time due to re-balancing, which causes a lag between the financial instrument and the underlying it seeks to replicate. Click here to learn more.
The term “duration” has several common uses related to trading. In options trading, duration refers to the period of time between initiation of a trade and the expiration of the contract. At doublerainbow, duration is often referenced as “days-to-expiration,” or DTE. In bond trading, duration may refer to the change in value for a fixed income security given a 1% move in interest rates. Click here to learn more.
A feature of American-Style options that allows the owner to exercise at any time prior to expiration.
Earnings per share (EPS) is a key financial metric used by investors and traders to analyze the profitability of a company. EPS is commonly defined as the portion of a company’s profit that is allocated to one share of common stock. Earnings per share is calculated by subtracting preferred dividends from net income, and then dividing that number by the total shares outstanding.
(Net Income - Preferred Dividends)/Shares Outstanding
In finance, equity is one of the principal asset classes. Equity securities (i.e. common stocks) represent ownership interest in a company.
An exchange-traded fund, a basket of stocks meant to track an index or sector.
A type of option contract that can be exercised only on its expiration date, not before. (Note: It is important to confirm and understand all pertinent contract details prior to trading any non-American-Style option; other contract differences may exist).
A type of indirect investment, exchange-traded funds (ETFs) are professionally managed investment vehicles that contain pooled money from individual investors. ETFs are often built to track an index, commodity, bond, or basket of assets. Unlike mutual funds, ETFs trade like common stocks and may be bought and sold throughout the day on an exchange. Like mutual funds, owners of ETFs do not directly own the underlying securities in the fund, instead they own a share of the investment fund itself.
Exchange-traded notes (ETNs) are unsecured, unsubordinated debt securities that are issued by an underwriting bank. ETNs are typically designed to provide investors with the return of a specific market benchmark. ETNs are not equities, funds, or futures, but do trade on exchanges like stocks and ETFs. Unlike ETFs, ETNs do not own any of the underlying assets of the indices or benchmarks they are designed to track.
The date investors buying the stock will no longer receive the dividend. Because stock trades take three days to clear, the ex-dividend date usually falls two days prior to the record date. Investors that want to receive the dividend therefore need to purchase the stock prior to the ex-dividend date in order to receive the dividend.
In trading, exercise refers to the option owner invoking his/her right specified in the contract. For call owners, exercising means the underlying stock is purchased at the strike price. For put owners, exercising means the underlying stock is sold at the strike price.
A type of option contract that is non-standard as compared to American-Style and European-Style options. Due to their complexity and customization, Exotic Options often trade over-the-counter (OTC).
The amount that a stock is predicted to increase or decrease from its current price, based on the current level of implied volatility for binary events.Click here to learn more.
The date at which an option stops trading, and all contracts are exercised or become worthless.
Together, extrinsic value and intrinsic value make up the two parts of an option’s total value. Extrinsic value, also referred to as “time value” or “risk premium,” is everything that is not intrinsic value. Because the intrinsic value is always known, extrinsic value is equal to the total option premium less intrinsic value. The extrinsic value of an option therefore fluctuates based on supply and demand (i.e. the market price of volatility).
Total Option Value = Extrinsic Value + Intrinsic Value
The stated value of a financial instrument at the time it is issued. For stocks, the face value is the original value shown on the stock certificate. For bonds, it is the amount paid to the holder at maturity (often $1,000 or $100). Note, the face value of a stock or bond usually does not denote the actual market value, which is based on supply and demand.
A Time in Force designation that is similar to Immediate or Cancel (IOC). The difference being that Fill-or-Kill (FOK) designated orders cannot be partially filled. FOK orders are immediately filled in their entirety, otherwise they are automatically cancelled.
In finance, fixed income debt is one of the principal asset classes. Fixed income securities (i.e. bonds) are debt instruments that represent loans made by companies or governments to investors. Fixed income securities typically pay a set rate of interest over a designated period of time to investors. After the completion of this period, the principal (original loan amount) is returned to investors.
The term “flat” has several common uses related to trading. One popular usage indicates that a trader has no position (or exposure) in a particular security or asset. “Flat” can also be used to describe a position that has minimal directional exposure. Lastly, “flat” may be used to indicate that the price of a security or asset has been trading in a tight range (i.e. trading “flat”).
Exchange traded equity or index options in which the investor can specify some terms of the contract, such as exercise price, expiration date, exercise type, and settlement calculation. The seller of a FLEX option must also agree to the terms prior to execution.
