A - C         D - N         O - Z

 

D

DATE CERTAIN
A term identifying the date on/by which the specified actions of a contract can be reasonably completed. This date is important, as it is generally considered legally binding.

DEALER OPTION
An option created upon physical commodities, outside of regular exchange regulations.

DEATH PUT
An optional redemption feature on a debt instrument allowing the beneficiary of the estate of the deceased to put (sell) the bond (back to the issuer) in the event of the beneficiary's death or legal incapacitation. Also known as a "survivor's option".

DEEP IN THE MONEY
An option with an exercise price, or strike price, significantly below (for a call option) or above (for a put option) the market price of the underlying asset. Significantly, below/above is considered one strike price below/above the market price of the underlying asset. For example, if the current price of the underlying stock was $10, a call option with a strike price of $5 would be considered deep in the money.

DEFERRED PAYMENT OPTION
An option with all the characteristics of an American vanilla option, with one exception: payment is deferred until the original expiration date.

DELIVERY
The action by which an underlying commodity, security, cash value, or delivery instrument covering a contract is tendered and received by the contract holder.

DELTA
The ratio comparing the change in the price of the underlying asset to the corresponding change in the price of a derivative. Sometimes referred to as the "hedge ratio".

DELTA HEDGING
An options strategy that aims to reduce (hedge) the risk associated with price movements in the underlying asset by offsetting long and short positions. For example, a long call position may be delta hedged by shorting the underlying stock. This strategy is based on the change in premium (price of option) caused by a change in the price of the underlying security. The change in premium for each basis-point change in price of the underlying is the delta and the relationship between the two movements is the hedge ratio.  

DELTA NEUTRAL
A portfolio consisting of positions with offsetting positive and negative deltas. The deltas balance out to bring the net change of the position to zero.

DERIVATIVE
In finance, a security whose price is dependent upon or derived from one or more underlying assets. The derivative itself is merely a contract between two or more parties. Its value is determined by fluctuations in the underlying asset. The most common underlying assets include stocks, bonds, commodities, currencies, interest rates and market indexes. Most derivatives are characterized by high leverage. 

DIAGONAL SPREAD
An options strategy established by simultaneously entering into a long and short position in two options of the same type (two call options or two put options) but with different strike prices and expiration dates.

DIGITAL OPTION
An option whose payout is fixed after the underlying stock exceeds the predetermined threshold or strike price. Also referred to as "binary" or "all-or-nothing option."

DOUBLE BARRIER OPTION
An option with two distinct triggers that define the allowable range for the price fluctuation of the underlying asset. In order for the investor to receive a payout, one of two situations must occur; the price must reach the range limits (for a knock-in) or the price must avoid touching either limit (for a knock-out).

DOUBLE NO-TOUCH OPTION
A type of exotic option that gives an investor an agreed upon payout if the price of the underlying asset does not reach or surpass one of two predetermined barrier levels. An investor using this type of option pays a premium to his/her broker and in turn receives the right to choose the position of the barriers, the time to expiration, and the payout to be received if the price fails to breach either barrier. With this type of option, the maximum possible loss is just the cost of setting up the option.

A double no-touch option is the opposite of a double one-touch option.

DOUBLE ONE-TOUCH OPTION
A type of exotic option that gives an investor an agreed upon payout if the price of the underlying asset reaches or surpasses one of two predetermined barrier levels. An investor using this type of option is able to determine the position of both barriers, the time to expiration, and the payout to be received if the price does rise above one of the barriers. Either one of the barrier levels must be breached prior to expiration for the option to become profitable and for the buyer to receive the payout. If neither barrier level is breached prior to expiration, the option expires worthless and the trader loses all the premium paid to the broker for setting up the trade.

DOUBLE WITCHING
Similar to triple witching, but instead of three classes of options or futures expiring on the same day, double witching is when only two classes (any two) are expiring. The three classes are stock options, index options, and index futures.

DOWN-AND-IN OPTION
A form of a knock-in option whose payoff is determined by the price of the underlying asset sinking to the barrier price level.

