A - C         D - N         O - Z

 

O

OMEGA
A measure of the change in an option's value with respect to the percentage change in the underlying price. The omega gives option investors an idea of how the option price and the stock price that underlies it move together.

Omega is the third derivative of the option price, and the derivative of gamma.

ONE-TOUCH OPTION
A type of exotic option that gives an investor a payout once the price of the underlying asset reaches or surpasses a predetermined barrier. This type of option allows the investor to set the position of the barrier, the time to expiration and the payout to be received once the barrier is broken. Only two outcomes are possible with this type of option: 1) the barrier is breached and the trader collects the full payout agreed upon at the outset of the contract, or 2) the barrier is not breached and the trader loses the full premium paid to the broker.

OPEN INTEREST
1. The total number of options and/or futures contracts that are not closed or delivered on a particular day.

2. The number of buy market orders before the stock market opens.

OPENING TRANSACTION
The initial or primary transaction of an options contract. Rights for a buyer are created as is the obligation of the seller.

OPTION
A privilege sold by one party to another that offers the buyer the right, but not the obligation, to buy (call) or sell (put) a security at an agreed-upon price during a certain period of time or on a specific date.

OPTION CHAIN
A way of quoting options prices through a list of all of the options for a given security.

OPTION CYCLE
A pattern of months in which option contracts usually expire (usually a nine month period). There are three common cycles:

JAJO - January, April, July, and October

MJSD - March, June, September, and December

FMAN - February, May, August, and November

OPTION DISCLOSURE DOCUMENT
A publication issued by the Options Clearing Corporation (OCC) that first-time option traders are required to read before being allowed to make any option trades. The document prepares traders for the options market.

OPTION SERIES
A specific set of calls or puts on the same underlying security, in the same class and with the same strike price and expiration date.

OPTIONABLE STOCK
A stock that has options trading on a market exchange. Not all companies that trade publicly have exchange traded options, this is due to requirements that need to be met, such as minimun share price and minimun outstanding shares.

OPTIONS CLEARING CORPORATION - OCC
A clearing organization that acts as both the issuer and guarantor for option and futures contracts.

OPTIONS CONTRACT
One options contract represents one hundred shares in the underlying stock. The quoted price of an option is per share.

OPTIONS PRICE REPORTING AUTHORITY - OPRA
A committee of representatives from participating exchanges responsible for providing last-sale options quotations and information from the participating exchanges.

OTC OPTIONS
Exotic options traded on the over-the-counter market, where participants can choose the characteristics of the options traded.

OUT OF THE MONEY
1. For a call, when an option's strike price is higher than the market price of the underlying asset.

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

OUTRIGHT OPTION
An option that is bought or sold by itself; in other words, the option position is not hedged by another offsetting position. An outright option can be either a call or a put.

OVERHANG
A measure of the potential dilution to which a common stock's existing shareholders are exposed due to the potential that stock-based compensation will be awarded to executives, directors or key employees of the company. It is usually represented in percentage form and is calculated as stock options granted, plus the remaining options granted, plus the remaineng options that have yet to be granted devided by the total shared outstanding.

OVERWRITE
A type of covered-call strategy that consists of writing call options on stocks that the writer  already owns to generate maximum current income from options premiums and dividends.

OVERWRITING
An options strategy that involves the sale of call or put options on stocks that are believed to be overpriced or underpriced. The options are not expected to be exercised.

P

PARITY PRICE
The term "parity" refers to equality. Thus, parity price is a price for an asset that is directly linked to another price. Examples of parity price are:

1. Convertibles - the price at which a convertible security equals the value of the underlying stock. 
2. Options - when an option is trading at its intrinsic value ("trading at parity").
3. International parity - official rates for a currency in terms of other pegged currencies, typically the U.S. dollar.
4. Commodities - a commodity's price dependent on a composite of prices during a period of time, usually the most recent 10-year period.
5. Listed parity - situation when all parties involved are of equal standing and priority.

PATH DEPENDENT OPTION
An exotic option that is valued according to pre-determined price requirements for its underlying asset or commodity.

PERIOD CERTAIN
An annuitization-method option with which the annuitant selects a specific time period for which the annuity income payments will last. This is unlike the more commonly selected life option, with which the annuitant receives an income payment for the rest of his or her life, regardless of how long (or short) their retirement years end up lasting.

PHILADELPHIA STOCK EXCHANGE - PHLX
The first securities exchange to be formed in the United States.

