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Content Licensed from the Options Industry Council. Content licensed from the Options Industry Council is intended to educate investors about U. Options involve risk and are not suitable for all investors. Learn More About Trading Options. Index Options Basic Strategies. Do You Feel Lucky? Looking for the Catalyst Day Trading Advice: The Hidden Key to Trading Success. Product Tutorials Lightspeed Trader Tutorials view all. Lightspeed Trader Tips and Tricks. Customizing your Lightspeed Trader Layout.
Livevol X Product Tutorials and Webinars view all. Options Trading with Livevol X. Adjustments - A change to contract terms due to a corporate action e.
Depending on the corporate action, different contract terms including strike price, deliverable, expiration date, multiplier etc. An adjusted option may cover more or less than the usual shares. For example, after a 3-for-2 stock split, the adjusted option will represent shares. For such options, the premium must be multiplied by a corresponding factor.
Adverse market movements All-or-none order AON - A type of option order which requires that the order be executed completely or not at all. 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.
Assigned an exercise - Received notification of an assignment by OCC. 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. 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. Bats - Bats Options Exchange 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. 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.
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. 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 - BOX Options Exchange 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. 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. 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.
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. 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. C2 - C2 Options Exchange 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. 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. 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. 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. 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.
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.
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.
Contract size - The amount of the underlying asset covered by the option contract. This is shares for 1 equity option unless adjusted for a special event. 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. The process of executing these three-sided trades is sometimes called conversion arbitrage.
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. 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 shares of the underlying 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 straddle - An option strategy in which one call and one put with the same strike price and expiration are written against each shares of the underlying 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. Curvature - A measure of the rate of change in an option's Delta for a one-unit change in the price of the underlying stock. Cycle - The expiration dates applicable to the different series of options.
Traditionally, there were three cycles: For example, on January 1, a stock in the January cycle will be trading options expiring in these months: January, February, April and July.