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WHICH CAN ADVERSELY AFFECT ACTUAL TRADING RESULTS.
Hopefully you have traded stocks before and know how they operate, because I
will not be going into that.

Before we get started, I wanted to let you know there is a booklet that you are
required to read before you trade a single option. Your broker will require you to
read it before you start trading. In fact they are required to give you a copy. The
booklet is called Characteristics and Risks of Standardized Options and
Supplements.

This booklet is designed to explain all the risks involved with options trading. It is
pretty technical and you will need to go through it a few times to understand it
but it is well worth the time.

Here is a link to download it.

http://www.optionsclearing.com/about/publications/character-risks.jsp

There are two types of options.

Call Options and Put Options.

A Call gives one the right but not the obligation, to purchase an underlying
security at a set (strike) price.

A Put gives one the right but not the obligation, to sell an underlying security at a
set (strike) price.

Although options are legal contracts it helps to think of them as something else.

I like to think of an option as a coupon. Let's say you are thinking of buying a
watermelon in the not too distant future. And you think that the price of
watermelons is going to increase. So you want to lock in today's price.

In this case, I agree to sell you a coupon (option) to buy a watermelon from me
for $1.00 which is today's price. But I will charge you 10 cents for this coupon and
it expires in 90 days.
Let's say 89 days go by. Your coupon expires tomorrow. If the price of
watermelons is more than $1.00 and you still want your watermelon you should
use the coupon. If the price of watermelons is below $1, you should forget the
coupon and just buy a watermelon at the market price. This will allow the coupon
to expire worthless and I would make a nice profit of 10 cents.

But what if you didn't want the watermelon but the price went up to $2. You
could either buy the watermelon yourself using the coupon and sell it to someone
else for $2, making you a nice 90 cents profit. (Remember you paid 10 cents for
the coupon.) Or you can sell the coupon to someone else, for $1, also making you
90 cents. Either way you win, and I lose.

It's the same with stocks. Thousands of stocks, indexes, and ETFs have options
available to trade. Options are gaining in popularity because of the immense
leverage. In our example, all you have to invest was 10 cents to control $1 worth
of watermelon.

Let's look at our example above again. You buy an option for 10 cents, and you
later can sell that option for $1 making you 90 cents. That's a 900% return on your
money. If instead you had bought a watermelon at $1 and sold it later at $2, you
would have made $1, or 100% return. 100% is great, but not compared to 900%.

In our example the coupon you bought was a Call option.

If you had thought the price of watermelons was going down, you could have
bought a Put option. Put options gain value when the stock goes down in price.

Call options gain value when the stock goes up in price.

That’s basically all you have to remember.

Calls make money when the underlying stock goes up.

Puts make money when the underlying stock goes down.

Call me UP.

Put me DOWN.
Let’s move on.

When talking about an option there are 3 classifications to be aware of:

In the Money, At the Money, Out of the Money.

In the Money

If a stock is trading at $50 the $45 Call the option is in the money by $5 as it has to
have $5 of intrinsic value.

At the Money

If a stock is trading at $50 the $50 call is trading at the money.

Out of the Money

If a stock is trading at $50 the $55 call is out of the money.

Expiration

As you saw earlier in the Watermelon example, the coupon I sold you was only
good for 90 days.

That is what is known as the expiration date.

All options have an expiration date.

At expiration, the option will stop trading. If the option has any value left it can be
exercised. That is jargon for used. Basically if you use your coupon to buy a
watermelon you are exercising your option.

If the option has no value at expiration, it expires worthless and basically goes
away. Poof like magic.

There are many different expiration cycles to choose from.

The most common are monthly options. There are also weekly options,
quarterlies, and LEAPS.

A LEAP is long term option that expires in January it could be next January, or one
or more years away.

2 Components of Option Value

Intrinsic and time value

Option Value is known as Premium.

Premium is made up of two sources: Intrinsic Value and Time value.

An option has Intrinsic Value only if it is In The Money.

So if the strike price of a Call option is $50 and the stock is trading at $57, the
option has $7 worth of Intrinsic Value.

Options also have Time Value.

Time Value is based on how much time left to expiration. The farther away it is
the more the option buyer will have to pay for the option.

American and European

Most stock and ETF options are American style options. Index options are
European style.

The main difference is that American style can be exercised early. European
options cannot.

A Short History of Options

Let’s talk about why options started trading in the first place.
 Options were created as a way to lose money!

Most amateur traders don’t realize this. Options were created as a way to hedge
a position. They were created to act as insurance.

They were first introduced in the commodities space. Imagine you are a wheat
farmer and you need to know what the price of wheat will be when your crop is
ready to sell. Prices fluctuate all the time. As a farmer you could buy Put options
on wheat as a hedge against falling prices. This way even if the price of wheat
drops to zero and your crop is worthless, your Put options will make money and
make up for the loss.

Or take the example of a toy manufacturer. Toys are made of mostly plastic which
is made from oil and gasoline. In order for you to know your costs, you need to
know what the oil and gasoline will cost in the future. If they go up too much your
toys will cost too much to produce and no one will buy them. So what you do is
buy Call options on Oil and Gasoline. That way even if the prices go up, your
options will make money and you can use that money to offset the higher cost of
materials. Since your costs of Oil and Gasoline are known in advance you can price
your product properly.

In both scenarios, you want to lose money on your options! You only wanted
them as insurance. No one ever wants to collect on their insurance, because that
means something bad happened.

Market makers and other traders are happy to sell these options because they
know the odds are on their side and that the options will most likely expire
worthless.

So you see, both sides know that the options will expire. And they are happy with
it.

Options were then introduced on stocks in the hopes of increasing trading and
commissions. Boy did that pay off for the stock exchanges.
But that’s when speculators jumped in and started promoting options as a way to
get rich. And while it is possible to hit a home run with options once in a while,
over the long term, buying options is a losing game.

If you have ever seen an ad or heard someone talking about making 1000 percent
gains they are talking about buying options.

In future lessons you will see why this is a very hard way to get ahead over the
long term.

Summary:

You now have a basic understanding of what an option is.

You know that there are two types of Options: Calls and Puts

You know they all have an expiration date.

You know the price of the option is also called Premium and is made up of
Intrinsic Value and Time Value.

You know how to tell is an option is In the Money, At the Money, or Out of the
Money.

You know the difference between American and European Options

And you had to sit through a brief history lesson on options. 

Philosophy of Income Trades

99% of the public knows that you buy stocks and hope they go up. They also know
that you lose in stocks when the stock goes down.

Thanks to this report, you are going to be part of the small minority of people that
will know how to make money when a stock not only goes up, but down, and
sideways as well.

There are four major reasons why option selling is the best way to invest and
grow your money.

1. You Don’t Need to Predict the Future

Over the long run, stocks average 8% a year.