Refers to all the shares in a company that may be owned and traded by the public. Does not include restricted stock. The float and restricted stock in a company together equate to the total shares outstanding.
A trader on an exchange floor who executes orders for other people.
A trader on an exchange floor who executes orders for his/her own account.
The Federal Open Market Committee (FOMC) is a committee within the Federal Reserve System that is charged under US law with overseeing the nation’s open market operations. The FOMC is instrumental in managing and executing US monetary policy, which includes setting key interest rates.
A term for a securities contract with monthly expiration that is closest to the current date.
An investing/trading methodology that estimates a security’s fair value using relevant quantitative and qualitative information. The goal of this approach is to compare the result of fundamental analysis to the current market value of a security to determine whether it is undervalued, overvalued, or fair.
A type of derivative, futures contracts require buyers and sellers to trade an asset at a specified price on a predetermined future date. The two participating parties agree to buy and sell an asset for a price agreed on today (forward price), with delivery and payment occurring on a specified future date (delivery date). Futures contracts are standardized for trading on futures exchanges, and typically involve physical commodities or financial instruments. Some futures call for physical delivery of the underlying asset, while others are cash settled. Click here to learn more.
A type of option in which the underlying asset is futures. Futures options expire into long/short futures contracts.Click here to learn more.
A measurement of the magnitude of daily movement in the price of an underlying over a future period of time. Unlike historical volatility, future volatility is unknown. However, many market participants attempt to forecast future volatility using mathematical models.
One of the Greeks, gamma measures the rate of change in an option’s delta for a $1 change in the price of the underlying.
A synonym of initial public offering (IPO).
A Time in Force designation - Good-‘Til-Cancelled (GTC) orders remain active unless cancelled by the trader or completely executed. GTC designated orders automatically expire 120 calendar days after they are entered.
In finance, the “Greeks” are parameters that measure the sensitivity of an option’s value to changes in the following: underlying price, time, volatility, and interest rates. These measurements are collectively known as the “Greeks” because they are denoted by letters from the Greek alphabet, including: delta, gamma, theta, vega, and rho.
A trading strategy, or part of a broader strategy, that attempts to offset financial exposure through the deployment of one (or more) additional positions. Click here to learn more.
High-frequency trading refers to technologically and quantitatively intensive, high-volume trading strategies that rely on computer algorithms and transaction speed. Click here to learn more.
Trade setups we use during times of rich option prices. We like to collect credit/sell premium, and hope for a contraction in volatility.Click here to learn more.
A measurement of the magnitude of daily movement in the price of an underlying over a period of time (in history). Future volatility is unknown.
Someone who has bought an option or owns a security.
A term that implies the target company of an acquisition is not a willing participant.
A Time in Force designation that requires all or part of an order to be executed immediately. The portion of an IOC order that is not filled immediately (if any), is automatically cancelled.
A term that refers to the current market price of volatility for a given option. While historical volatility is observable, future volatility is unknown. The current price of volatility (i.e. implied volatility) reflects the culmination of the market’s expectations for future volatility. Implied volatility is dynamic and fluctuates according to supply and demand in the market.
A compilation of the prices of multiple entities into a single number.
A type of option in which the underlying asset is an index.
A class of marketable securities. Unlike direct investments, which investors own themselves, indirect investments are made in vehicles that pool investor money to buy and sell assets. Examples of indirect investments include hedge funds, mutual funds, and unit trusts.
The process by which a private company transforms into a public company. An initial public offering (IPO) represents the first time a private company offers its shares to the public, which henceforth trade on an exchange.
A large financial organization engaged in professional investing and trading.
Together, intrinsic value and extrinsic value make up the two parts of an option’s total value. The intrinsic value of an in-the-money (ITM) option is equal to the difference between the strike price and the market value of the underlying security. For example, the $35 strike call with the underlying trading $40 has an intrinsic value of $5. Out-of-the-money (OTM) options do not have intrinsic value, only extrinsic value.
Total Option Value = Extrinsic Value + Intrinsic Value
Selling puts above calls, or calls below puts, when managing a short position.Click here to learn more.
In-the-money (ITM) means the the strike price of a call is below the market price of the underlying security, or that the strike price of a put is above the market price of the underlying security. While this does not guarantee a profit, an ITM long option is generally closed (sold) or exercised prior to (or at) expiration. ITM short options will generally be assigned prior to (or at) expiration.