DOWN-AND-OUT OPTION
A type of knock-out barrier option that ceases to exist when the price of the underlying security hits a specific barrier price level. If the price of the underlying does not reach the barrier level, the investor has the right to exercise their European call or put option at the exercise price specified in the contract.

E

E-MINI (STOCK INDEX FUTURES)
An electronically traded futures contract on the Chicago Mercantile Exchange that represents a portion of the normal futures contracts. E-mini contracts are available on a wide range of indices such as the Nasdaq 100, S&P 500, S&P MidCap 400 and Russell 2000.

EARLY EXERCISE
When an option or other security is exercised prior to its maturity date.

EMBEDDED OPTION
An option that is an inseparable part of another instrument. Compare this to a normal (or bare) option, which trades separately from the underlying security.

EQUITY LINKED FOREIGN EXCHANGE OPTION - ELF-X
A put or call option that protects an investor from foreign-exchange risk for a future sale or purchase of a specified foreign-equity portfolio.

ESCROW RECEIPT
A bank guarantee that an option writer has the underlying security on deposit and that the underlying security is readily available for delivery if the option is exercised.

EUROPEAN OPTION
An option that can only be exercised at the end of its life.

EVERGREEN OPTION
An employee option plan that grants additional shares to the plan every year.

EXCHANGE-TRADED OPTION
An option traded on a regulated exchange where the terms of each option are standardized by the exchange. The contract is standardized so that underlying asset, quantity, expiration date and strike price are known in advance. Over-the-counter options are not traded on exchanges and allow for the customization of the terms of the option contract.

Exchange-traded options are also known as "listed options".

EXERCISE
An action by a stockholder taking advantage of a privilege offered by a company or other financial institution. This includes warrants, options and other exotic financial instruments.

EXERCISE LIMIT
A restriction on the amount of option contracts of a single class that any one person or company can exercise within a fixed time period (usually a period of five business days). This limit is in place so that no one person or company can corner or greatly impact the option market.

EXERCISE PRICE
The price at which the underlying security can be purchased (call option) or sold (put option). The exercise price is determined at the time the option contract is formed.
 
Also known as the "strike price".

EXOTIC OPTION
A type of option that differs from common American or European options in terms of the underlying asset or the calculation of how or when the investor receives a certain payoff. These options are more complex than options that trade on an exchange, and generally trade over the counter.

EXPIRATION DATE
The day on which an options or futures contract is no longer valid and, therefore, ceases to exist.

EXTRINSIC VALUE
The difference between an option's price and the intrinsic value.

F

FINANCIAL ENGINEERING
The creation of new and improved financial products through innovative design or repackaging of existing financial instruments.

FLEXIBLE EXCHANGE OPTION - FLEX
An option, generally written by a clearing house, whose expiration date, strike price, and exercising style can be modified.

FRONT FEE
The premium charged upon the initial purchase of a compound option.

FRONTSPREAD
A type of options spread in which a trader holds more short positions than long positions. This type of spread has unlimited risk of loss while also limiting profit potential. This type of trade is often implemented by professional traders who believe that the price of an underlying asset will make a calculated move higher or that volatility will decrease.

Also known as a "ratio vertical spread".

FUNGIBILITY
The interchangeability of listed options, futures contracts, and other instruments dependent upon identical terms.

FUNGIBLES
Goods, securities or instruments that are equivalent and, therefore, interchangeable. In other words, they are goods that consist of many identical parts which can be easily replaced by other, identical goods. If the goods are sold by weight or number, this is a good sign that they are fungible.

FURTHEST OUT
Mainly pertaining to options and futures, this is the options or futures contract that has the most distant deliverly month or expiration.

FUTURES
A financial contract obligating the buyer to purchase an asset (or the seller to sell an asset), such as a physical commodity or a financial instrument, at a predetermined future date and price. Futures contracts detail the quality and quantity of the underlying asset; they are standardized to facilitate trading on a futures exchange. Some futures contracts may call for physical delivery of the asset, while others are settled in cash. The futures markets are characterized by the ability to use very high leverage relative to stock markets.

Futures can be used either to hedge or to speculate on the price movement of the underlying asset. For example, a producer of corn could use futures to lock in a certain price and reduce risk (hedge). On the other hand, anybody could speculate on the price movement of corn by going long or short using futures.