Which is not bad if you have 30 years to retirement and don’t mind the wild
swings like in 2008 when they were down 38%. If you have the faith to stay
invested and enough money to put into the markets, then buying index funds and
not opening your statements might be a good strategy for you.

For most of us, we either cannot follow that route, or we don’t want to.

I for one, am disgusted by the poor returns of mutual funds who cannot even do
better than the averages they compete against and yet they still have the nerve to
charge tons of fees.

These companies are playing the game with our money, and losing. But they are
charging us for allowing them to use our money. We take all the risk, and they get
paid no matter what happens.

That is such a sweet setup that I think I just talked myself into starting a mutual
fund company.

In fact, the mutual fund guys know their model doesn’t work and they too are
getting into the option selling business. There are at least ten mutual funds that
implement option selling strategies. Fund companies like Blackrock, Eaton Vance,
Nuveen, and others are willing to charge you 1% of assets and more to do for you
what you can easily do yourself.

If you have been in the markets for any length of time you know that markets go
up and they go down.

And if you’re honest with yourself you know that no one can predict what the
markets will do, and neither can anyone time the market with any regularity.

But wait!

What about all the ads on TV and the Internet about people who have a
“Software” that tells you when to get in and when to get out. All you have to do is
follow the red and green arrows!

That’s why they have indicators right? Like the MACD or the Stocastics. These tell
you what is happening and when to trade.

If you believe all that, then I have some oceanfront property on Jupiter I can let
you have real cheap.

I am sorry my friend, but no one, not even the best traders in the world can
predict what the markets will do in the future with any regularity.

And no one can time the markets. Some pundits get lucky and call a market top or
bottom once, and then make their money offering predictions the rest of their
lives. What you don’t know is their overall track record.

Let’s look at the famous Jim Cramer.

This man ran his own hedge fund. Now he runs his own stock picking advisory, as
well as his own TV show, and has written several books on investing and trading.

I actually like the guy. He makes sense a lot of times. He has been in the trenches
so he knows a lot more about the way Wall Streeters think than we do. But that
doesn’t mean we should listen to his stock picks.
Some of the financial media have tried to analysis his picks to see how well he
does, but no one seems to have a clear answer. I don’t even think that matters,
because no one is out there (at least I hope not) that is following his every buy
and sell recommendation.

This guy claims to have made millions in the market for his hedge fund investors
and he probably did. But even he admits that he cannot predict the market. And
even though he has done shows with topics like “How to Tell When A Market has
Topped” I would never follow his advice blindly.

I actually know more traders that do the opposite of what Cramer says than those
that follow his advice.

The same goes with most of the pundits in the financial media. Everytime the
markets drop a few points, they bring out the Doom and Gloomers who start
talking about how everything is going to hell because of inflation, or the FED, or
government spending, or some other reason that can make them stand out from
the other pundits.

I actually stopped watching financial TV as much because they would keep

bringing on the same idiots that were always wrong.

Here’s a tip you probably already figured out on your own: The guys that are
really making money don’t have time to come on TV for interviews. And the ones
who are on TV all the time are the ones losing their investors’ money.

Ok, so I think I have made it clear that it is very hard to predict the future. No wait
it is impossible to predict the future.

That’s one reason to sell options. I don’t care which way the market goes.

I don’t have to predict. If I want to do a bullish trade, I can, but I don’t have to be
right to make money.

This removes so much of the stress.

When you have an 80% chance of winning on a trade, you don’t have to be the
best trader in the world to make money.
You see, when you buy a stock it has to go up for you to make money.

And if it does not, then your money is just sitting there not earning anything.
Unless it’s a dividend stock and you get some measly return like 3%.

And if it goes down then you lose.

You have to be right about the direction.

It is the same with buying options, except it is exponentially harder

Not only do you have to be right about the direction, but you have to know by
when the move will take place, and how much the stock will move. If you are
wrong on any of those three elements, you lose.

Here’s the magic:

When selling options, you get to play a range. The stock does what it does and as
long as it stays in the range you want, you win.

Let’s use golf as an example.

To make money with stocks you have to get the ball into the hole in 3 strokes.

To make money by buying options you have to hit a hole in one.

To make money by selling options you just have to hit the ball onto the course.

One additional point I want to make is that emotionally, winning more often does
wonders for your self-esteem and confidence. And as a trader having confidence
in your trades and yourself is a key factor to success.

2. Mean Reversion is Real

According to Investopedia, mean reversion is

A theory suggesting that prices and returns eventually move back towards the
mean or average. This mean or average can be the historical average of the price
or return or another relevant average such as the growth in the economy or the
average return of an industry.

In other words, if prices go up too far, too fast they have to slow down and come
back before they can keep going up.

Eventually they revert back to the mean.

This works especially well with volatility. Volatility is movement. We will cover it
in more detail in another lesson, but volatility is movement in the marketplace.

Implied volatility of a stock dictates option prices. So the more volatile the stock,
the more expensive the options.

You with me so far?

When a stock is moving a lot, it’s implied volatility is high. And so its options cost
more than normal.

When volatility returns to normal – the mean- option prices drop.

This is a great thing to know as an option seller.

High Volatility = high option prices.

Historical Volatility is the volatility level that is normal for the stock.

So if you want to determine if a stock is more than less volatile than normal, you
compare the historical volatility to the implied volatility.

If the implied vol is high, eventually it will come back down to the mean.

If the implied vol is low, eventually it will increase to the mean.

As an option trader you can choose to play with volatility. There are certain
strategies that trade around volatility which can make profits very, very quickly.
For example, when a stock drops a lot in price, let’s say after some news event. Its
volatility will jump and so will the prices of its options. That might be a good time
to sell some options. Once things calm down, the volatility will come back down
to normal, and the option prices will deflate as well. And this happens even if the
price of the stock does NOT change.

But you can also play options and not have much to do with volatility.

The credit spread is a strategy that does not use volatility as a major factor in
making money.

Reversion is also why playing the range works more often than not.

Let’s say there is some rumor that makes traders start buying stocks. The market
jumps. It jumps again the next day, and the next. It looks like it will keep going up
day after day.

Buy eventually everyone who was going to buy right away had bought. And others
do not want to buy at such a high price. So they wait. The stock moves sideways
for a few days. People think the rally is over, and they start selling. When the rice
drops for a couple days, the people that still wanted to buy it buy didn’t start
buying and the price goes up again. Then other short sellers things the rally has
gone too far and start to short the stock and so it comes back down.

This happens over and over in the markets.

Unless there is some amazingly beneficial news, no stock moves in a straight line.

3. Most Options Expire

There have been studies done in the past that show that close to 80% of all
options expire worthless.

Some people disagree with that.

It doesn’t matter.
We will learn both types of strategies, the ones in which we want the option to
expire and the ones in which we need to exit the trade anyway and don’t care
what happens to our sold option at expiration.