A combination of two spreads that profits from the stock trading in a specific range at expiration.
Implied volatility reverting to the mean.Click here to learn more.
A metric which tells us whether implied volatility is high or low in a specific underlying based on a given time frame of IV data.Click here to learn more.
Junk bonds are fixed income securities that carry low credit ratings. Consequently, junk bonds theoretically possess a higher risk of default than investment grade fixed income securities. The traditional delineation for qualification as a junk bond is a Standard & Poor’s credit rating of BB or lower, or a Moody’s Investors Service credit rating of Ba or lower.
A trading approach that uses options to lock in gains at certain price points (strikes).
Adding additional exposure to an existing position while maintaining the original trading assumption.
Options with an expiration month more than one year in the future.
A term used when referring to the execution of positions with more than one component. For example, when trading a straddle, both the call and put must be bought or sold. In this case, the trade has “two legs,” which may be executed simultaneously or at two different points in time. If a trader misses one “leg” of the trade (i.e. due to an adverse price change), the trader is said to be “legged.”
A term used when referring to the execution of positions with more than one component. When trading one component of a position prior to the other(s), a trader is said to be “legging in” to any component of the trade that is executed thereafter. For example, when trading a straddle both the call and put must be bought or sold. If a trader first sells the call, he/she is then said to be “legging in” to the put component of the trade.
The use of a small amount of money to control a large number of securities.
Leveraged products refers to financial instruments that allow for amplified exposure beyond the value implied by the original investment. Click here to learn more.
A conditional order type that indicates a security should be bought or sold at a specific price, or better. Limit orders require a Time in Force designation.
The risk that a position can't be closed when desired.
A call or put traded on a national options exchange.
Trade setups that benefit from increases in volatility as well as more directional strategies.Click here to learn more.
The amount being borrowed to purchase securities. Click here to learn more.
A term referring to the current market value of a security. Derives from “mark-to-market,” which is a system of valuing assets by the most recent market price.
Marketable securities are equity or debt instruments listed on an exchange that can be bought and sold easily. Maturities of marketable debt securities must be one year or less. Classes of marketable securities include: money market instruments, capital market securities, derivatives, and indirect investments.
A theory focusing on the degree to which asset prices reflect all relevant and available information. Proponents of strong market efficiency believe all pertinent information is already priced into current market values. On the other end of the spectrum, proponents of weak market efficiency believe that the market is not perfectly efficient, and that asset prices do not reflect all pertinent information.
An exchange member whose function is to aid in the making of a market by making bids and offers in the absence of public buy or sell orders.
An order type for immediate execution at current market prices. If willing buyers or sellers exist to take the other side, market orders are filled. Market orders are generally used when certainty of execution takes priority over price. Market orders expire after the market closes on the day they are entered. (Note: market orders can affect the price of the security being traded, sometimes significantly, adding uncertainty to the ultimate execution price.)
A combination of a long stock position with a long put
A type of corporate action that occurs when two companies unite and establish a single, new company.
A class of marketable securities, money market instruments are short-term equity and debt securities with maturities of one year or less that trade in liquid markets. Examples of money market instruments include Treasury Bills, commercial paper, bankers’ acceptances, deposits, and certificates of deposit. Money market instruments with maturities of three months (or less) often qualify as cash equivalents.
A statistics-based simulation used to model the probability of different outcomes.
A type of indirect investment, a mutual fund is a professionally managed investment vehicle that contains pooled money from individual investors. Mutual funds use the pooled money to buy and sell securities with the intention of generating of positive return on investment. Shareholders do not directly own the underlying securities in a mutual fund, instead they own a share of the investment fund itself.
A call or put that does not have an offsetting stock or option position.
The value of an asset if it were sold immediately and all debts associated with it were repaid.
The total number of outstanding contracts for a given option series.
Any position that has not yet been closed or expired.
A type of derivative, an option is a contract that grants the right, but not the obligation, to buy or sell an underlying asset at a set price on (or sometimes before) a specific date.
A stock which has associated listed options.
The Options Clearing Corporation (OCC) provides central counterparty clearing and settlement services to 15 exchanges. Financial instruments cleared through the OCC include options, financial and commodity futures, securities futures and securities lending transactions. In its role as a clearing house, the OCC acts as a guarantor between counterparties ensuring that the obligations of the contracts they clear are fulfilled. The OCC operates under the jurisdiction of both the Securities Exchange Commission (SEC) and the Commodity Futures Trading Commision (CFTC).
