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Darren Krett

Monday, 19 December 2022

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Glossary

ADJUSTMENT: The process by which the holder of a spread buys or sells stock or options in order to re-establish neutrality in his/her position.

AMERICAN-STYLE OPTION: An option that can be exercised at any time on or before the expiration date.

ARBITRAGE: The process in which traders simultaneously buy and sell similar securities for a profit at theoretically zero risk. Risk in arbitrage occurs when historical relationships that were expected to hold no longer apply, or when expected events like an announced takeover fail to materialize.

ASK PRICE: The price a seller is willing to accept for the security; also called the offer price. A resource that has economic value to its owner. Cash, accounts receivable,

ASSET: inventory, real estate and securities are examples of assets

ASSIGNMENT: The receipt of an exercise notice by an option seller (writer) that obligates him/her to make delivery of the underlying in the case of a call or take delivery in the case of a put at the specified strike price.

AT THE MONEY: An option is at the money if the strike price of the option is equal or approximately equal to the market price of the underlying security.

AUTOMATIC EXERCISE: A protection procedure whereby the Options Clearing Corporation (OCC) attempts to protect the holder of an expiring in the money option on behalf- the trader by automatically exercising the option.

BACKSPREAD: A spread consisting of either: a) Two option series with the same expiration date in which the holder has more long contract than short contracts, OR b) A position in options and/or stock which does not include any short options.

BACKWARDATION: A condition where spot prices exceed forward/future prices.

BASIS POINT: One-one-hundredth of a percent.

BASIS RISK: Risk from changes in spreads.

BEARISH: An outlook anticipating lower prices in the underlying security.

BEAR SPREAD: A delta short position comprised of a long higher strike option versus a short lower strike option with the same expiration, 1:1. The spread theoretically increases in value as the underlying price goes down and decreases if it goes up. The strategy can be implemented with either puts or calls.

BETA: A measure of how a stock moves, more or less than the movement of a broader stock market index.

Beta Weight Beta weighting is a means for investors to put all of their positions into one standard unit. It is a way to look at an entire portfolio and understand how it will change with a move in the market. It tells us about the size, diversity and general risk of positions.

BID PRICE: The highest price any potential buyer is willing to pay for a particular option.

BID/ASK SPREAD: The difference in price between the latest available bid and asked quotations for a particular option contract.

BLACK SCHOLES FORMULA: This version of the option pricing model is used most often in the standardized pricing on the floors of the various options exchanges. It factors in the current stock price, strike price, time until expiration, level of interest rates, any dividends and the volatility of the underlying security. The Black Scholes model won a Nobel Prize in 1996 for its contribution to the financial markets.

BREAKEVEN POINT: The stock price at which a particular strategy neither gains or loses money.

BULLISH: An outlook anticipating higher prices in the underlying security.

BULL SPREAD: A delta long position comprised of long a lower strike option versus short a higher strike option with the same expiration, 1:1. The spread theoretically increases in value as the underlying price goes up, and decreases in value as it goes down.

BUTTERFLY SPREAD: A long butterfly spread is normally established by buying an in the money option, selling 2 at the money options, and buying an out of the money option.

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C-DVera

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