Option Pain – The strike price of the contracts with the most open interest for a given security. Out of the money (OTM) – A call option with a strike price above the price of the underlying instrument, or a put option with a strike price below the underlying instrument’s price. Parity – An option trading In layman’s terms, it means the option owner buys or sells the underlying stock at the strike price, and requires the option seller to take the other side of the trade. Interestingly, options are a lot like most people, in that exercise is a fairly infrequent event. (See Cashing Out Your Options.) The purchase and sale of a futures or an options contract in the same day, thus ending the day with no established position in the market or being flat. Day Traders. Speculators who take positions in futures or options contracts and liquidate them prior to the close of the same trading day. Day Trading
Option trading terms & definitions - Options Dictionary - Option Glossary | Option Strategist
These option trading terms are used with some frequency throughout our website and in our various publications. The process by which a seller or writer of an option is notified that he is being required to fulfill his obligation to sell stock call assignment or buy stock put assignment. Any spread in which in-the-money options are sold and a greater quantity of out-of-the-money options are bought.
In a more general sense, it may refer to any strategy that makes money when the market becomes volatile. A spread which makes money if the underlying stock or future declines in price. Typically constructed by buying puts at one strike and selling a like number of puts with a lower strike.
The point at which a strategy or position would neither make nor lose money generally, at the option's expiration date. A spread which makes money if the underlying stock or future rises in price.
Typically, one would buy calls at a certain strike and sell the same number of calls at a higher strike. A spread in which one sells options at one strike and buys options at a longer maturity with the same striking price. In a neutral calendar spread, one would not necessarily buy and sell the same quantity of options. The spread may be constructed with either puts or calls, but they are not mixed; that is, if one buys calls, he also sells calls to complete the spread -- puts would not be involved in that case.
An option or future that settles for cash at its expiration date, rather than being converted into stock or a physical commodity. A trade that reduces an investor's position. Closing buy transactions reduce one's short position, and closing sell trades reduce an existing long position. One who thinks that the popular opinion of the masses is option trading terms definitions, and will therefore go against that opinion. If everyone is bullish, the contrarian will interpret that as a sell signal.
A written option is considered covered if the investor has an offsetting position in the underlying security. Written calls are covered by long stock; written puts are covered by short stock.
Typically meant to denote the strategy in which one is long the stock or future and is short an equal number of calls. Money received in an account. When a spread is done "at a credit", the dollars from the options sold are greater than the cost of the options purchased. The amount by which an option's price will change if the underlying security moves one point in price.
See also 'position delta'. An option is trading at a discount if it is selling for less than its intrinsic value. The exercise or option trading terms definitions of an option before its expiration date. Not allowed for certain options, which are known as European options. Two strategies are equivalent if they have the same profit picture at expiration. Selling naked puts is equivalent to writing covered calls; buying stock and puts is equivalent to buying calls. A feature of some options which means that they are only allowed to be exercised at expiration, but not before.
Therefore, there can be no early assignment of a European option. Many index options have this feature. A mathematical estimate of the return that can be made from a position. It is technically the return which an investor might expect to make if he were to make exactly the same investment many times throughout history, option trading terms definitions. If one consistently invests option trading terms definitions positions with high expected returns, he should, on average, outperform those who don't, option trading terms definitions.
The date on which an option contract becomes void, option trading terms definitions. For equity and index options, it is the Saturday after the third Friday of the expiration month. For futures options, each one is different.
However, most commodity-based futures options expire in the month before the future expires. A term used to describe the theoretical worth of an option or futures contract; determined generally by a mathematical model, with volatility sometimes being a subjective variable.
A standardized contract calling for the delivery of a specified quantity of a commodity at a specified date in the future.
In some cases, the contract is cash-based, meaning that no actually commodity is delivered; rather the contract is settled for cash. The amount by which the delta will change when the underlying stock moves by one point.
See delta. A measure of the volatility of the underlying stock or futures contract, determined by using historical price data. A measure of the volatility of the underlying stock or futures contract. It is determined by using prices currently existing in the market at the time, rather than using historical data price changes.
A future or option whose underlying entity is an index. Most index futures and options are cash-based, meaning they settle for cash at their expiration, option trading terms definitions, rather than for shares of the index itself. A term describing any option that has intrinsic value. A call is in-the-money if the stock or future is trading higher than the striking price; a put is in-the-money if the stock is trading lower than the striking price.