As option sellers we have something very powerful on our side: Math

We will be using statistics and modeling to determine what probability of profit

our trade has even before be place the trade.

We can them place trades that are based on our personal risk tolerance.

Do you want to make trades with a 90% probability of winning? You will learn
how in another lesson.

For my trades in which I am looking for the option to expire, I like to do trades
that have a 75% or greater probability of profit.

You cannot do this with stock. Buying stock is a 50/50 coin flip.

These percentages are calculated using option prices, volatility, days to

expiration, and more.

We are not going to go into calculating this by hand. I let my broker software do it
all for me, because I want to keep my trading as simple as possible. And in
another video I will show you how to calculate the probability of profit for your
trades.

4. Monthly Income

By selling options you get to have regular monthly income.

You can leave this money in your account and compound it or take it out to use.
Your choice.

Most of our trades are short term trades about a month long.
For some trades like the credit spread or the condor you get paid a credit when
you execute the trade. That money is deposited into your account as soon as your
trade is filled.

These are the top 4 reason I prefer option selling to any other investment
method.

There are plenty of other benefits that I have not gone over such as:

• Does not take long to monitor trades.

• Can be done from anywhere in the world

• Can be custom tailored to your experience, account size, and risk tolerance

• Can be started with no money (papertrading) and can be scaled to millions

very quickly

• Can be done in a retirement or other tax advantaged account

• No employees, no customers, no inventory (for business owners)

• You can take time off from trading whenever you wish

• Can be done with family/friends

Option Brokers

Having a good broker is one of the most crucial aspects of trading. Since your
broker is the one sending your orders to the exchanges and acting on your behalf
you owe it to yourself to be using only the best broker or brokers in the
marketplace.

It also goes without saying that commissions will also impact your trading. The
lower the commissions the more you keep and the easier it is to trade. On the
other hand, low commissions are great but they should not be the only criteria
used to choose a broker.
All brokers are not created equal. Just because a broker is well known for stocks,
does not mean they are a good place to trade options. In the past, I have always
said, the best brokers are not the ones with the flashy TV ads. That is not as true
as it once was but it is still a good rule of thumb.

A common complaint of new option traders is if your broker will not help you
place a trade. That is the sign of an option unfriendly broker.

Another complaint many new traders have is that their broker will not allow them
to do option selling strategies in their IRA. This one pisses me off because the
brokers lie and say it is against IRA rules. This is totally not true. All option friendly
brokers let you trade options in an IRA.

Having a bad broker is like trading with one hand tied behind your back. Trading is
hard enough so why make it harder by using a bad broker?

What I look for in a good option broker:

There are many criteria, but I would like a broker that

• Gives me the best tools

• Makes it super easy to trade

• Allows me access to trade everything I want to trade in one account

• Has great customer service

• Has great low commissions and fees

• Can keep tax time simple by offering easy to understand reporting and
statements

By best tools I mean: the best trading platform software for desktop, phone and
ipad/tablet trading, real time quotes included, easy access to research, education,
and other traders.
They should offer great charting and analyze tools to visually look at my option
trades. I should be able to know with a quick glance what my probability of profit
it, how much I can make, how much I can lose, etc on any trade.

Super easy to trade means a very simple interface to place trades. I want to get
good fills and be updated through alerts. They should also offer portfolio margin if
I desire it.

Trading everything in one account means I can trade, stocks, options, futures, and
futures options in one account without having to have multiple accounts with
separate piles of money in each account. This also means they do not limit my IRA
account by not letting me trade options in it.

Great customer service means there is some who picks up the phone when I call
and is knowledgeable enough to answer questions about my trade/account/ or
whatever I am calling about. They should also answer emails very quickly (2 hours
is good).

Low commissions and fees is self explanatory. I don’t mind paying a little more for
better tools and service but don’t charge me double either.

A clear account statement is something most people do not think about but tax
time can be a real pain if your statements are not easy to read.

Trading Accounts

If you get approved for options trading, you can trade weeklies.

To be able to trade options on Index and do the more advanced strategies you
will need a high level trading account.

Different brokers use different jargon, but you want an account with as high a
“level” as you can get.

To get approved for options, you just have to fill out a form.
Your broker will ask some questions about your trading experience, net worth,
purpose of trading, etc.

If the broker deems you worthy (have enough money and knowledge that if you
lose it you won’t sue them) they will grant you option trading ability.

To increase your account’s Level you have to fill out the forms again. But it is
better to just call your broker and ask to increase your Level.

You want to be able to trade “Spreads on Indexes”. This is usually allowed in only
the highest level accounts.
Glossary

Adjustments

A change to contract terms due to a corporate action (e.g., a merger or stock

split). Depending on the corporate action, different contract terms (including
strike price, deliverable, expiration date, multiplier etc.) could be adjusted. An
adjusted option may cover more or less than the usual 100 shares. For example,
after a 3-for-2 stock split, the adjusted option will represent 150 shares. For such
options, the premium must be multiplied by a corresponding factor. Example:
buying 1 call (covering 150 shares) at 4 would cost $600.

All-or-none order (AON)

A type of option order which requires that the order be executed completely or
not at all. An AON order may be either a day order or a GTC (good-‘til-cancelled)
order.

American-style option

An option that can be exercised at any time prior to its expiration date. See also
European-style option.

Arbitrage

A trading technique that involves the simultaneous purchase and sale of identical
assets or equivalent assets in two different markets with the intent of profiting by
the price discrepancy.

Ask / Ask price

The price at which a seller is offering to sell an option or a stock. See also
Assignment.

Assigned (an exercise)

Received notification of an assignment by OCC. See also Assignment.

Assignment

Notification by OCC to a clearing member that an owner of an option has

exercised their rights. For equity and index options, OCC makes assignments on a
random basis. See also Delivery and Exercise.

At-the-money / At-the-money option

A term that describes an option with a strike price that is equal to the current
market price of the underlying stock.

Averaging down

Buying more of a stock or an option at a lower price than the original purchase to
reduce the average cost.

Backspread

A Delta-neutral spread composed of more long options than short options on the
same underlying instrument. This position generally profits from a large
movement in either direction in the underlying instrument.
Bear (or bearish) spread

One of a variety of strategies involving two or more options (or options combined
with a position in the underlying stock) that can potentially profit from a fall in the
price of the underlying stock.

Bear spread (call)

The simultaneous writing of one call option with a lower strike price and the
purchase of another call option with a higher strike price. Example: writing 1 XYZ
May 60 call and buying 1 XYZ May 65 call.

Bear spread (put)

The simultaneous purchase of one put option with a higher strike price and the
writing of another put option with a lower strike price. Example: buying 1 XYZ
May 60 put and writing 1 XYZ May 55 put.