G

GAMMA
The rate of change for delta with respect to the underlying asset's price.

GAMMA NEUTRAL
An asset portfolio whose delta rate of change is zero.

GINZY TRADING
An illegal trading practice used by floor brokers. It is considered to be non-competitive, as it involves the execution of large trades at different prices.

GRANTOR
1. A seller of either call or put options who profits from the premium for which the options are sold. Synonymous with option writer.

2. The creator of a trust, meaning the individual whose assets are put into the trust.

GREEKS
Refers to the Greek letters used in options trading.

GREENSHOE OPTION
Legally referred to as an over-allotment option, a provision contained in an underwriting agreement which gives the underwriter the right to sell investors more shares than originally planned by the issuer. This would normally be done if the demand for a security issue proves higher than expected.

A greenshoe option can provide additional price stability to a security issue, since the underwriter has the ability to increase supply and smooth out price fluctuations if demand surges too high.

GUT SPREAD
An option strategy created by selling an in-the-money put at the same time as an in-the-money call.

H

HORIZONTAL SPREAD
An options strategy involving the simultaneous purchase and sale of two options of the same type, having the same strike price, but different expiration dates.

I

IMPLIED VOLATILITY - IV
The estimated volatility of a security's price.

IN THE MONEY
1. For a call option, when the option's strike price is below the market price of the underlying asset.

2. For a put option, when the strike price is above the market price of the underlying asset.

INCENTIVE STOCK OPTION - ISO
A type of employee stock option with a tax benefit, when you exercise, of not having to pay ordinary income tax. Instead, the options are taxed at a capital gains rate.

INDEX ARBITRAGE
An investment strategy that attempts to profit from the differences between actual and theoretical futures prices of the same stock index. This is done by simultaneously buying (or selling) a stock index future while selling (or buying) the stocks in that index.

INDEX OPTION
A call or put option on a financial index.

INTERCOMMODITY SPREAD
Going long on one futures market in a given delivery month and simultaneously going short on the same commodity and delivery month but a different futures market but with similar underlying asset. 

INTERNATIONAL MONETARY MARKET - IMM
A division of the Chicago Mercantile Exchange (CME) that deals with the trading of currency and interest rate futures and options. Trading on the IMM started in May 1972 when the CME and the IMM merged.

INTRINSIC VALUE
1. The value of a company or an asset based on an underlying perception of the value.

2. For call options, this is the difference between the underlying stock's price and the strike price. For put options, it is the difference between the strike price and the underlying stock's price. In the case of both puts and calls, if the difference between the underlying stock's price and the strike price is negative, the value is given as zero.

INVERTED MARKET
In the context of options and futures, this is when the current (or short-term) contract prices are higher than the long-term contracts.

IRON BUTTERFLY
An options strategy that is created with four options at three consecutively higher strike prices. The two options located at the 'middle strike' create a long or short straddle (one call and one put with the same strike price and expiration date) depending on whether the options are being bought or sold. The 'wings' (options at the higher and lower strike prices) of the strategy are created by the purchase or sale of a 'strangle' (one call and one put at different strike prices but the same expiration date). This strategy differs from the butterfly spread because it uses both calls and puts, as opposed to all calls or all puts.

IRON CONDOR
An advanced options strategy that involves buying and holding four different options with different strike prices. The iron condor is constructed by holding a long and short position in two different strangle strategies. A strangle is created by buying or selling a call option and a put option with different strike prices, but the same expiration date. The potential for profit or loss is limited in this strategy because an offsetting strangle is positioned around the two options that make up the strangle at the middle strike prices.

J

JAJO
An acronym representing the months January, April, July, and October.

K

KAPPA
Used in regression analysis, Kappa represents the ratio of the dollar price change in the price of an option to a 1% change in the expected price volatility.

KNOCK-IN OPTION
A latent option contract that begins to function as a normal option ("knocks in") only once a certain price level is reached before expiration.

KNOCK-OUT OPTION
An option with a built in mechanism to expire worthless should a specified price level be exceeded.

