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A

ACTUALS
1. A term used to describe the underlying in future and forward contracts, dealing with commodities rather than financial instruments.

2. A term used to describe a securities historical volatility.

ADJUSTED EXERCISE PRICE
1. An option's strike price after adjustments have been made for stock splits to its underlying security.

2. A term used to describe the strike prices for options written on Ginnie Mae pass through certificates.

AGGREGATE EXERCISE PRICE
The strike price of a put or call option multiplied by its contract size. Aggregate exercise prices are used to determine the dollar amount required should the option be exercised.

ALLIGATOR SPREAD
A term referring to an unprofitable spread regardless of favorable market movements. This loss is due entirely to large commissions charged upon the transactions.

AMERICAN OPTION
An option that can be exercised anytime during its life. The majority of exchange-traded options are American.

ARBITRAGE TRADING PROGRAM - ATP
A program used to place simultaneous orders for stock index futures and the underlying stocks.

ASIAN OPTION
An option whose payoff depends on the average price of the underlying asset over a certain period of time as opposed to at maturity. Also known as an average option.

ASIAN TAIL
An option feature whereby a reference price is activated at the end of an option should the underlying fall below a specified average before option expiry.

ASSET-OR-NOTHING CALL OPTION
An option payoff that is equal to the asset's price if the asset is above the strike price, otherwise the payoff is zero.

ASSET-OR-NOTHING PUT OPTION
An option payoff that is equal to the asset's price if the asset is below the strike price, otherwise the payoff is zero.

ASSIGN
The act of clearing houses and brokerages selecting short option and future contract holders to deliver underlying securities or commodities of maturing or exercised/tendered contracts.

ASSIGNABLE CONTRACT
A futures contract with a provision permitting the contract holder to convey his or her rights of assignment to a third party. This enables the contract to another to perform and receive the benefits of that contract before it closes.

ASSIGNMENT
1. The transfer of an individual's rights or property to another person or business.

2. A notice received by an option writer stating that the option sold has been exercised by the purchaser of the option.

AT THE MONEY
An option is at-the-money if the strike price of the option equals the market price of the underlying security.

AUTOMATED CLEARING HOUSE - ACH
An electronic funds-transfer system run by the National Automated Clearing House Association. This payment system deals with payroll, direct deposit, tax refunds, consumer bills, tax payment, and many more payment services.

AUTOMATIC EXERCISE
A procedure implemented to protect an option holder where the Option Clearing Corporation will automatically exercise an "in the money" option for the holder.

AVERAGE PRICE CALL
A type of option where the payoff is either zero or the amount by which the average price of the asset exceeds the strike.

AVERAGE PRICE PUT
A type of option where the payoff is either zero or the amount by which the strike price exceeds the average price of the asset.

B

BACK FEE
The premium charged upon the second term or portion of a compound option.

BACKSPREAD
A type of options spread in which a trader holds more long positions than short positions. The premium collected from the sale of the short option is used to help finance the purchase of the long options. This type of spread enables the trader to have significant exposure to expected moves in the underlying asset while limiting the amount of loss in the event prices do not move in the direction the trader had hoped for. This spread can be created using either all call options or all put options.

BALLOON OPTION
An option whose notional payments increase significantly after a set threshold is broken.

BARRIER OPTION
A type of option whose payoff depends on whether or not the underlying asset has reached or exceeded a predetermined price.

BASKET OPTION
A type of option whose underlying asset is a basket of commodities, securities, or currencies.

BEAR CALL SPREAD
A type of options strategy used when a decline in the price of the underlying asset is expected. It is achieved by selling call options at a specific strike price while also buying the same number of calls, but at a higher strike price. The maximum profit to be gained using this strategy is equal to the difference between the price paid for the long option and the amount collected on the short option.

BEAR PUT SPREAD
A type of options strategy used when an option trader expects a decline in the price of the underlying asset. Bear Put Spread is achieved by purchasing put options at a specific strike price while also selling the same number of puts at a lower strike price. The maximum profit to be gained using this strategy is equal to the difference between the two strike prices, minus the net cost of the options.

BEAR SPREAD
1. An option strategy seeking maximum profit when the price of the underlying security declines. The strategy involves the simultaneous purchase and sale of options; puts or calls can be used. A higher strike price is purchased and a lower strike price is sold. The options should have the same expiration date.

2. A trading strategy used by futures traders who intend to profit from the decline in commodity prices while limiting potentially damaging losses.

BERMUDA OPTION
A type of option that can only be exercised on predetermined dates, usually every month.

BERMUDA SWAPTION
A swaption with predefined limitations on exercise.

BINOMIAL OPTION PRICING MODEL
An options valuation method developed by Cox, et al, in 1979.  The binomial option pricing model uses an iterative procedure, allowing for the specification of nodes, or points in time, during the time span between the valuation date and the option's expiration date.

The model  reduces possibilities of price changes, removes the possibility for arbitrage, assumes a perfectly efficient market, and shortens the duration of the option. Under these simplifications, it is able to provide a mathematical valuation of the option at each point in time specified.