PHYSICAL DELIVERY
Term in an options or futures contract which requires the actual underlying asset to be delivered upon the specified delivery date, rather than being traded out with offsetting contracts.

PIGGYBACK WARRANTS
Additional warrants that are acquired following the exercise of primary warrants.

PIN RISK
A risk that the writer of an options or futures contract faces when the price of the underlying asset closes at or very near the exercise price of the contract upon expiration.

PINNING THE STRIKE
The tendency of a stock's price to close near the strike price of heavily traded options (in the same stock) as the expiration date nears.

PLAIN VANILLA
The most basic or standard version of a financial instrument, usually options, bonds, futures and swaps. Its opposite is an exotic instrument, which alters the components of a traditional financial instrument, resulting in a more complex security.

POSITION LIMIT
A predetermined position level set by regulatory bodies for a specific contract or option.

POSITIVE CARRY
A strategy of holding two offsetting positions, one of which creates an incoming cashflow that is greater than the obligations of the other.

PREMIUM
1. The total cost of an option.

2. The difference between the higher price paid for a fixed-income security and the security's face amount at issue.

3. The specified amount of payment required periodically by an insurer to provide coverage under a given insurance plan for a defined period of time. The premium is paid by the insured party to the insurer, and primarily compensates the insurer for bearing the risk of a payout should the insurance agreement's coverage be required.

PRICE SWAP DERIVATIVE
An obligation made by one company to secure the declining value of another company's assets through the commitment of shares.

PRICE-BASED OPTION
A derivative financial instrument in which the underlying asset is a debt security. Typically, these options give their holders the right to purchase or sell an underlying debt security (usually a bond) or to receive cash payment based on the current value of the underlying debt security.

PUT
An option contract giving the owner the right, but not the obligation, to sell a specified amount of an underlying asset at a set price within a specified time. The buyer of a put option estimates that the underlying asset will drop below the exercise price before the expiration date.

The possible payoff for a holder of a put option contract is illustrated by the following diagram:

PUT OPTION
An option contract giving the owner the right, but not the obligation, to sell a specified amount of an underlying security at a specified price within a specified time. This is the opposite of a call option, which gives the holder the right to buy shares.

PUT RATIO BACKSPREAD
An investment strategy that combines options to create a spread which has limited loss potential and a mixed profit potential.

PUT WARRANT
A warrant that gives the holder the right to sell the underlying share for an agreed price, on or before a specified date.

PUT-CALL PARITY
A principle referring to the static price relationship, given a stock's price, between the prices of European put and call options of the same class (i.e. same underlying, strike price and expiration date). This relationship is shown from the fact that combinations of options can create positions that are the same as holding the stock itself. These option and stock positions must all have the same return or an arbitrage opportunity would be available to traders.  Any option pricing model that produces put and call prices that don't satisfy put-call parity should be rejected as unsound because arbitrage opportunities exist.

PUT-CALL RATIO
A ratio of the trading volume of put options to call options. It is used to gauge investor sentiment.

Q

QUADRUPLE WITCHING
A day on which contracts for stock index futures, stock index options, stock options, and single stock futures (SSF) all expire.

QUANTITY-ADJUSTING OPTION - QUANTO
A cash-settled cross-currency derivative in which the underlying asset is denominated in a currency other than the currency in which the option is settled. Quantos are settled at a fixed rate of exchange, providing investors with shelter from exchange-rate risk because they contain an embedded currency forward based on a variable notional amount on which the derivatives are quantity adjusted.

R

RAINBOW OPTION
A single option linked to two or more underlying assets. In order for the option to pay off, all the underlying assets must move in the intended direction.

RATIO SPREAD
An options strategy in which an investor simultaneously holds an unequal number of long and short positions. A commonly used ratio is two short options for every option purchased.

REBATE
1. In a short-sale transaction, the portion of interest or dividends earned by the owner (lender) of shares that are paid to the short seller (borrower) of the shares.

2. In an options transaction, the amount paid to the holder of the option if the option expires worthless.

REBATE BARRIER OPTION
A barrier option that offers a predetermined rebate, should the option be 'knocked-out.'

REGISTERED OPTIONS PRINCIPAL - ROP
An employee at a brokerage firm that is responsible for supervising options' exposure and the trading activites on options within client accounts. he ROP acts between the client making the order and the exchange member who executes the order.

REGISTERED OPTIONS TRADER
An individual working on the floor of an exchange whose function it is to watch a number of options traded on the exchange to ensure that they are being traded fairly, in fair market conditions. The individual may trade for him/herself or for other parties, but is under no obligation to 'make a market' for any options traded on the exchange.