Bearish

An adjective describing the opinion that a stock, or a market in general, will

decline in price; a negative or pessimistic outlook.

Beta

A measure of how closely the movement of an individual stock tracks the

movement of the entire stock market.
Bid / Bid Price

The price at which a buyer is willing to buy an option or a stock.

Black-Scholes formula

The first widely used model for option pricing. This formula is used to calculate a
theoretical value for an option using current stock prices, expected dividends, the
option's strike price, expected interest rates, time to expiration and expected
stock volatility. While the Black-Scholes model does not perfectly describe real-
world options markets, it is often used in the valuation and trading of options.

Box spread

A four-sided option spread that involves a long call and a short put at one strike
price in addition to a short call and a long put at another strike price. Example:
buying 1 XYZ May 60 call and writing 1 XYZ May 65 call; simultaneously buying 1
XYZ May 65 put and writing 1 May 60 put.

Break-even point(s)

The stock price(s) at which an option strategy results in neither a profit nor a loss.
While a strategy's break-even point(s) are normally stated as of the option's
expiration date, a theoretical option pricing model can be used to determine the
strategy's break-even point(s) for other dates as well.

Broker

A person acting as an agent for making securities transactions. An account

executive or a broker at a brokerage firm who deals directly with customers. A
floor broker on the trading floor of an exchange actually executes someone else's
trading orders.

Bull (or bullish) spread

One of a variety of strategies involving two or more options (or options combined
with an underlying stock position) that may potentially profit from a rise in the
price of the underlying stock.

Bull spread (call)

The simultaneous purchase of one call option with a lower strike price and the
writing of another call option with a higher strike price. Example: buying 1 XYZ
May 60 call and writing 1 XYZ May 65 call.

Bull spread (put)

The simultaneous writing of one put option with a higher strike price and the
purchase of another put option with a lower strike price. Example: writing 1 XYZ
May 60 put, and buying 1 XYZ May 55 put.

Bullish

An adjective describing the opinion that a stock, or the market in general, will rise
in price; a positive or optimistic outlook.

Butterfly spread

A strategy involving three strike prices with both limited risk and limited profit
potential. Establish a long call butterfly by buying one call at the lowest strike
price, writing two calls at the middle strike price and buying one call at the highest
strike price. Establish a long put butterfly by buying one put at the highest strike
price, writing two puts at the middle strike price and buying one put at the lowest
strike price. For example, a long call butterfly might include buying 1 XYZ May 55
call, writing 2 XYZ May 60 calls and buying 1 XYZ May 65 call.

Buy-write

A covered call position that includes a stock purchase and an equivalent number
of calls written at the same time. This position may be a combined order with
both sides (buying stock and writing calls) executed simultaneously. Example:
buying 500 shares XYZ stock and writing 5 XYZ May 60 calls. See also Covered call
/ Covered call writing.

Calendar spread

An option strategy that generally involves the purchase of a longer-termed

option(s) (call or put) and the writing of an equal number of nearer-termed
option(s) of the same type and strike price. Example: buying 1 XYZ May 60 call
(far-term portion of the spread) and writing 1 XYZ March 60 call (near-term
portion of the spread). See also Horizontal spread.

Call option

An option contract that gives the owner the right but not the obligation to buy
the underlying security at a specified price (its strike price) for a certain, fixed
period (until its expiration). For the writer of a call option, the contract represents
an obligation to sell the underlying product if the option is assigned.

Carry / Carrying cost

The interest expense on money borrowed to finance a securities position.

Cash settlement amount

The difference between the exercise price of the option being exercised and the
exercise settlement value of the index on the day the index option is exercised.
See also Exercise settlement amount.

CBOE

Chicago Board Options Exchange

Class of options

A term referring to all options of the same type (either calls or puts) covering the
same underlying stock.

Close / Closing transaction

A reduction or an elimination of an open position by the appropriate offsetting

purchase or sale. A selling transaction closes an existing long option position. A
purchase transaction closes an existing short option position. This transaction
reduces the open interest for the specific option involved.

Closing price

The final price of a security at which a transaction was made. See also Settlement
price.
Collar

A protective strategy in which a written call and a long put are taken against a
previously owned long stock position. The options typically have different strike
prices (put strike lower than call strike). Expiration months may or may not be the
same. For example, if the investor previously purchased XYZ Corporation at $46
and it rose to $62, the investor could establish a collar involving the purchase of a
May 60 put and the writing of a May 65 call to protect some of the unrealized
profit in the XYZ Corporation stock position. The investor may also use the reverse
(a long call combined with a written put) if he has previously established a short
stock position in XYZ Corporation. See also Fence.

Collateral

Securities against which loans are made. If the value of the securities (relative to
the loan) declines to an unacceptable level, this triggers a margin call. As such, the
investor is asked to post additional collateral or the securities are sold to repay
the loan.

Combination

An arrangement of options involving two long, two short, or one long and one
short positions. The positions can have different strikes or expiration months. The
term combination varies by investor. Example: a long combination might be
buying 1 XYZ May 60 call and selling 1 XYZ May 60 put.

Condor spread

A strategy involving four strike prices with both limited risk and limited profit
potential. Establish a long call condor spread by buying one call at the lowest
strike, writing one call at the second strike, writing another call at the third strike,
and buying one call at the fourth (highest) strike. This spread is also referred to as
a flat-top butterfly.

Contingency order

An order to execute a transaction in one security that depends on the price of

another security. An example might be to sell the XYZ May 60 call at $2.00,
contingent upon XYZ stock being at or below $59.

Contract size

The amount of the underlying asset covered by the option contract. This is 100
shares for 1 equity option unless adjusted for a special event. See also
Adjustments.

Conversion

An investment strategy in which a long put and a short call with the same strike
price and expiration combine with long stock to lock in a nearly riskless profit. For
example, buying 100 shares of XYZ stock, writing 1 XYZ May 60 call and buying 1
XYZ May 60 put at desirable prices. The process of executing these three-sided
trades is sometimes called conversion arbitrage. See also Reversal / Reverse
conversion.

Cover

To close out an open position. This term most often describes the purchase of an
option or stock to close out an existing short position for either a profit or loss.
Covered call / Covered call writing

An option strategy in which a call option is written against an equivalent amount

of long stock. Example: writing 2 XYZ May 60 calls while owning 200 shares or
more of XYZ stock. See also Buy-write and Overwrite.

Covered combination

A strategy in which one call and one put with the same expiration, but different
strike prices, are written against each 100 shares of the underlying stock.
Example: writing 1 XYZ May 60 call and writing 1 XYZ May 55 put, and buying 100
shares of XYZ stock. In actuality, this is not a fully covered strategy because
assignment on the short put requires purchase of additional stock.