BLACK SCHOLES MODEL
A model of price variation over time of financial instruments such as stocks that can, among other things, be used to determine the price of a European call option. The model assumes that the price of heavily traded assets follow a geometric Brownian motion with constant drift and volatility. When applied to a stock option, the model incorporates the constant price variation of the stock, the time value of money, the option's strike price and the time to the option's expiry.

BLACK'S MODEL
A variation of the Black-Scholes model that allows for the valuation of options on futures contracts.

BOND OPTION
An option contract in which the underlying asset is a bond. Other than the different characteristics of the underlying assets, there is no significant difference between stock and bond options. Just as with other options, a bond option allows investors the ability to hedge the risk of their bond portfolios or speculate on the direction of bond prices with limited risk.

BOOKOUT
The process of closing out a position in a swap contract or another OTC derivative agreement prior to maturity.

BOX SPREAD
A dual option position involving a bull and bear spread with identical expiry dates. This investment strategy provides for minimal risk. Additionally, it can lead to an arbitrage position as an investor attempts to lock in a small return at expiry.

BREAK-EVEN POINT - BEP
1. In general, the point at which gains equal losses.

2. In options, the market price that a stock must reach for option buyers to avoid a loss if they exercise. For a call, it is the strike price plus the premium paid. For a put, it is the strike price minus the premium paid.

BULL CALL SPREAD
A type of options strategy used when a moderate rise in the price of the underlying asset is expected. It is achieved by purchasing call options at a specific strike price while also selling the same number of calls of the same asset and expiration date but at a higher strike. The maximum profit in this strategy is the difference between the strike prices of the long and short options, less the net cost of options. Most often, bull call spreads are vertical spreads.

BULL PUT SPREAD
A type of options strategy that is used when the investor expects a moderate rise in the price of the underlying asset. This strategy is constructed by purchasing one put option while simultaneously selling another put option with a higher strike price. The goal of this strategy is realized when the price of the underlying stays above the higher strike price, which causes the short option to expire worthless, resulting in the trader keeping the premium. 

BULL SPREAD
An option strategy in which maximum profit is attained if the underlying security rises in price. Either calls or puts can be used. The lower strike price is purchased and the higher strike price is sold. The options have the same expiration date.

BULL VERTICAL SPREAD
An bullish strategy used by investors who feel that the market price of a commodity will appreciate but wish to limit the downside potential associated with an incorrect prediction.

BULLET TRADE
The act of purchasing an "in the money" put option so that the buyer can capitalize on a bear market by effectively shorting a stock without waiting for an uptick.

BUTTERFLY SPREAD
An option strategy combining a bull and bear spread. It uses three strike prices. The lower two strike prices are used in the bull spread, and the higher strike price in the bear spread. Both puts and calls can be used.

BUY TO OPEN
A term used by many brokerages to represent the opening of a long position in option transactions.

BUYER'S CALL
An agreement between a buyer and seller whereby a commodity purchase occurs at a specific price above a futures contract for an identical grade and quantity.

Also known as a call sale, this agreement gives the buyer the option to fix the price of the commodity by either purchasing a future from the seller or indicating to the seller a time in which the price of the transaction will be set. A buyer's call is used instead of buying the commodity on the spot market because of the possibility that its price will depreciate.

C

CALCULATION AGENT
An individual who calculates the value of a derivative or the amount owing from each party in a swap agreement.

CALENDAR SPREAD
An options or futures spread established by simultaneously entering a long and short position on the same underlying asset but with different delivery months. Sometimes referred to as an inter-delivery, time or horizontal spread.

CALL
1. The period of time between the opening and closing of some future markets wherein the prices are established through an auction process.

2. An option contract giving the owner the right (but not the obligation) to buy a specified amount of an underlying security at a specified price within a specified time.

CALL OPTION
An agreement that gives an investor the right (but not the obligation) to buy a stock, bond, commodity, or other instrument at a specified price within a specific time period.

CALL PREMIUM
1. The dollar amount over the par value of a callable fixed-income debt security that is given to holders when the security is called by the issuer.

2. The amount the purchaser of a call option must pay to the writer.

CALL RATIO BACKSPREAD
A very bullish investment strategy that combines options to create a spread with limited loss potential and mixed profit potential. It is generally created by selling one call option and then using the collected premium to purchase a greater number of call options at a higher strike price. This strategy has potentially unlimited upside profit because the trader is holding more long call options than short ones.

CALL RULE
A exchange rule whereby the official bidding price for a cash commodity is competitively established at the end of each trading day and held until the opening of the exchange the following trading day.

CALLED AWAY
A term used to describe the elimination of a contract due to the obligation of delivery. This occurs if an option is exercised, if a redeemable bond is called before maturity or if a short position held in a security requires delivery.  

CAPPED OPTION
An option with a pre-established profit cap. 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.

CAPPING
1. The practice of selling large amounts of a commodity or security close to the options expiry date in order to prevent a rise in market price.

2. An attempt to keep a stock's price low or move its price lower by putting selling pressure on it.

CAPUT
A type of exotic option that consists of a call option on a put option. Essentially it gives the holder the right to purchase another option. This type of option is also known as a "compound option".