RELOAD OPTION
An employee stock option that grants additional options upon exercise of the original.

REVERSE CONVERSION
A finance and risk management technique based on a put-call parity strategy that consists of selling a put and buying call (a synthetic long position), while shorting the underlying stock.  As long as the put and call have the same underlying, strike price and expiration date, a synthetic long position will have the same risk/return profile as ownership of an equivalent amount of the underlying stock.   

REVERSE CONVERTIBLE BOND - RCB
A bond that can be converted to cash, debt or equity at the discretion of the issuer at a set date. The bond contains an embedded derivative that allows the issuer to put the bond to bondholders at a set date prior to the bond's maturity for existing debt or shares of an underlying company. The underlying company need not be related in any way to the issuer's business. These types of bonds usually have shorter terms to maturity and higher yields than most other bonds because of the risk involved for investors, who may be forced to redeem their bonds for securities in a company that have, or are expected to, decrease substantially in value.

RHO
The rate at which the price of a derivative changes relative to a change in the risk-free rate of interest. Rho measures the sensitivity of an option or options portfolio to a change in interest rate.

RINGS
Trading arenas, located on the floor of an exchange, in which traders execute orders. Rings are also referred to as pits.

RISK CAPITAL
The money that a person allocates to investing in high-risk securities.

RISK GRAPH

A two-dimensional graphical representation that displays the profit or loss of an option at various prices. The x-axis represents the price of the underlying security and the y-axis represents the potential profit/loss. Often called a "profit/loss diagram", this graph provides an easy way to understand and visualize the effects of what may happen to an option in various situations.

RISK REVERSAL
1. In commodities trading, it is a hedge strategy that consists of selling a call and buying a put option. This strategy protects against unfavorable, downward price movements but limits the profits that can be made from favorable upward price movements.

2. In foreign-exchange trading, risk reversal is the difference in volatility (delta) between similar call and put options, which conveys market information used to make trading decisions.

ROLL BACK
When an investor replaces an old options position with new one having an earlier expiration date (and the same strike price).

ROLL DOWN
When an investor replaces an old options position with new one at a lower strike price.

ROLL FORWARD
When an investor replaces an old options position with a new one having a later expiration date (and same strike price).

ROLL UP
1. The move from one option position to another with a higher exercise price.

2. In the context of venture capital, when a VC forces small companies to merge in order to reduce costs.

RUN RATE
1. How the financial performance of a company would look if you were to extrapolate current results out over a certain period of time.

2. The average annual dilution from company stock option grants over the most recent three year period recorded in the annual report.

RUSSIAN OPTION
A lookback option without an expiry date. This type of option can have either an American or a Mid-Atlantic settlement.

S

S-8 FILING
A SEC filing required for companies wishing to issue equity to their employees.

SCALPERS
A person trading in the equities or options and futures market who holds a position for a very short period of time, attempting to make money off of the bid-ask spread.

SELL TO CLOSE
A phrase used by many brokerages on the street to represent the closing of a long position in option transactions.

SELL TO OPEN
A phrase used by many brokerages on the street to represent the opening of a short position in option transactions.

SELLER
1. An individual or entity that exchanges any type of good or service in return for payment.

2. In the open market, the seller is the investor who collects a premium from the buyer in return for taking on the risk associated with holding a short position in an option. The seller of an option is also known as a "writwer"

SELLER'S OPTION
The right of a foward contract seller to choose some of the specifications of a commodity to be delivered. The choices about the delivered commodity's quality and delivery specifications must fit among the limits imposed by the terms of the contract.

Seller's option can also refer to a put option.

SERIES 3
A securities license entitling the holder to sell commodities or futures contracts.

SERIES 4
A securities license entitling the holder to supervise options sales personnel and compliance issues. Before taking the Series 4 exam, you must have your Series 7 license.

SEVERABILITY
A clause in a contract that allows for the terms of the contract to be independent of one another, so that if a term in the contract is deemed unenforceable by a court, the contract as a whole will not be deemed unenforceable. If there were no severability clause in a contract, a whole contract could be deemed unenforceable because of one unenforceable term.

Also known as a "severability clause" or a "savings clause".

SHAREHOLDER VALUE TRANSFER - SVT
A measurement of the amount of shareholders' equity flowing out of a company to its executives through exercised stock options.

SHORT STRADDLE
An options strategy carried out by holding a short position in both a call and a put that have  the same strike price and expiration date. The maximum profit is the amount of premium collected by writing the options.