Covered option

An open short option position completely offset by a corresponding stock or

option position. A covered call could be offset by long stock or a long call, while a
covered put could be offset by a long put or a short stock position. This insures
that if the owner of the option exercises, the writer of the option will not have a
problem fulfilling the delivery requirements. See also Uncovered call option
writing and Uncovered put option writing.

Covered put / Covered cash-secured put

The cash-secured put is an option strategy in which a put option is written against
a sufficient amount of cash (or Treasury bills) to pay for the stock purchase if the
short option is assigned.

Covered straddle
An option strategy in which one call and one put with the same strike price and
expiration are written against each 100 shares of the underlying stock. Example:
writing 1 XYZ May 60 call and 1 XYZ May 60 put, and buying 100 shares of XYZ
stock. In actuality, this is not a fully covered strategy because assignment on the
short put requires purchase of additional stock.

Credit

Money received in an account either from a deposit or from a transaction that

results in increasing the account's cash balance.

Credit spread

A spread strategy that increases the account's cash balance when established. A
bull spread with puts and a bear spread with calls are examples of credit spreads.

Cycle

The expiration dates applicable to the different series of options. Traditionally,

there were three cycles:

Cycle Available Expiration Months

January January, April, July, October

February February, May, August, November

March March, June, September, December

Today, most equity options expire on a hybrid cycle, which involves four option
series: the two nearest-term calendar months and the next two months from the
traditional cycle to which that class of options has been assigned. For example, on
January 1, a stock in the January cycle will be trading options expiring in these
months: January, February, April and July. After the January expiration, the
months outstanding will be February, March, April and July.

Day order

A type of option order that instructs the broker to cancel any unfilled portion of
the order at the close of trading on the day the order was first entered.

Day trade

A position (stock or option) that is opened and closed on the same day.

Debit

Money paid out from an account from either a withdrawal or a transaction that
results in decreasing the cash balance.

Debit spread

A spread strategy that decreases the account's cash balance when established. A
bull spread with calls and a bear spread with puts are examples of debit spreads.

Decay

A term used to describe how the theoretical value of an option erodes or declines
with the passage of time. Time decay is specifically quantified by Theta.

Delivery
The process of meeting the terms of a written option contract when notification
of assignment has been received. In the case of a short equity call, the writer
must deliver stock and in return receives cash for the stock sold. In the case of a
short equity put, the writer pays cash and in return receives the stock.

Delta

A measure of the rate of change in an option's theoretical value for a one-unit

change in the price of the underlying stock.

Derivative / Derivative security

A financial security whose value is determined in part from the value and
characteristics of another security known as the underlying security.

Diagonal spread

A strategy involving the simultaneous purchase and writing of two options of the
same type that have different strike prices and different expiration dates.
Example: buying 1 May 60 call and writing 1 March 65 call.

Discount

An adjective used to describe an option that is trading at a price less than its
intrinsic value (i.e., trading below parity).

Discretion

Freedom given by an investor to his or her account executive to use judgment

regarding the execution of an order. Discretion can be limited, as in the case of a
limit order that gives the floor broker price flexibility beyond the stated limit price
to use his or her judgment in executing the order. Discretion can also be
unlimited, as in the case of a market-not-held order.

Early exercise

A feature of American-style options that allows the owner to exercise an option at

any time prior to expiration.

Equity

In a margin account, equity is the difference between the securities owned and
the margin loans owed. The investor keeps this amount after all positions are
closed and all margin loans paid off.

Equity option

An option on shares of an individual common stock or exchange traded fund.

European-style option

An option that can be exercised only during a specified period just prior to
expiration. See also American-style option.

Ex-date / Ex-dividend date

The day before the date that an investor must have purchased the stock in order
to receive the dividend. On the ex-dividend date, the previous day's closing price
is reduced by the amount of the dividend because purchasers of the stock on the
ex-dividend date will not receive the dividend payment. This date is sometimes
referred to simply as the ex-date, and can apply to other situations (e.g., splits
and distributions). If you purchase a stock on the ex-date for a split or
distribution, you are not entitled to the split stock or that distribution. However,
the opening price for the stock will have been reduced by an appropriate amount,
as on the ex-dividend date. Weekly financial publications, such as Barron's, often
include a stock's upcoming ex-date as part of their stock tables.

Exchange traded funds (ETFs)

Exchange traded funds (ETFs) are index funds or trusts listed on an exchange and
traded in a similar fashion as a single equity. The first ETF came about in 1993
with the AMEX's concept of a tradable basket of stocks— Standard & Poor's
Depositary Receipt (SPDR). Today, the number of ETFs that trade options
continues to grow and diversify. Investors can buy or sell shares in the collective
performance of an entire stock portfolio (or a bond portfolio) as a single security.
Exchange traded funds allow investors to enjoy some of the more favorable
features of stock trading, such as liquidity and ease of equity style, in an
environment of more traditional index investing.

Exercise

To invoke the rights granted to the owner of an option contract. In the case of a
call, the option owner buys the underlying stock. In the case of a put, the option
owner sells the underlying stock.

Exercise price

The price that the owner of an option can purchase (call) or sell (put) the
underlying stock. Used interchangeably with strike or strike price.

Exercise settlement amount

The difference between the exercise price of the option being exercised and the
exercise settlement value of the index on the day the index option is exercised.

Expiration date

The date that an option and the right to exercise it cease to exist.

Expiration Friday

The last business day prior to the option's expiration date during which purchases
and sales of options can be made. For equity options, this is generally the third
Friday of the expiration month. If the third Friday of the month is an exchange
holiday, the last trading day is the Thursday immediately preceding the third
Friday.

Expiration month

The month that the expiration date occurs.

Fill-or-kill order (FOK)

A type of option order that requires that the order be executed completely or not
at all. A fill-or-kill order is similar to an all-or-none (AON) order. The difference is
that if the order cannot be completely executed (i.e., filled in its entirety) as soon
as it is announced in the trading crowd, it is killed (cancelled) immediately. Unlike
an AON order, an FOK order cannot be used as part of a good-‘til-cancelled order.

FINRA (Financial Industry Regulatory Authority)

The largest independent regulator for all securities firms doing business in the
United States.

Fundamental analysis

A method of predicting stock prices based on the study of earnings, sales,

dividends, and so on.

Gamma

A measure of the rate of change in an option's Delta for a one-unit change in the
price of the underlying stock. See also Delta.

Good-'til-cancelled (GTC) order

A type of limit order that remains in effect until it is either executed (filled) or
cancelled. This is unlike a day order, which expires if not executed by the end of
the trading day. If not executed, a GTC option order is automatically cancelled at
the option's expiration.

Hedge / Hedged position

A position established with the specific intent of protecting an existing position.

For example, an owner of common stock may buy a put option to hedge against a
possible stock price decline.