CASH-OR-NOTHING CALL
A type of option whose payoff is set to a specified fixed price if the final asset price is above the strike price; if not, the payoff is set to zero.

CASH-OR-NOTHING PUT
A type of option whose payoff is set to a specified fixed price if the final asset price is below the strike price; if not, the payoff is set to zero.

CASHLESS EXERCISE
A transaction that is used when exercising employee stock options (ESO). Essentially, what you do here is borrow enough money from your broker to exercise the options. You then simultaneously sell enough shares to pay for the purchase, taxes, and broker commissions.

CBOE NASDAQ VOLATILITY INDEX - VXN
A volatility index on the Chicago Board Options Exchange, known by its ticker symbol VXN. The VXN is a measure of implied volatility for the Nasdaq 100 (NDX).

CHAMELEON OPTION
An option that has the ability to change its structure, should certain pre-determined terms of the contract be met.

CHANGER
The name given to a clearing member that is willing to assume the opposite position of a futures contract within a larger alternative exchange, of which it also is a clearing member.

CHICAGO BOARD OF TRADE - CBOT
A commodity exchange established in 1848 that today trades in both agricultural and financial contracts. The CBOT originally traded only agricultural commodities such as wheat, corn and soybeans. Now, the CBOT offers options and futures contracts on a wide range of products including gold, silver, U.S. Treasury bonds and energy.

CHICAGO BOARD OPTIONS EXCHANGE - CBOE
Founded in 1973, the CBOE is an exchange that focuses on options contracts for individual equities, indexes and interest rates. The CBOE is the world's largest options market. It captures a majority of options traded. It is also a market leader in developing new financial products and technological innovation, particularly with electronic trading.

The CBOE is also referred to as the "See-bo."

CHOOSER OPTION
An option where the investor has the opportunity to choose whether the option is a put or call at a certain point in time during the life of the option.

CHRISTMAS TREE
An options trading strategy that is generally achieved by purchasing one call option and selling two other call options at different strike prices. When drawn structurally, the strike price of the long option is located below the two successively higher written calls.

CLEARING
The procedure by which an organization acts as an intermediary and assumes the role of a buyer and seller for transactions in order to reconcile orders between transacting parties.

CLEARING FEE
A fee charged by clearing corporations for their services provided to investment firms.

CLEARING HOUSE
An agency or separate corporation of a futures exchange responsible for settling trading accounts, clearing trades, collecting and maintaining margin monies, regulating delivery and reporting trading data. Clearing houses act as third parties to all futures and options contracts - as a buyer to every clearing member seller and a seller to every clearing member buyer.

CLIQUET
An extended option that periodically settles and resets its strike price at the level of the underlying during the time of settlement.

COMBINATION
When an investor holds a position in both call and put options on the same asset.

COMMERCIAL TRADER
A classification used by the Commodity Futures Trading Commission (CFTC) for traders that use the futures market primarily to hedge their business activities.

COMMODITY EXCHANGE ACT - CEA
An act passed in 1936 by the U.S. Government that provides federal regulation of all futures trading activities. This act replaced the Grain Futures Act of 1922.

COMPOUND OPTION
An option for which the underlying is another option. Therefore, there are two strike prices and two exercise dates. These are the four tpes of compound options:
-Call on a Call
-Put on a Put
-Call on a Put
-Put on a Call

CONDOR SPREAD
Similar to a butterfly spread, a condor is an options strategy that also has a bear and a bull spread, except that the strike prices on the short call and short put are different.

CONTANGO
When the futures price is above the expected future spot price. Consequently, the price will decline to the spot price before the delivery date.

CONTRACT MARKET
Any board of trade designated to trade a specific options or futures contract. Basically it's another word for "designated exchange".

CONTRACT SIZE
The deliverable quantity of goods or commodities underlying futures, forward, and option contracts.

CONTRACT UNIT
The actual amount of commodities represented by a single futures contract.

COUNTRY BASKET
A derivative security designed to mimic the major index of an international exchange.

COVERED CALL
An options strategy whereby and investor holds a long position in an asset and writes (sells) call options on that same asset in an attempt to generate increased income from the asset. This is often employed when an investor has a short-term neutral view on the asset and for this reason hold the asset long and simultaneously have a short position via the option to generate income from the option premuim.

CREDIT SPREAD
1. The spread between Treasury securities and non-Treasury securities that are identical in all respects except for quality rating.

2. An options strategy where a high premium option is sold and a low premium option is bought on the same underlying security.

CUM RIGHTS
A situation in which the shares held by holders of record are qualified for a rights offering declared by a company.

CURRENCY OPTION
A contract that grants the holder the right, but not the obligation, to buy or sell currency at a specified exchange rate during a specified period of time. For this right, a premium is paid to the broker, which will vary depending on the number of contracts purchased. Currency options are one of the best ways for corporations or individuals to hedge against adverse movements in exchange rates.

CYLINDER
A term used to describe a transaction, involving two derivatives, where there is no initial cost bourne by the investor when entering into the position.