Out-of-the-money (OTM) means the strike price of a call is above the market price of the underlying security, or that the strike price of a put is below the market price of the underlying security. OTM options have no intrinsic value, only extrinsic value.
Trades that are negotiated and executed directly between two parties, without the use of an exchange or other intermediary.
Trading a discrepancy in the correlation of two underlyings. Click here to learn more.
The term parity has several common uses in finance. As it relates to options trading, parity means that an option is trading at a price equivalent to intrinsic value.
A synonym of face value.
Defined by FINRA Rule 4210 as a stock trader who executes 4 (or more) round-trip day trades over the course of five business days in a margin account. However, if the number of day trades is less than or equal to 6% of the total trades made by the trader during that five-day period, the trader will not be considered a pattern day trader.
The risk that a stock price settles exactly at the strike price when it expires. For option sellers, pin risk means there exists uncertainty around how many contracts may get assigned. For owners of options, last second moves in the underlying can quickly change in-the-money (ITM) options to out-of-the-money (OTM) options, and vice versa. Pin risk can translate to an unwanted long or short delta exposure on the Monday after expiration.
A system of calculating margin requirements using a risk-based methodology.
A type of equity, preferred stock is a class of ownership in a company. Preferred stock has a higher claim on earnings and assets than common stock, but does not come with voting rights. Preferred stock dividends must be paid in full before dividends may be paid to common stock shareholders. In the event of liquidation, preferred stockholders have rights to a company’s assets before common stockholders, but only after bondholders and other debtholders have been paid in full.
The value of an option contract which is paid by the buyer to the option writer.
A term referring to the segment of the capital markets where new securities are issued, like an initial public offering (IPO). Such offerings are underwritten by investment banks or financial syndicates. Once the initial offering is completed, trading is henceforth conducted on a secondary market (i.e exchange). For securities that trade on multiple exchanges, “primary market” may also be used to describe the exchange where trading volume in the security is the highest.
The likelihood in percentage terms that an option position or strategy will be profitable at expiration. For spreads like short verticals or iron condors, you can estimate the probability of success by taking the max loss of that position and divide it by the distance between the long and short strikes. So, if you sell a 100/105 call spread for 2.00 credit, the max potential loss is $300. If you take $300 divided by $500, you get a probability of success of 60%.
The likelihood in percentage terms that a stock or index will land above or below some price on the day of expiration. The probability of expiring doesn't care about what happens between now and expiration. It only considers the probability that the stock will be above some higher price or below some lower price at expiration.
The likelihood in percentage terms that a stock or index will reach some higher or lower price at any time between now and expiration. The probability of touching takes into account all the possible prices that might occur in between now and expiration. It is always higher than the probability of expiring
Often viewed as an indicator of investor sentiment, the Put-Call Ratio provides information regarding the volume of put contracts relative to call contracts. Traditionally, a ratio higher than 1 (i.e. more put contracts trading than call contracts) has been viewed as a bearish indicator.
An option that gives the holder the right to sell stock at a specific price.
A person who sells a put and receives a premium.
A term referring to the current bid/ask price of an asset in the marketplace.
A spread in which more options are sold than purchased.
A synonym of historical volatility.
The date by which an investor needs to own a stock in order to receive the dividend.
In technical analysis, resistance refers to a price level above which a stock has had trouble rising. Technical analysts believe that stocks tend to “test” resistance levels before eventually breaking through.
Refers to all the shares held by a company’s officers and other insiders. Restricted stock must be traded in compliance with SEC regulations. The restricted stock and float in a company together equate to the total shares outstanding.
This is potential maximum return you could make on an option trade. It's calculated by taking the maximum potential profit and dividing it by the margin requirement of the position. For example, if you sell a 100/105 call vertical for 2.00 credit, the return on capital would be the max profit of $200 divided by the margin requirement of $300. That yields a max return on capital of 66%.Click here to learn more.
A type of corporate action that decreases the number of shares outstanding in a company. Reverse stock splits do not affect the total market capitalization of a company, only the number of shares outstanding. Therefore, the price per share is adjusted such that the market capitalization (price per share x number of shares) theoretically remains the same pre-split and post-split. For example, a company with 100 shares outstanding and trading for $50/share has a market capitalization of $5,000. If the company announces a 1-for-10 (1:10) stock split then the total number of shares drops to 10. Because the market capitalization remains $5,000, and there are now 10 shares outstanding, the price per share increases to $500 ($5,000/10). Reverse stock splits with ratios of 1:10, 1:5, and 1:4 are common, but any ratio is possible.