Historic volatility

A measure of actual stock price changes over a specific period. See also Standard
deviation.
Horizontal spread

An option strategy that generally involves the purchase of a farther-term option

(call or put) and the writing of an equal number of nearer-term options of the
same type and strike price. Example: buying 1 XYZ May 60 call (far-term portion of
the spread) and writing 1 XYZ March 60 call (near-term portion of the spread). See
also Calendar spread.

Immediate-or-cancel order (IOC)

A type of option order that gives the trading crowd one opportunity to take the
other side of the trade. After announcement, the order is either partially or totally
filled with any remaining balance immediately cancelled. An IOC order,
considered a type of day order, cannot be used as part of a good-‘til-cancelled
order since it is cancelled shortly after being entered. The difference between fill-
or-kill (FOK) orders and IOC orders is that an IOC order may be partially executed.

Implied volatility

The volatility percentage that produces the best fit for all underlying option prices
on that underlying stock. See also Individual volatility.

In-the-money / In-the-money option

A term used to describe an option with intrinsic value. For standard options, a call
option is in-the-money if the stock price is above the strike price. A put option is
in-the-money if the stock price is below the strike price.

Index
A compilation of several stock prices into a single number. Example: the S&P 100
Index.

Index option

An option whose underlying interest is an index. Generally, index options are

cash-settled.

Individual volatility

The volatility percentage that justifies an option's price, as opposed to historic

volatility or implied volatility. A theoretical pricing model can be used to generate
an option's individual volatility when the five remaining quantifiable factors (stock
price, time until expiration, strike price, interest rates and cash dividends) are
entered along with the price of the option itself.

Institution

A professional investment management company. Typically, this term describes

money managers such as banks, pension funds, mutual funds and insurance
companies.

Intrinsic value

The in-the-money portion of an option's premium. See also In-the-money.

Iron butterfly

An option strategy with limited risk and limited profit potential that involves both
a long (or short) straddle, and a short (or long) strangle. An iron butterfly contains
four options. It is equivalent to a regular butterfly spread that contains only three
options. For example, a short iron butterfly might include buying 1 XYZ May 60
call and 1 May 60 put, and writing 1 XYZ May 65 call and writing 1 XYZ May 55
put.

Last trading day

The last business day before the option's expiration date during which purchases
and sales of options can be made. For equity options, this is generally the third
Friday of the expiration month. If the third Friday of the month is an exchange
holiday, the last trading day is the Thursday immediately preceding the third
Friday.

LEAPS® (Long-term Equity AnticiPation Securities) / Long-dated options

Calls and puts with an expiration of over nine months when listed. Currently,
equity LEAPS have two series at any time with a January expiration.

Leg

A term describing one side of a position with two or more sides. When a trader
legs into a spread, they establish one side first, hoping for a favorable price
movement in order to execute the other side at a better price. This is a higher-risk
method of establishing a spread position.

Leverage

A term describing the greater percentage of profit or loss potential when a given
amount of money controls a security with a much larger face value. For example,
a call option enables the owner to assume the upside potential of 100 shares of
stock by investing a much smaller amount than that required to buy the stock. If
the stock increases by 10%, for example, the option might double in value.
Conversely, a 10% stock price decline might result in the total loss of the purchase
price of the option.

Limit order

A trading order placed with a broker to buy or sell stock or options at a specific
price.

Liquidity / Liquid market

Trading environments characterized by high trading volume, a narrow spread

between the bid and ask prices, and the ability to trade larger sized orders
without significant price changes.

Listed option

A put or call traded on a national options exchange. In contrast, over-the-counter

options usually have non-standard or negotiated terms.

Long option position

The position of an option purchaser (owner) which represents the right to either
buy stock (in the case of a call) or to sell stock (in the case of a put) at a specified
price (strike price) at or before some date in the future (the expiration date). This
position results from an opening purchase transaction (long call or long put).

Long stock position

A position in which an investor has purchased and owns stock.

Margin / Margin requirement

The minimum equity required to support an investment position. To buy on

margin refers to borrowing part of the purchase price of a security from a
brokerage firm.

Mark-to-market

An accounting process by which the price of securities held in an account are

valued each day to reflect the closing price or closing market quotes. As a result,
the equity in an account is updated daily to reflect current security prices
properly.

Market order

A trading order placed with a broker to immediately buy or sell a stock or option
at the best available price.

Market quote

Quotations of the current best bid/ask prices for an option or stock in the
marketplace (an exchange trading floor). The investor usually obtains this
information from a brokerage firm. However, for listed options and stocks, these
quotes are widely disseminated and available through various commercial
quotation services.

Market maker

An exchange member on the trading floor who buys and sells options for their
own account and who has the responsibility of making bids and offers and
maintaining a fair and orderly market. See also Specialist / specialist group /
specialist system.

Married put strategy

The simultaneous purchase of stock and put options representing an equivalent

number of shares. This is a limited risk strategy during the life of the puts because
the stock can always be sold for at least the strike price of the purchased puts.

Naked or uncovered option

A short option position that is not fully collateralized if notification of assignment

is received. A short call position is uncovered if the writer does not have a long
stock or deeper-in-the-money long call position. A short put position is uncovered
if the writer is not short stock or long another deeper-in-the-money put.

Nasdaq

A national securities exchange (Operated by Nasdaq OMX).

Net credit

Money received in an account either from a deposit or a transaction that results

in increasing the account's cash balance.

Net debit

Money paid from an account either from a withdrawal or a transaction that

results in decreasing the cash balance.
Neutral

An adjective describing the belief that a stock or the market in general will neither
rise nor decline significantly.

Neutral strategy

An option strategy (Or stock and option position) expected to benefit from a
neutral market outcome.

Ninety-ten (90/10) strategy

A conservative option strategy in which an investor buys Treasury bills (or other
liquid assets) with 90% of their funds, and buys call options (or put options or a
mixture of both) with the balance. The proportions of this strategy are subject to
change based on prevailing interest rates.

Non-equity option

Any option that does not have common stock as the underlying asset. Non-equity
options include options on futures, indexes, foreign currencies, Treasury security
yields, etc.

Offer / Offer price

The price at which a seller is offering to sell an option or a stock. Also known as
ask or ask price.

One-cancels-other order (OCO)

A type of option order that treats two or more option orders as a package,
whereby the execution of any one of the orders causes all the orders to be
reduced by the same amount. For example, the investor would enter an OCO
order if they wished to buy 10 May 60 calls or 10 June 60 calls or any combination
of the two which when summed equaled 10 contracts. An OCO order may be a
day order or a good-‘til-cancel order.

Open interest

The total number of outstanding option contracts on a given series or for a given
underlying stock.

Open outcry

The trading method by which competing market makers and floor brokers
representing public orders make bids and offers on the trading floor.

Opening transaction

An addition to, or creation of, a trading position. An opening purchase transaction

adds long options to an investor's total position, and an opening sale transaction
adds short options. An opening option transaction increases that option's open
interest.