L

LADDER OPTION
An option that locks-in gains once the underlying reaches predetermined price levels or "rungs," guaranteeing some profit even if the underlying security falls back below these levels before the option expires. 

LAMBDA
A ratio comparing change in option price to a 1% change in option volatility.

LAST TRADING DAY
The final day that a futures or options contract may trade or be closed out before delivery of the underlying asset must occur.

LEG
1. Term describing an order entry technique used by brokers. A leg occurs when a broker executes contingent orders in separate phases, thus increasing the risk for price swings through time delays.

2. A description of different aspects in a combination option.

LIMIT ORDER
An order placed with a brokerage to buy or sell a set number of shares at a specified price or better. Limit orders also allow an investor to limit the length of time an order can be outstanding before being canceled.

LOCK-UP OPTION
A stock option offered by a target company to a white knight for additional equity or for the purchase of a valuable portion of their company.

LONG JELLY ROLL
An option strategy that aims to profit from a time value spread through the sale and purchase of two call and two put options, each with different expiration dates.

LONG-TERM EQUITY ANTICIPATION SECURITIES - LEAPS
An options contract that expires more than nine months in advance, and can last as long as two years. Normal options tend to last no longer than nine months.

LOOKBACK OPTION
An exotic option that allows investors to "look back" at the underlying prices occurring over the life of the option, and then exercise based on the underlying asset's optimal value.

M

MANAGED FUTURES ACCOUNT
An account that is like a mutual fund, except that positions in government securities, futures contracts and options on futures contracts are used to manage the portfolio.

MARRIED PUT
An option strategy whereby an investor, holding a long position in stock, purchases a put on the same stock to protect against a depreciation in the stock's price.

MAX PAIN (TM)
The point at which options expire worthless.

MID-ATLANTIC OPTION
An option that can be exercised at different times during the life of the option. The various times set for exercise are written within the option and allow for flexibility for both the writer and holder of the option.

MINI-SIZED DOW OPTIONS
A type of option for which the underlying assets are Dow Jones Industrial Average futures contracts. The option has a 5 times multiplier, which means that each option contract on the index controls 5 times the value of the index. This gives the option holder more leverage on his/her investment compared to cash index options at a lower cost. The option is traded on the Chicago Board of Trade.

MJSD
An acronym representing the months March, June, September, and December.

MONTREAL EXCHANGE
A Canadian derivatives exchange that facilitates the trading of stock options, interest rate futures and options, as well as index options and futures. Located in Montreal, Quebec, it is the country's main financial derivative market, while the Winnipeg Commodities Exchange in Manitoba is the home to Canadian commodity derivative trading.

N

NAKED CALL
A call option position held by a writer who does not hold a long position in the stock on which the call has been written. Sometimes referred to as an "uncovered call."

NAKED OPTION
An option position where the buyer or seller has no underlying security position.

NAKED POSITION
A securities position that is not hedged from market risk. Both the potential gain and the potential risk are greater when a position is naked instead of covered (a covered position is hedged from market risk).

NAKED PUT
A put option whose writer does not have a short position in the stock on which he or she has written the put. Sometimes referred to as an "uncovered put."

NEARBY MONTH
In the context of options and futures, it's the month closest to delivery (futures) or expiration (options).

NEGATIVE CARRY
A situation in which the cost of financing a  securities or financial futures position exceeds the yield earned.

NEW YORK BOARD OF TRADE - NYBOT
A commodities exchange in New York that trades futures and options on sugar, cotton, coffee, cocoa and orange juice, in addition to interest rates, currency and indexes.

NEW YORK MERCANTILE EXCHANGE - NYMEX
The world's largest physical commodity futures exchange. Trading is conducted through two divisions: the NYMEX Division, which is home to the energy, platinum and palladium markets, and the COMEX Division, where metals like gold, silver and copper and the FTSE 100 index options are traded. The NYMEX uses an outcry trading system during the day and an electronic trading system after hours.

NON-EQUITY OPTION
A term for option contracts whose underlying securities are instruments other than equities.

NON-QUALIFIED STOCK OPTION - NSO
A type of employee stock option where you pay ordinary income tax on the difference between the grant price and the price at which you exercise the option.