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All or None Order:
An order which must be filled for the full size of the order before
it can be executed.
American Depository Receipt (ADR): A security issued by a United
States bank in place of foreign shares held in trust by the bank.
American-style Option: An option contract that may be exercised
at any time between the date of purchase and the expiration date.
Ask: The price at which a seller will sell a security.
Assignment: The receipt of an exercise notice by an option writer
(seller) that obligates them to sell (in the case of a call) or purchase
(in the case of a put) the underlying security at the specified strike
price.
At-the-Money: An option is at-the-money if the strike price of
the option is equal to or near the market price of the underlying security.
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Bear
Market: A term to describe
a declining stock market.
Bid: The price at which a purchaser is willing to buy a security.
Bond: A certificate of debt, usually long-term, whereby the issuing
company normally promises to pay the bond holder a specified amount
of interest for a specified length of time, and to repay the loan on
the expiration date.
Bull Market: A term to describe a rising stock market.
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Calendar Spread:
The simultaneous sale and purchase of either calls or puts with the
same strike price but different expiration months.
Call: An option contract that gives the holder the right, but
not the obligation, to buy the underlying security at a specified price
for a certain, fixed period of time.
Capped-style Option: A capped option is an option with an established
profit cap or cap price. The cap price is equal to the option's strike
price plus a cap interval for a call option or the strike price minus
a cap interval for a put option. A capped option is automatically exercised
when the underlying security closes at or above (for a call) or at or
below (for a put) the option's cap price.
Class of Options: Option contracts of the same type (call or
put) and style (American, European or Capped) that cover the same underlying
security.
Closing Transaction: A transaction in which at some point prior
to expiration, the option holder makes an offsetting sale of an identical
option, or the option writer makes an offsetting purchase of an identical
option. A closing transaction in an option reduces or cancels out an
investor's previous position as the holder or the writer of that option.
Covered Call Option Writing: A strategy in which one sells call
options while simultaneously owning an equivalent position in the underlying
security.
Covered Put Option Writing: A strategy in which one sells puts
and simultaneously is short an equivalent position in the underlying
security.
Currency Option: The right to buy or sell one currency against
another currency at a specified price during a specified period.
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Day Order:
An order which remains in effect only until executed or till the end
of the trading day.
Delta:
The amount by which the price of an option will change for a corresponding
change in the underlying stock.
Derivative Security: A financial security whose value is determined
in part from the value and characteristics of another security.
Dividend: The payment designated by the Board of Directors of
a company to be distributed to shareholders.
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Equity (or stock) Options:
Options on shares of an individual common stock.
European-style Option: An option contract that may be exercised
only during a specified period of time just prior to expiration.
Ex-dividend: Or, "without dividend." A buyer of a stock that
is selling "ex-dividend" does not receive the recently declared dividend.
Dividends are payable on a fixed date to shareholders recorded on the
books of the company as of a previous date of record.
Exercise: To implement the right under which the holder of an
option is entitled to buy (in the case of a call) or sell (in the case
of a put) the underlying security.
Exercise price: See strike price.
Exercise Settlement Amount: The difference between the exercise
price of the option and the exercise settlement value of the index on
the day an exercise notice is tendered, multiplied by the index multiplier.
Expiration Cycle: An expiration cycle relates to the dates on
which options on a particular underlying security expire. A given option,
other than LEAPS®, will be assigned to one of three cycles, the
January cycle, the February cycle or the March cycle.
Expiration Date: The last day on which an option contract may
be exercised. All holders of options must indicate their desire to exercise,
if they wish to do so, by this date.
Expiration Time: The time of day by which all exercise notices
must be received on the expiration date.
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Fill or Kill Order:
An order which must be executed for the full size of the order
when voiced or else cancelled.
Floor Broker: A participant who handles and executes orders in
the trading crowd on an exchange floor.
Futures: Exchange traded contracts specifying a future date of
delivery or receipt of a certain amount of a specific tangible or intangible
product.
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Good-till-Cancelled
Order: An order which remains
in effect until it is cancelled or executed.
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Hedge:
A conservative strategy used to limit investment loss by effecting a
transaction which offsets an existing position.
Holder: The purchaser of an option.
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Immediate or Cancel Order: An order which must
be executed in whole or part when voiced or else cancelled.
In-the-Money:
A call option is in-the-money if the strike price is less than
the market price of the underlying security. A put option is in-the-money
if the strike price is greater than the market price of the underlying
security.
Intrinsic Value: The difference between the strike price and
the market value of the underlying security for an in-the-money option.
At-the-money and out-of-the money options have no intrinsic value.
Inverse (or European) Terms: An option quoted on a currency pair
in the reciprocal. For example, an option on the Deutsche mark quoted
in U.S. cents could be quoted in the inverse as an option on U.S. dollars
quoted in Deutsche marks.