One of the Greeks, rho measures the expected change in an option’s theoretical value given a 1% change in interest rates.
A type of corporate action in which a company offers shares to existing shareholders. Technically a rights issue is a type of dividend, but in this case it isn’t a payment, but rather a subscription right. Existing shareholders are given the right to purchase shares before they are offered to the public. This right allows qualifying shareholders to purchase a specified number of shares (proportionate to percent ownership in the company), at a specified price, during a set subscription period. Companies executing spinoffs often utilize rights issues.
A type of arbitrage in which a profit is theoretically guaranteed. May also be referred to as "Risk-Free Arbitrage."
A synonym of extrinsic value.
To close an existing option and replace it with an option of a later date or different strike price. Click here to learn more.
A trading approach that hinges on increasing position size as an asset’s price moves against you or as capital available in a trading account increases, as opposed to making the full investment when originally deploying the position. For example, a trader intending to purchase 10,000 shares of a stock, may decide to originally invest in 2,000 shares, and increase their holding if the stock price falls to a specific level. Click here to learn more.
A trader who enters and exits a position quickly for a small profit or loss.
A trading strategy, or part of a broader strategy, that attempts to make profits on movement in an underlying asset. Click here to learn more.
The market where securities are bought and sold after their initial offering to public investors.
The Securities and Exchange Commision (SEC) is an agency of the United States government that is charged with monitoring and regulating the securities industry.
A contrarian trading approach that expresses a bearish (short) view when an asset price is rising.
Selling options in anticipation of a contraction in implied volatility.Click here to learn more.
All options of the same class that have the same expiration date and strike price.
A defined risk strategy that uses two varying vertical spread widths, thus creating a directional bias.Click here to learn more.
Refers to the total number of shares in a company that are held by shareholders, including restricted shares (those held by the company’s officers and insiders). Shares outstanding is the sum of a company’s float and restricted stock. This number (shares outstanding) is used when calculating important financial metrics such as earnings per share (EPS).
A position that is opened by selling borrowed stock, with the expectation the stock price will fall.
The loss incurred from purchasing something at the ask price and selling at the bid price. Slippage costs are inversely related to liquidity, which is why we like to trade extremely liquid products
Like regular dividends, special dividends are payments made by a company to its shareholders. If a company has a recurring schedule of regular dividends, then any additional dividends that fall outside that fixed schedule are often referred to as special dividends.
An exchange member whose function is to make markets and keep the book of public orders.
A type of corporate action in which an existing publicly-traded company sells a segment of its assets, or distributes new shares, with the purpose of forming an independent company. Spinoffs are often executed using a rights issue, when new shares are first offered to existing shareholders. If shares in the new independent company remain unclaimed after the rights issue, the company may then choose to offer them to the public.
A position involving a long and short option of different strike prices or expirations, or both.
A statistical measure of price fluctuation. In volatility trading, standard deviation is often used to measure how stock price movements are distributed around the mean.
A type of corporate action that increases the number of outstanding shares in a company. Stock splits do not affect the total market capitalization of a company, only the number of shares outstanding. Therefore, the price per share is adjusted such that the market capitalization (price per share x number of shares) theoretically remains the same pre-split and post-split. For example, a company with 100 shares outstanding and trading for $50/share has a market capitalization of $5,000. If the company announces a 2-for-1 (2:1) stock split then the total number of shares increases to 200. Because the market capitalization remains $5,000, and there are now 200 shares outstanding, the price per share is reduced to $25 ($5,000/200). Stock splits with ratios of 2:1, 3:1, and 3:2 are common, but any ratio is possible.
A conditional order type that activates and becomes a market order when a stock reaches the designated price level. Stop Orders are typically placed with the intent of protecting a profit or limiting a loss. Buy Stop Orders are placed above the current market price, and Sell Stop Orders are placed below the current market price. A Buy Stop Order becomes a Market Order when a trade occurs at or above the price designated on the order. A Sell Stop Order becomes a Market Order when a trade occurs at or below the price indicated on the order.
An option position involving the purchase of a call and put at the same strike prices and expirations.
An option position involving the purchase of a call and put at different strike prices.
The price at which stock is purchased or sold when an option is exercised.