Option

A contract that gives the owner the right, but not the obligation, to buy or sell a
particular asset (the underlying stock) at a fixed price (the strike price) for a
specific period of time (until expiration) . The contract also obligates the writer to
meet the terms of delivery if the owner exercises the contract right.

Option period

The time from when a buyer or writer of an option creates an option contract to
the expiration date; sometimes referred to as an option's lifetime.

Option pricing curve

A graphical representation of the estimated theoretical value of an option at one

point in time, at various prices of the underlying stock.

Option pricing model

The first widely used model for option pricing was the Black Scholes. This formula
can be used to calculate a theoretical value for an option using current stock
prices, expected dividends, the option's strike price, expected interest rates, time
to expiration and expected stock volatility. While the Black-Scholes model does
not perfectly describe real-world options markets, it is still often used in the
valuation and trading of options.

Option writer

The seller of an option contract who is obligated to meet the terms of delivery if
the option owner exercises his or her right. This seller has made an opening sale
transaction, and has not yet closed that position.

Optionable stock
A stock on which listed options are traded.

Options Clearing Corporation (OCC)

OCC is the world's largest equity derivatives clearing organization. Founded in

1973, OCC operates under the jurisdiction of both the Securities and Exchange
Commission (SEC) as a Registered Clearing Agency and the Commodity Futures
Trading Commission (CFTC) as a Derivatives Clearing Organization. OCC provides
central counterparty (CCP) clearing and settlement services to 16 exchanges and
trading platforms for options, financial futures, security futures and securities
lending transactions.

OTC option

An over-the-counter option is traded in the over-the-counter market. OTC options

are not listed on an options exchange and do not have standardized terms. These
are to be distinguished from exchange-listed and traded equity options, which are
standardized.

Out-of-the-money / Out-of-the-money option

A term used to describe an option that has no intrinsic value. The option’s
premium consists entirely of time value. For standard contracts, a call option is
out-of-the-money if the stock price is below its strike price. A put option is out-of-
the-money if the stock price is above its strike price. See also Intrinsic value and
Time value.

Over-the-counter / Over-the-counter market

A decentralized association of market participants, with many characteristics of
an exchange, where trading takes place via an electronic network.

Overwrite

An option strategy involving the writing of call options (wholly or partially) against
existing long stock positions. This is different from the buy-write strategy that
involves the simultaneous purchase of stock and writing of a call. See also Ratio
write.

Parity

A term used to describe an option contract's total premium when that premium is
the same amount as its intrinsic value. For example, an option is ‘worth parity’
when its theoretical value is equal to its intrinsic value. An option is said to be
‘trading for parity’ when an option is trading for only its intrinsic value. Parity may
be measured against the stocks last sale, bid or offer.

Payoff diagram

A chart of the profits and losses for a particular options strategy prepared in
advance of the execution of the strategy. The diagram is a plot of expected profits
or losses against the price of the underlying security.

Physical delivery option

An option whose underlying entity is a physical good or commodity, like a

common stock or a foreign currency. When its owner exercises that option, there
is delivery of that physical good or commodity from one brokerage or trading
account to another.
Pin risk

The risk to an investor (option writer) that the stock price will exactly equal the
strike price at expiration (that option will be exactly at-the-money). The investor
will not know how many of their written(short) options will be assigned or
whether a last second move in the underlying will leave any long options in- or
out-of-the-money. The risk is that on the following Monday the option writer
might have an unexpected long (in the case of a written put) or short (in the case
of a written call) stock position, and thus be subject to the risk of an adverse price
move.

Position

The combined total of an investor's open option contracts (Calls and/or puts) and
long or short stock.

Position trading

An investing strategy in which open positions are held for an extended period.

Premium

1. Total price of an option: intrinsic value plus time value.

2. Often (Erroneously) this word is used to mean the same as time value.

Primary market

For securities traded in more than one market, the primary market is usually the
exchange where trading volume in that security is highest.
Profit/loss graph

A graphical presentation of the profit and loss possibilities of an investment

strategy at one point in time (usually option expiration), at various stock prices.

Put option

An option contract that gives the owner the right to sell the underlying stock at a
specified price (its strike price) for a certain, fixed period (until its expiration). For
the writer of a put option, the contract represents an obligation to buy the
underlying stock from the option owner if the option is assigned.

Ratio spread

A term most commonly used to describe the purchase of an option(s), call or put,
and the writing of a greater number of the same type of options that are out-of-
the-money with respect to those purchased. All options involved have the same
expiration date. For example, buying 5 XYZ May 60 calls and writing 6 XYZ May 65
calls. See also Ratio write.

Ratio write

An investment strategy in which stock is purchased and call options are written on
a greater than one-for-one basis (more calls written than the equivalent number
of shares purchased). For example, buying 500 shares of XYZ stock, and writing 6
XYZ May 60 calls. See also Ratio spread.

Realized gains and losses

The net amount received or paid when a closing transaction is made and matched
with an opening transaction.
Resistance

A term used in technical analysis to describe a price area at which rising prices are
expected to stop or meet increased selling activity. This analysis is based on
historic price behavior of the stock.

Reversal / Reverse conversion

An investment strategy used mostly by professional option traders in which a

short put and long call with the same strike price and expiration combine with
short stock to lock in a nearly riskless profit. For example, selling short 100 shares
of XYZ stock, buying 1 XYZ May 60 call, and writing 1 XYZ May 60 put at favorable
prices. The process of executing these three-sided trades is sometimes called
reversal arbitrage.

Rho

A measure of the expected change in an option's theoretical value for a 1%

change in interest rates.

Rolling

A trading action in which the trader simultaneously closes an open option position
and creates a new option position at a different strike price, different expiration,
or both. Variations of this include rolling up, rolling down, rolling out and diagonal
rolling.

SEC

The Securities and Exchange Commission. The SEC is an agency of the federal
government that is in charge of monitoring and regulating the securities industry.
Secondary market

A market where securities are bought and sold after their initial purchase by
public investors.

Sector index

An index that measures the performance of a narrow market segment, such as

biotechnology or small capitalization stocks.

Secured put / Cash-secured put

An option strategy in which a put option is written against a sufficient amount of

cash (or Treasury bills) to pay for the stock purchase if the short option is
assigned.

Series of options

Option contracts on the same class having the same strike price and expiration
month. For example, all XYZ May 60 calls constitute a series.

Settlement

The process by which the underlying stock is transferred from one brokerage
account to another when equity option contracts are exercised by their owners
and the inherent obligations assigned to option writers.

Settlement price
The official price at the end of a trading session. OCC establishes this price and
uses it to determine changes in account equity, margin requirements and for
other purposes. See also Mark-to-market.

Short option position

The position of an option writer that represents an obligation on the part of the
option's writer to meet the terms of the option if its owner exercises it. The writer
can terminate this obligation by buying back (cover or close) the position with a
closing purchase transaction.

