Monday, 19 December 2022
CALL OPTION: A call option is a financial derivative contract that provides the holder with the right, but not the obligation, to purchase a specific underlying asset at a predetermined price on or before a predetermined date. It gives the holder exposure to potential profits from an increase in the underlying asset’s price without actually owning it. In essence, buying a call
CALENDAR SPREAD: The sale of an option with a nearby expiration against the purchase of an option with the same strike price, but a more distant expiration. The loss is limited to the net premium paid, while the maximum profit possible depends on the volatility value of the distant option when the nearby expires. The strategy takes advantage of time value differentials during periods of relatively flat prices.
CASH SETTLEMENT: An option or future through which exercise is accomplished by a payment in cash, and not with a delivery of an underlying position. The amount of cash settlement is determined by the difference between the options striking price and the price of the underlying security. Stock index and industry group options are cash settlement options.
CLASS OF OPTIONS: Options contracts of the same type (call or put) and style (American,European or capped) that cover the same underlying security.
CLEARING MEMBER: A member firm of an exchange which is authorized by the clearing house to process trades for its customers, and which guarantees, through the collection of margin and variation monies, the integrity of its customers' trades.
CLEARINGHOUSE: An agency associated with an exchange, which guarantees all trades, thus assuring contract delivery and/or financial settlement. The clearinghouse becomes the buyerfor every seller and the seller for every buyer. In the case of listed equity options, the clearinghouse is the Options Clearing corporation (OCC).
CLOSING PRICE: The price of a stock or option at the last transaction of the day.
CONTANGO: A condition where forward prices exceed spot prices.
CONTRACT SIZE: The amount of the underlying asset covered by the options contract. This is 100 shares for one stock option contract unless adjusted for a special event, such as a stock split or a stock dividend.
CONVEXITY: One of the benefits of buying options is convexity: when a stock drops 1 point,and a call option's initial delta of 50% causes a half-point loss in the option, the next one-point drop in a stock will have a lower delta on the call option (for example, 40% in this casc), which only causes a 40-cent drop in the option price. This positive curvature' helps reduce youroption's price risk on each successive decline in the underlying shares, while the underlyingcontinues to lose the same 1 point on each successive drop in the stock. This positive curvature also works in your favor as the stock moves up, as a call option's delta will increase on each successive gain in the stock, allowing the call option holder greater upside participation with each successive gain in the underlying share price.
COVERED WRITE: A delta long position comprised of long stock and a short call in a 1:1 ratio. It could also be a delta short position comprised of short stock and short puts in a 1:1 ratio.
CREDIT SPREAD: A strategy by which the trader collects a credit upon initiating a spread. Bullish credit spreads typically involve selling an out of the money put and buying a further outof the money put for protection. Bearish credit spreads use out of the money calls in a similar manner.
CURVATURE: A characteristic of an option or a spread describing how rapidly its delta willchange when price movement occurs in the underlying stock.
DEBIT SPREAD: Any spread which causes an initial debit in the trader's account.
DELTA: The rate of change in the theoretical value of an option over a one point change in underlying price. Expressed as a percentage, it can also be interpreted as the equivalent amount of underlying that an option represents, or hedge ratio. Calls have positive deltas, puts havenegative deltas. The delta is also an approximation of the probability that an option will finish in the money.
DELTA HEDGE: A hedging position which causes a portfolio to be delta neutral.
DELTA LONG POSITION: Description of a position in options and/or stock in which any increase in underlying price will theoretically increase the net value of the position.
DELTA NEUTRAL: Having no delta exposure.
DELTA SHORT POSITION: A position in which a decrease in stock price will theoretically increase the net value of the position.
DERIVATIVE SECURITY: A financial security whose value is derived in part from the value and characteristics of another security, the underlying security. Options are considered a derivative security.
DESIGNATED PRIMARY MARKET MAKER/LEAD MARKET MAKER: On stock option exchanges, a market maker given primary rights to make a market in options on a specific underlying stock.
DIAGONAL SPREAD: Utilizes options with different expiration dates and different strike prices.
DIVIDEND: When a company's stock pays some form of compensation to existing shareholders, this is known as a dividend.
DURATION: A measure of exposure to interest rates.
Monday, 19 December 2022
Monday, 19 December 2022