SHOUT OPTION
An exotic option that allows the holder to lock in a defined profit while maintaining the right to continue participating in gains without a loss of locked-in monies.

SINGLE PAYMENT OPTIONS TRADING - SPOT
A type of option product that allows an investor to set not only the conditions that need to be met in order to receive a desired payout, but also the size of the payout he or she wishes to receive if the conditions are met. The broker that provides this product will determine the likelihood that the conditions will be met and in turn charge what it feels is an appropriate commission. This type of arrangement is often referred to as a "binary option" because only two types of payouts are possible for the investor:

(1) The conditions set out by both parties occur, and the investor collects the agreed upon payout amount, or

(2) The event does not occur, and the investor loses the full premium paid to the broker.

SMALL TRADER
An options or futures investor holding or controlling a single position below the required reporting levels.

SPAN MARGIN
Short for standardized portfolio analysis of risk (SPAN). This is a leading margin system, which has been adopted by most options and futures exchanges around the world. SPAN is based on a sophisticated set of algorithms that determine margin according to a global (total portfolio) assessment of the one-day risk for a trader's account.

SPREAD
1. The difference between the bid and the ask price of a security or asset.

2. An options position established by purchasing one option and selling another option of the same class but of a different series.

SPREAD OPTION
A type of option that derives its value from the difference between the prices of two or more assets. Spread options can be written on all types of financial products including equities, bonds and currencies. This type of position can be purchased on large exchanges, but is primarily traded in the over-the-counter market. 

STIR FUTURES & OPTIONS
An acronym standing for "short-term interest rate" options or futures contract.

STOCK OPTION
A privilege, sold by one party to another, that gives the buyer the right, but not the obligation, to buy (call) or sell (put) a stock at an agreed-upon price within a certain period or on a specific date.
 
In the U.K., it is known as a "share option".

STRADDLE
An options strategy with which the investor holds a position in both a call and put with the same strike price and expiration date.

STRANGLE
An options strategy where the investor holds a position in both a call and put with different strike prices but with the same maturity and underlying asset. This option strategy is profitable only if there are large movements in the price of the underlying asset.

This is a good strategy if you think there will be a large price movement in the near future but are unsure of which way that price movement will be.

STRAP
An options strategy created by being long in one put and two call options, all with the exact same strike price, maturity and underlying asset. Also referred to as a "triple option".

STRIKE PRICE
The stated price per share for which underlying stock may be purchased (for a call) or sold (for a put) by the option holder upon exercise of the option contract.

STRIP
1. For bonds, the process of removing coupons from a bond and then selling the separate parts as a zero coupon bond and interest paying coupons. Also known as a stripped bond or zero coupon bond.

2. In options, a strategy created by being long in one call and two put options, all with the exact same strike price.

SUM CERTAIN
A legal description of the predetermined settlement price for a contract or negotiable instrument.

SWAPTION (SWAP OPTION)
The option to enter into an interest rate swap. In exchange for an option premium, the buyer gains the right but not the obligation to enter into a specified swap agreement with the issuer on a specified future date.

SYNTHETIC PUT
An investment strategy of short selling a security and entering a long position on its call.

T

THETA
A measure of the rate of decline in the value of an option due to the passage of time. Theta can also be referred to as the time decay on the value of an option. If everything is held constant, then the option will lose value as time moves closer to the maturity of the option.

Theta is part of the group of measures known as the "Greeks" (other measures include delta, gamma and vega) which are used in options pricing.

TICKER SYMBOL
An arrangement of characters (usually letters) representing a particular security listed on an exchange or otherwise traded publicly. When a company issues securities to the public marketplace, it selects an available ticker symbol for its securities which investors use to place trade orders. Every listed security has a unique ticker symbol, facilitating the vast array of trade orders that flow through the financial markets every day.

TIME DECAY
The ratio of the change in an option price to the decrease in time to expiration. Since options are a wasting asset, their value declines over time. As an option approaches its expiry date without being in the money, its time value declines since the probability of that option being profitable (in the money) is reduced. Also known as "theta" and "time-value decay".

TIME VALUE
The portion of the option premium that is attributable to the amount of time remaining until the expiration of the option contract.

TRADE OR FADE RULE
An option exchange rule that prevents the occurrence of a trade through.

TRIPLE WITCHING
An event that occurs when the contracts for stock index futures, stock index options and stock options all expire on the same day. Triple witching days happen four times a year: the third Friday of March, June, September and December. This phenomenon is sometimes referred to as "Freaky Friday".

