Asked Price: Lowest price an option seller will accept. The price paid to buy.
At-The-Money: Option trading at the same price as the exercise (strike) price.
Bearish: Outlook for lower prices.
Bear Call Spread: Option strategy to buy a higher strike call option and sell the lower strike call option at the same expiration month. Designed to produce a profit if the underlying asset declines in value.
Bear Put Spread: Option strategy to to buy a higher strike price put option and sell the lower strike put option at the same expiration month. Designed to produce a profit if the underlying asset decline in value.
Bear Time Spread: Strategy to buy an out-of-the-money longer term option and sell an out-of-the-money shorter term option at the same expiration month.
Bid Price: The highest price a bidder is willing to pay. The option sale price.
Bid/Ask Spread: The difference between the buy/sell price of an option.
Bollinger Bands: Created by John Bollinger, is a market direction indicator that plots bands above and below a 20 day moving average. Upper band acts as “resistance” and the lower band is price “support.”
Bullish: Outlook for higher prices.
Bull Call Spread: Strategy to buy a lower strike price call option and sell a higher price strike call option of the same expiration month.
Bull Put Spread: Strategy to buy a lower strike price option and sell a higher strike price put option for the same expiration month.
Buy to Close: Options purchase transaction which “buys back” and closes a “short” position.
Calender Spread: Strategy to buy and sell an option with the same strike price and different expiration months. Strike price is usually at-the-money and can be completed with either puts or calls.
Call: Option contract that gives the owner the right to buy 100 shares of an asset at a fixed price on or before a specified date.
Called Away: Option writer (seller) is required by terms of the contract to surrender an underlying asset to the option owner (buyer) at the strike price of a written (sold) call.
Closing Price: Option price as of the last transaction of the day.
Collar Trade: Strategy to buy shares in the underlying asset simultaneously purchasing an equal number of put contracts as a hedge and writing an equal number of call contracts to offset all or part of the cost of the put contracts.
Contract: Agreement between an option buyer and option writer guaranteeing the option buyer the right to buy a certain number of shares on or before a specific date at a specified price (strike price). Both parties are bound by the terms of the contract.
Covered Call Writing: Strategy of writing call option contracts equal to the number of shares owned. The written call offers a limited hedge against a decline in stock price.
Credit Spread: Strategy where buyer receives a credit into his/her account upon entering into the spread trade.
Credit Trade: Trade where one receives a credit into their account upon initiating the trade.
Correction: Price decline after a rally.
Day Order: A Limit order that is good and can only be filled on the day the trade was placed. If not filled that same day, the trade is automatically canceled.
Debit Spread: Strategy where one pays money out of his account upon entry into the trade.
Debit Trade: Trade where one pays money out of his account upon initiating the trade.
Delta: Measures the degree of change in an option premium relating to changes in the underlying asset.
Execution: Completion of a buy or sell order.
Exercise: Option owner chooses to buy or sell a set number of shares at the strike price.
Expiration Day: Last day on which the option may be exercised. The expiration date is the Saturday following the third Friday of the contract month. Option must be exercised or it will expire worthless.
Extrinsic Value: The value of any option in excess of the intrinsic value.
Fundamental Analysis: Asset valuation based on earning, P/E value, Price/book etc.
Gamma: Measures changes in the Delta relating to the underlying stock value.
Good-till-Canceled Order: Limit order that remains active until executed or canceled.
Historic Volatility: Value derived from past fluctuations.
Implied Volatility: Value derived from current market conditions or anticipated future fluctuations.
Index Option: Listed option on any equity index or industry group.
In-The-Money: Any option with intrinsic or cash value. A call option is in-the-money when the strike price is below the current stock price.
Intrinsic Value: Cash value realized or unrealized if the option is exercised.
Leaps: Acronym for “Long Term Equity Anticipation securities.” Leaps are both call or put options with expiration dates at least 9 months out and maximum length of 2.5 years. When a LEAP option contract has less than 9 months left to it’s expiration date it converts to a regular option contract.
Limit Order: Order to buy at or below or sell at or below a specific price known as a limit price.
Listed Option: Publicly traded options with a secondary market and can be traded without exercise.
Married Put: Strategy of buying shares and simultaneously buying an equal number of put contracts as a hedge against a downward price movement.
Naked Option Writing: The act of selling an option without first owning it.
Neutral Spread: Spread strategy designed to profit from time value decay rather than stock price movement.
Open Interest: Number of outstanding option contracts on a particular option strike price. The greater Open Interest the more liquidity that strike price has.
Option: Contract that gives the owner the right, but not the obligation, to buy or sell a number of shares at a fixed price (strike price) on or before a specific date (expiration date).
Option Writing: The selling of an option contract and receiving the option premium in exchange for guaranteeing fulfillment of the terms of the contract should the option owner decide to exercise.
Oscillators: Indicators that plot the movement of as asset’s price relative to an assumed cycle of highs and lows.
Overbought: Condition in which a security has reached the cycle high and is more likely to decline than to advance further.
Oversold: Condition in which a security has reached the cycle low and is more likely to advance than to decline further.
Premium: An amount paid by a buyer to a seller to guarantee the fulfillment of the terms of the contract. Premiums are quoted on a per share basis and are usually greater than the intrinsic value due to time and volatility value.
Protective Put: Strategy of being long the underlying asset and buying an equal number of put contracts to hedge the position from a decline in value.
Put: Option contract that gives the owner the right to sell a certain number of shares (100 lots) at a fixed price (strike) on or before a specific date (expiration).
Rolling Down: Process of closing out an option at a higher strike price and “roll down” to an option with a lower strike price.
Rolling Out: Process of closing out an option that is near expiration and “rolls out” into a longer term expiration date.
Rolling Up: Process of closing out an option at a lower strike price and “rolls up” into an option with a higher strike price.
Sell to Open: A sell transaction to open a new short position on a listed option contract.
Sell to Close: A sell transaction that sells back and closes an existing short position of a listed option contract.
Slippage: The cost an investor pays to buy at the “ask price” and sell at the “bid Price.” The difference is the amount paid to the “market makers” called slippage.
Spread: Simultaneous purchase and sale of options on the same security with different strike prices, expiration months or both.
Straddle: Strategy using the simultaneous purchase of a call and put option for the same strike price and expiration date. Designed to produce a profit from substantial price movement in either direction.
Strangle: Strategy of the simultaneous purchase of a call and put option with the same expiration but with different strike prices.
Strike Price: Fixed price at which a buyer can either buy or sell a security and the option writer is obligated to buy or sell if the option is assigned (exercised).
Technical Analysis: Process which determines the direction of a given asset based on historical price and volume data determined by chart patterns.
Theta: Measures the amount of value an option premium will lose within a given period of time. It is the rate at which time decays an option’s premium.
Time Decay: The loss of an option’s value over time. The rate at which an option value decreases accelerates as the expiration date moves closer.
Time Premium: The portion of an option’s value that is based on the time remaining until expiration.
Vega: Measures the rate of change in an option’s price due to “implied volatility.”
Volume: The number of shares (or options) that have been traded within a specific period of time.
Whipsaw: To alternate rapidly in contrasting directions.