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LEAPS®:
Long-term Equity Anticipation Securities®, or LEAPS®,
are long-term stock or index options with expirations dates available
for up to three years in the future.
Limit Order: An order which may be executed only at the specified
limit price, or better.
Liquidity: The ability of a market to provide a sufficient amount
of bids and offers so as to assure fair prices.
Long Position: Signifies ownership of a financial instrument
or an investor's interest in a particular series of options as a net
holder (i.e., the number of contracts bought exceeds the number of contracts
sold).
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Margin:
Refers to the cash or securities required to be deposited with
a brokerage firm or clearing firm as collateral.
Market Order: An order which must be executed at the prevailing
best bid or offer.
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Notice of Exercise:
The notice originated by an option
holder and assigned to an option writer stating that an option is being
exercised.
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Opening Transaction:
A purchase or sale transaction by which a person establishes or increases
a position as either the holder or the writer of an option.
Open Interest: The number of outstanding option contracts in
the exchange market or in a particular options class or series.
Options Clearing Corporation, The (OCC): The OCC is the registered
clearing agency of all options listed on stock exchanges in the United
States and is subject to regulation by the Securities and Exchange Commission
(SEC). The OCC is rated 'AAA' by the rating agency of Standard and Poor's
Corporation.
Out-of-the-Money: A call option is out-of-the-money if the strike
price is greater than the market price of the underlying security. A
put option is out-of-the-money if the strike price is less than the
market price of the underlying security.
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Position
Limits: An exchange rule
limiting the maximum number of options on the same side of the market
with respect to a single underlying security that may be held or written
by a single investor or group of investors acting in concert. These
limits differ for options on different underlying stocks, indices and
currencies.
Premium: The price of an option contract, determined in the competitive
marketplace, which the buyer of the option pays to the option writer
for the rights conveyed by the option contract.
Put: An option contract that gives the holder the right, but
not the obligation, to sell the underlying security at a specified price
for a certain fixed period of time.
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Quote: The highest
bid to buy and the lowest offer to sell a security in a given market
at a given time.
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Record date: The
last date in which a shareholder must be registered with a company in
order to receive a declared dividend or to vote on company matters.
Registered Options Trader (ROT): A participant on the exchange
trading for their own or their firm's account who is responsible for
making two-sided markets in response to requests. Also referred to as
a market maker.
Regular Way Delivery: Unless otherwise specified, securities
sold are to be delivered to the buying broker by the selling broker
and payment made to the selling broker on the third business day after
the transaction.
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Secondary Market:
A market that provides for the purchase or sale of previously sold or
bought options through closing transactions or for securities after
the completion of the primary distribution.
Securities and Exchange Commission (SEC): A United States securities
regulatory agency established by Congress to ensure the protection of
investors.
Series: All option contracts of the same class that also have
the same expiration date and strike price.
Settlement: The conclusion of a securities or options transaction
when a customer pays a broker/dealer for securities or options purchased
or delivers securities or options sold and receives from the broker
the proceeds of the sale.
Short Position: The amount of stock that an individual has sold
and is not owned or a position wherein a person's interest in a particular
series of options is as a net writer (i.e., the number of contracts
sold exceeds the number of contracts bought).
Specialist: A participant of the exchange who trades for their
firm's or their own account and is responsible for maintaining a fair
and orderly market in whatever issue has been allocated to them by providing
bid and ask markets. They are also responsible for orders entrusted
to them for execution.
Spread: A strategy involving the simultaneous sale and purchase
of two different series of options with different strike prices or expiration
months.
Stop order: An order to buy or sell at a specific price or better.
A stop order becomes a market order when the stock sells at or beyond
the specified price and may not be executed at that price.
Stop limit order: An order which becomes eligible for execution
at a specified limit price when the stop price is reached.
Straddle: The simultaneous sale or purchase of both a call and
a put with the same expiration month and with the same strike price.
Strangle: The simultaneous sale or purchase of both a call and
a put with the same expiration month and different strike prices.
Strike Price: The stated price per share for which the underlying
security may be purchased (in the case of a call) or sold (in the case
of a put) by the option holder upon exercise of the option contract.
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Time Value:
The portion of the option premium that is attributable to the amount
of time remaining until the expiration of the option contract. Time
value is whatever value the option has in addition to its intrinsic
value.
Type: The classification of an option contract as either a put
or a call.
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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 their 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.
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Vertical Spread:
The simultaneous sale and purchase of either calls or puts with the
same expiration month but different strike prices.
Volatility: A measure of the fluctuation in the market price
of a security. Mathematically, volatility is the annualized standard
deviation of returns.
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Writer:
The seller of an options contract.
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