U

UNDERLYING
1. In derivatives, the security that must be delivered when a derivative contract, such as a put or call option, is exercised.

2. In equities, the common stock that must be delivered when a warrant is exercised, or when a convertible bond or convertible preferred share is converted to common stock.

UNDERWATER
1. The condition a call option is in when its strike price is higher than the market price of the underlying stock.

2. The condition a put option is in when its strike price is lower than the market price of the underlying stock.

Also known as "out of the money."

UP-AND-IN OPTION
An option that can only be exercised when the price of the underlying asset reaches a set barrier level. This is a type of a knock-in barrier option.

UP-AND-OUT OPTION
A type of option that ceases to exist when the price of its underlying asset has reached a pre-specified price level.

V

VANILLA OPTION
A normal option with no special or unusual features.

VEGA
The amount that the price of an option changes compared to a 1% change in volatility.

VERTICAL SPREAD
An options trading strategy with which a trader makes a simultaneous purchase and sale of two options of the same type that have the same expiration dates but different strike prices.

VEST FLEECE
A slang term used to describe a situation in which a company's executives accelerate the vesting of their employee stock options. Usually, accelerated vesting is preceded by a period of excessively high employee stock option grants. The result of vest fleecing is that shareholders' ownership is reduced, and option holders are able to turn their options into stock in a shorter time period than if they had not accelerated vesting.

VIX - CBOE VOLATILITY INDEX
The ticker symbol for the Chicago Board Options Exchange (CBOE) Volatility Index, which shows the market's expectation of 30-day volatility. It is constructed using the implied volatilities of a wide range of S&P 500 index options. This volatility is meant to be forward looking and is calculated from both calls and puts. The VIX is a widely used measure of market risk.

The index is often referred to as the "investor fear gauge".

VOLATILITY
1. A statistical measure of the tendency of a market or security to rise or fall sharply within a set period.

2. A variable in option-pricing formulas showing the extent to which the return of the underlying asset will fluctuate between now and the option's expiration.

VIX OPTION
A type of non-equity option that uses the CBOE Volatility Index as the underlying asset. This is the first exchange-traded option that gives individual investors the ability to trade market volatility. Trading VIX options can be a useful tool for investors wanting to hedge their portfolios aganst sudden narket declines, as well as to speculate on future moves in volatility.

VOLATILITY
1. A statistical measure of the dispersion of returns for a given security or market index. Volatility can either be measured by using the standard deviation or variance between returns from that same security or market index. Commonly, the higher the volatility, the riskier the security.

2. A variable in option-pricing formulas showing the extent to which the return of the underlying asset will fluctuate between now and the option's expiration. Volatility, as expressed as a percentage coefficient within option-pricing formulas, arise from daily trading activities. How volatility is measured will affect the value of the coefficient used.

VOLATILITY QUOTE TRADING
A method of quoting option contracts whereby bids and asks are quoted according to their implied volatilities rather than prices.

VOLATILITY SMILE
A common graphical shape that results from plotting the strike price and implied volatility of a group of options with the same expiration date.

W

WARRANT
A derivative security that gives the holder the right to purchase securities (usually equity) from the issuer at a specific price within a certain time frame. Warrants are often included in a new debt issue as a "sweetener" to entice investors.

WARRANT COVERAGE
An agreement between a company and its shareholders whereby the company issues warrants equal to some percentage of the dollar amount of the shareholder's investment.

WARRANT PREMIUM
The premium paid for the rights associated with a warrant.

WASTING ASSET
A derivative security that loses value due to time decay.

WEATHER DERIVATIVE
An instrument used by companies to hedge against the risk of weather-related losses. The investor who sells a weather derivative agrees to bear this risk for a premium. If nothing happens, the investor makes a profit. However, if the weather turns bad, then the company who buys the derivative claims the agreed amount.

WRITER
The seller of an option who collects the premium payment from the buyer.

Y

YIELD-BASED OPTION
A type of debt-instrument-based option that derives its value from the difference between the exercise price and the value of the yield of the underlying debt instrument. Yield-based options are settled in cash. A yield-based call buyer expects interest rates to go up, while a yield-based put buyer expects interest rates to go down.

Z

ZERO COST COLLAR
A type of positive-carry collar that secures a return through the purchase of a cap and sale of a floor. Also called "zero cost options" or "equity risk reversals."

ZERO-SUM GAME
A situation in which one participant's gains result only from another participant's equivalent losses. The net change in total wealth among participants is zero; the wealth is just shifted from one to another.