Short stock position

A strategy that profits from a stock price decline. It is initiated by borrowing stock
from a broker-dealer and selling it in the open market. This strategy is closed
(covered) later by buying back the stock and returning it to the lending broker-
dealer.

Specialist / Specialist group / Specialist system

One or more exchange members whose function is to maintain a fair and orderly
market in a given stock or a given class of options. This is accomplished by
managing the limit order book and making bids and offers for their own account
in the absence of opposite market side orders. See also Market maker and Market
maker system (competing).

Spin-off

A stock dividend issued by one company in shares of another corporate entity,

such as a subsidiary corporation of the company issuing the dividend.
Spread / Spread order

A position consisting of two parts, each of which alone would profit from opposite
directional price moves. As orders, these opposite parts are entered and executed
simultaneously in the hope of (1) limiting risk, or (2) benefiting from a change of
price relationship between the two parts.

Standard deviation

A statistical measure of price fluctuation. One use of the standard deviation is to

measure how stock price movements are distributed about the mean. See also
Volatility.

Standardization

Interchangeability resulting from standardization. Options listed on national

exchanges are fungible, while over-the-counter options generally are not. Classes
of options listed and traded on more than one national exchange are referred to
as multiple-listed / multiple-traded options.

Stock dividend

A dividend paid in shares of stock rather than cash. See also Spin-off.

Stock split

An increase in the number of outstanding shares by a corporation through the

issuance of a set number of shares to a shareholder for a set number of shares
that the shareholder already owns. For example, a corporation might declare a 2-
for-1 stock split. This means that for every share of stock an investor owns,
he/she will be given another, thus owning two shares instead of one. There will
be a corresponding reduction in equity value per share. In this case, the new
shares (post-split) will be worth one-half their previous value but the investor will
own twice as many shares.

Stop order

A type of contingency order, often erroneously known as a stop-loss order, placed

with a broker. It becomes a market order when the stock trades, or is bid or
offered, at or through a specified price. See also Stop-limit order.

Stop-limit order

A type of contingency order placed with a broker that becomes a limit order when
the stock trades, or is bid or offered, at or through a specific price.

Straddle

A trading position involving puts and calls on a one-to-one basis in which the puts
and calls have the same strike price, expiration and underlying stock. When both
options are owned, the position is called a long straddle. When both options are
written, it is a short straddle. Example: a long straddle might be buying 1 XYZ May
60 call and buying 1 XYZ May 60 put.

Strike / Strike price

The price at which the owner of an option can purchase (call) or sell (put) the
underlying stock. Used interchangeably with striking price or exercise price.

Strike price interval

The normal price differential between option strike prices. Exchange rules for
strike intervals have changed over the years, and many stocks are now listed in $1
increments or smaller. In general, strike intervals in equity options are listed in
$2.50 increments for strikes under $50 and in $5 increments from $50 up to $200.
Over $200, strikes are listed in $10 increments. As mentioned, many stocks are
now exempt from standard listing procedures and strike increments will vary.

Support

A term used in technical analysis to describe a price area at which falling prices
are expected to stop or meet increased buying activity. This analysis is based on
previous price behavior of the stock.

Synthetic long call

A long stock position combined with a long put of the same series as that call.

Synthetic long put

A short stock position combined with a long call of the same series as that put.

Synthetic long stock

A long call position combined with a short put of the same series.

Synthetic position

A strategy involving two or more instruments that have the same risk-reward
profile as a strategy involving only one instrument.
Synthetic short call

A short stock position combined with a short put of the same series as that call.

Synthetic short put

A long stock position combined with a short call of the same series as that put.

Synthetic short stock

A short call position combined with a long put of the same series.

Technical analysis

A method of predicting future stock price movements based on the study of

historical market data such as the prices themselves, trading volume, open
interest, the relation of advancing issues to declining issues, short selling volume
and others.

Theoretical option pricing model

A formula that can be used to calculate a theoretical value for an option using
current stock prices, expected dividends, the option's strike price, expected
interest rates, time to expiration and expected stock volatility.

Theoretical value

The estimated value of an option derived from a mathematical model. See also
Model and Black-Scholes formula.
Theta

A measure of the rate of change in an option's theoretical value for a one-unit

change in time to the option's expiration date. See also Time decay.

Tick

The minimum price increment for an option's bid or ask.

Time decay

A term used to describe how the theoretical value of an option erodes or reduces
with the passage of time. Time decay is specifically quantified by Theta.

Time spread

An option strategy that generally involves the purchase of a farther-term option

(call or put) and the writing of an equal number of nearer-term options of the
same type and strike price. Example: buying 1 XYZ May 60 call (far-term portion of
the spread) and writing 1 XYZ March 60 call (near-term portion of the spread).
Also known as calendar spread or horizontal spread.

Time value

The part of an option's total price that exceeds its intrinsic value. The premium of
an out-of-the-money option consists entirely of time value.

Trader
1. Any investor who makes frequent purchases and sales.

2. A member of an exchange who conducts his or her buying and selling on the
trading floor of the exchange.

Trading pit

A specific location on the trading floor of an exchange designated for the trading
of a specific option class or stock.

Transaction costs

All of the charges associated with executing a trade and maintaining a position.
These include brokerage commissions, fees for exercise and/or assignment,
exchange fees, SEC fees and margin interest. In academic studies, the spread
between bid and ask is taken into account as a transaction cost.

Type of options

The classification of an option contract as either a put or a call.

Uncovered call option writing

A short call option position in which the writer does not own an equivalent
position in the underlying security represented by his or her option contracts.

Uncovered put option writing

A short put option position in which the writer does not have a corresponding
short position in the underlying security or has not deposited, in a cash account,
cash or cash equivalents equal to the exercise value of the put.

Underlying security

The security subject to being purchased or sold upon exercise of the option
contract.

Vega

A measure of the rate of change in an option's theoretical value for a one-unit

change in the volatility assumption. See also Kappa and Delta.

Vertical spread

Most commonly used to describe the purchase of one option and writing of
another where both are of the same type and of same expiration month, but have
different strike prices. Example: buying 1 XYZ May 60 call and writing 1 XYZ May
65 call. See also Bull (or bullish) spread and Bear (or bearish) spread.

Volatility

A measure of stock price fluctuation. Mathematically, volatility is the annualized

standard deviation of a stock's daily price changes. See also Historic volatility,
Individual volatility and Implied volatility

Write / Writer
To sell an option that is not owned through an opening sale transaction. While
this position remains open, the writer is subject to fulfilling the obligations of that
option contract; i.e., to sell stock (In the case of a call) or buy stock (In the case of
a put) if that option is assigned. An investor who so sells an option is called the
writer, regardless of whether the option is covered or uncovered.