A term referring to the price differential between strikes in a given option series. In general, stocks valued less than $50/share have strikes listed in $2.50 increments, stocks valued between $50 and $200/share have strikes listed in $5.00 increments, and stocks valued about $200/share have strikes listed in $10.00 increments. Stocks are often exempted from these guidelines and therefore may have varied strike price intervals.
In finance, suitability refers to a guideline (at times a legal requirement) that a particular investment approach/strategy is appropriate for a particular investor given his/her risk profile, financial means, and investment objectives.
An original doublerainbow strategy structured by buying an ATM call spread and financing the spread with the sale of a far OTM call option. Click here to learn more.
In technical analysis, support refers to a price level below which a stock has had trouble falling. Technical analysts believe that stocks tend to “bounce” off of these levels as opposed to breaking through them.
A term used to describe a position that is built to simulate another position, but utilizes different financial instruments. For example, synthetic long stock may be constructed by simultaneously buying a call and selling a put in the same underlying. Click here to learn more.
Risk inherent to the marketplace that cannot be eliminated with diversification.
A synonym of acquisition (see above).
The subject of an acquisition (or merger) attempt.
A investing/trading methodology used to forecast price direction using historical price and volume data. Technical analysts rely on charts and other data to evaluate a security’s strength or weakness in order to forecast future price changes.
Estimated fair value of an option, derived from a mathematical model.
One of the Greeks, theta measures the rate of change in an option’s theoretical value relative to the passage of time.
A term referring to the minimum price movement in a trading instrument.
Designations that dictate the length of time over which an order will keep working before it is cancelled. Examples include: Day Order, Good ‘Til Cancelled (GTC), Immediate or Cancel (IOC), and Fill or Kill (FOK).
A synonym of extrinsic value.
"Your trade size". example: if you normally trade 3 contract for a given strategy or underlying, 2 tranches would be 6 contracts.
Treasury Bills (T-Bills) are short-term debt securities backed by the US government with maturities of less than one year. Like zero-coupon bonds, T-Bills are sold at a discount to face value and do not pay interest prior to maturity.
Treasury Bonds (T-Bonds) are debt securities backed by the US government with maturities ranging from ten to thirty years. T-Bonds pay a coupon every six months (semiannual) and have denominations of $1,000.
Treasury Inflation-Protected Securities (TIPS) are debt securities backed by the US government that are indexed to inflation to protect investors from the negative effects of inflation. TIPS pay a coupon every six months (semiannual), are denominated in $100 increments, and are available with 5, 10, and 30-year maturities.
Treasury Notes (T-Notes) are debt securities backed by the US government with maturities ranging from one to ten years. T-Notes pay a coupon every six months (semiannual) and have denominations of $1,000.
"doublerainbow return on capital, which is Theta/Buying Power Reduction.
Risk that is accompanied with naked options and when your possible max loss is unknown on order entry. Click here to learn more.
Company-specific risk that can, in theory, be reduced or eliminated through diversification.
One of the Greeks, vega measures the rate of change in an option’s theoretical value given a 1% change in implied volatility.
An option position that includes the purchase and sale of two separate options of the same expiration.
An index that calculates the implied volatility of the S&P 500 index.
A measure of the fluctuation in the market price of a security or index. Also defined as the annualized standard deviation of returns. Volatility is frequently used as an input in models that calculate the theoretical value of options.
Often referred to as the market’s “fear gauge,” the Chicago Board Options Exchange Volatility Index (VIX) formulates a theoretical estimation for the 30-day implied volatility of S&P 500 index options. The VIX can be actively traded through futures contracts and exchange-listed options.
The underlyings in the volatility asset class used to gauge fear or uncertainty for various financial instruments and commodities.Click here to learn more.
The difference in implied volatility of each opposite, equidistant option. Click here to learn more.
A type of derivative, warrants entitle the holder to buy the underlying stock of an issuing company at a specified price during a set period of time. Unlike options, the party required to deliver the shares upon exercise of a warrant is the issuer of the securities.
A list of securities being monitored for potential trading or investing opportunities. Click here to learn more.
A term for securities contracts with one-week expiration periods.
A colloquial expression that means “selling an option to open.” The “writer” of the option is the seller. Not used when closing a long position because opening sales represent a different risk exposure than closing sales.
Zero-coupon bonds are sold at a discount to face value and do not pay interest prior to maturity. Theoretically zero-coupon bonds produce a positive yield to maturity when they are ultimately redeemed for full face value.