A spread involving contracts on two different markets, generally referring to futures contracts. For example, one might be long Deutschmark futures and short Yen futures as a hedge. A spread involving different contracts on the same underlying commodity. Example long July soybeans, short May soybeans. The amount by which an option is in-the-money; it is never a negative number. For calls, the difference between the stock or futures price and the striking price; for puts, the difference between the striking price and the stock or futures option trading terms definitions. An order to buy or sell at a specific price.
A limit buy order is placed below the current market price; a limit sell order is placed above the current market price. The investment required by a brokerage firm. Long options must be paid for in full.
Futures contracts and naked options are margined. In this sense, one is not borrowing money from the broker. Rather the margin is a deposit of collateral against potential losses from the position. An option trading terms definitions of closing prices over a specific time period, which could be hourly, daily, weekly, or even monthly. A day moving average of a stock price is sometimes considered to be significant support or resistance. A written option is considered to be naked, or uncovered, if the investor does option trading terms definitions have an offsetting position in the underlying stock or futures.
See covered option trading terms definitions. Describing a position that does not have exposure to a certain factor of the marketplace. For example, delta neutral means that the position is not affected by short-term market movements; gamma neutral means that the position will not be affected by even larger market movements; vega neutral means the position is not affected by changes in implied volatility.
A trade which adds to the net position of an investor; an opening buy adds more long options or futures, while an opening sell adds more short stock or futures. The net total of outstanding open futures or options contracts that have been purchased.
Note that for every opening buy, there is an opening sell as well, but the open interest only counts one side, not both, option trading terms definitions.
Describing an option with no current intrinsic value. For calls, when the stock or future is below the strike; for puts when the stock or future is above the strike. Describing an in-the-money option trading for its intrinsic value.
Also used as a point of reference -- an option is sometimes said to be trading at a specific distance "over parity" or "under parity", option trading terms definitions. An option trading under parity is trading at a discount. A graphical representation of the profit potential of a position. Usually, option trading terms definitions, the stock or future price is plotted on the horizontal axis, while the dollars of profit or loss are plotted on the vertical axis.
Results may be plotted at any point in time. Generally, in The Option Strategist, profit graphs will show results projected two weeks hence, option trading terms definitions well as projected results at expiration of the nearest-term option in the position. A measure of the exposure of an entire option position to market movement. It is computed by summing the following for every option in the position quantity × delta × shares per option.
A measure of option trading volume that is sometimes used as a contrarian technical indicator to predict forthcoming market movements. The ratio is computed by dividing trading volume of puts by the trading volume of calls. It may be used in a specific case, such as options on gold futures, option trading terms definitions, for example.
It may also be option trading terms definitions in a broader sense by dividing the total volume of all puts trading on equities on all exchanges by all calls traded. If the ratio gets too high, that indicates too many people are option trading terms definitions puts. Since this is a contrarian indicator, that would be a buy signal. Option trading terms definitions, if too many calls are being bought, the ratio will be too low, and that is generally a sell signal.
A spread in which the number of options sold is larger than the number purchased. Hence the strategy involves naked options. See also backspread. A term in technical analysis indicating a price area higher that the current stock price where an abundance of supply exists. Therefore the stock or future may have trouble rising through the resistance price. To close an option and re-establish a similar position in another option on the same underlying security.
To roll a long call, one would sell the call he owns, and buy another call, generally with either a higher strike or a longer time to expiration, option trading terms definitions, or both. A term referring to volatilities of options at different striking prices on the same underlying security.
[Explained] Basic Terminologies Used in Options Trading
, time: 3:07Options Trading Terms and Definitions - NerdWallet
Volume in options trading is a very simple; it basically refers to the number of transactions being made that involve a particular contract. If a specific contract is being heavily traded i.e. bought and sold many times throughout the course of a trading day, then it's said to have a high volume In layman’s terms, it means the option owner buys or sells the underlying stock at the strike price, and requires the option seller to take the other side of the trade. Interestingly, options are a lot like most people, in that exercise is a fairly infrequent event. (See Cashing Out Your Options.) An option is trading at a discount if it is selling for less than its intrinsic value. Example XYZ is 55, the Jan 50 call is 4½ this is a ½ point discount, since the intrinsic value is 55 − 50 = 5
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