Trading Glossary
The following list includes general trading terms and definitions that you may encounter in your everyday trading activities:
Abandon
When an option holder chooses not to exercise or offset an option.
Account
The relationship between a client and a broker/dealer firm allowing the client to place trades.
Active market
A market in which there is frequent trading.
Adjusted exercise price
The final exercise price of the option accounts for the coupon rates carried on Ginnie Mae (Government National Mortgage Association) mortgages.
Adjustment
A trade made with the primary intention of maintaining certain position characteristics. For example, making an adjustment to keep a position Delta neutral.
Advance commitment
A promise to sell an asset before the seller has lined up the purchase of the asset.
After-hours trading
Securities trading after regular trading hours on organized exchanges.
All-or-none (AON) order
An order that must be filled completely or not at all.
Alpha
The premium an investment earns above a set standard.
Alternate delivery procedure
A contract delivery method that permits buyers and sellers to settle delivery commitments, independently of the exchange.
American depository receipt (ADR)
Certificates issued by a U.S. depository bank, representing foreign shares held by the bank.
American option
An option that can be exercised at any time prior to expiration.
Arbitrage
The purchase and sale of the same security in different markets to take advantage of a price disparity between the two markets.
Ask/Ask Price
The Ask Price, or inside ask, is the current price a seller is willing to accept for a security. Also, see Bid/Bid Price.
Asset classes
Categories of assets, such as stocks, futures, forex, options, bonds, etc.
Assign
To require the seller of an option to take either a short position, in the case of a call, or long position, in the case of a put, at the specified exercise price.
Assignment
The process by which the seller of an option is notified of the buyer's intention to exercise.
At-the-money (ATM)
An option whose exercise price is equal to the current price of the underlying. On listed option exchanges the term is more commonly used to refer to the option whose exercise price is the closest to the current price of the underlying.
Automatic exercise
The exercise by the clearing-house of an in-the-money option at expiration, unless the holder of the option submits specific instructions to the contrary.
Average cost
The average cost of shares/contracts bought at different prices over time.
Backspread
A spread (usually Delta neutral) where more options are purchased than sold, and where all options have the same underlying contract and expire at the same time.
Back-testing
Applying a set of entry and exit rules on historical data to measure performance.
Backwardation
A futures market in which the front month is higher in price than the back months. It is the opposite of contango.
Base currency
The currency in which gains or losses from an international portfolio are measured.
Basis
The difference between the spot or cash price of a commodity and the price of the nearest futures contract for the same or a related commodity.
Bear market
A market characterized by declining prices. Any market in which prices are in a downward trend, usually down 10% or more from a previous market high.
Bear spread
Any spread which will theoretically increase in value with a decline in the price of the underlying asset.
Bearish
An expectation that an underlying market will decline in price. The term may also be applied to any position, which will profit from a decline in the underlying market.
Benchmark
The performance of a predetermined set of securities used for comparison purposes.
Beta
The measure of an asset's risk in relation to the market (for example, the S&P 500) or to an alternative benchmark or factors.
Bid-ask spread
The Bid Price, or inside bid, is the current highest price that a buyer is willing to pay for a security. Also, see Ask/Ask Price.
BId/Bid price
The amount someone is willing to pay to purchase a stock, commodity, or other financial instrument.
Binary Option
A type of option whose payoff is either zero or a fixed amount. For example, there could be a binary option that pays $1000 if a hurricane makes landfall in Hawaii before a specified date and zero otherwise.
Binomial model
A widely used option pricing model developed by John Cox, Stephen Ross, and Mark Rubenstein. The model approximates the price distribution of the underlying asset by constructing a binomial tree where the price of the underlying is assumed to move up or down a given amount over each time interval. This model is often used to evaluate American options.
Black model
A variation from the original Black-Scholes model developed by Fischer Black. The Black model is designed to evaluate European options on a futures contract.
Black-Scholes model
The first widely used pricing model for options, developed by Fischer Black and Myron Scholes. In its original form, the model was designed to evaluate European options on stock.
Block
A large quantity of stock or large currency amount of bonds held or traded. As a rule of thumb, 10,000 shares or more of stock and $200,000 or more worth of bonds would be described as a block.
Breadth of the market
In the context of general equities, the percentage of stocks participating in a particular market move.
Break-even point
The price at which a transaction reaches its average entry price.
Broker dealer
A firm that handles transactions for its customers.
Bull spread
Any spread which will theoretically increase in value with a rise in the price of the underlying asset.
Bullish
An expectation than an underlying market will rise in price. The term may also be applied to any position which will profit from a rise in the underlying market.
Bull market
A market characterized by rising prices. Any market in which prices are in an upward trend.
Bust
The undoing of a trade that previously was reported in error.
Butterfly spread
The sale of two options with the same exercise price, together with the purchase of one option with a lower exercise price and one option with a higher exercise price. All options must be of the same type, have the same underlying contract, and expire at the same time, and there must be an equal increment between exercise prices.
Buy order
An order to a broker to purchase a specific quantity of a security.
Calendar spread
The purchase of one option expiring on one date and the sale of another option expiring on a different date. Typically, both options are of the same type, have the same exercise price, and have the same underlying stock or commodity. Calendar spreads are sometimes referred to as time spreads.
Call option
A contract between a buyer and a seller whereby the buyer acquires the right, but not the obligation to purchase a specified underlying contract at a fixed price on or before a specified date. The seller of the call option assumes the obligation of delivering the underlying contract should the buyer wish to exercise the option.
Cancel
To void an order to buy or sell.
Carrying cost
The amount of interest which must be paid to finance a cash debit, or the amount of interest which can be earned on a cash credit, over a period of time.
Cash markets
Also called spot markets, markets that involve the immediate delivery of a security, commodity, or instrument.
Charting
The set of tools used in technical analysis in which charts are used to plot price movements, volume, settlement prices, open interest, and other indicators.
Class
All options of the same type with the same expiration date and the same underlying instrument (asset).
Clearing-house
The organization that guarantees the integrity of all trades made on an exchange.
Close
The price at which a security closed for trading on a given day or the closing price of a bar in a chart.
Commission
The fee paid to a broker to execute a trade, based on the number of shares or contracts.
Condor
An option strategy consisting of both puts and calls at different strike prices to capitalize on a narrow range of volatility.
Confirmation
The written statement that follows any trade in the securities markets.
Contango
A market condition in which futures prices are higher in the distant delivery months.
Contract
A unit of trading in futures. Also, the actual bilateral agreement between the buyer and seller in a futures transaction.
Correlation
A statistical measure of the degree to which the movements of two instruments are related.
Covered write
The sale of a call or put option against an existing long or short position in the underlying contract.
Daily price limit
The level at which many commodity, futures, and options markets are allowed to rise or fall in a day. Exchanges usually impose a daily price limit on each instrument.
Daily range
The difference between the high and low during one trading day.
Day trading
Buying or selling one or more securities within the same day.
Debit spread
The difference in the value of two options, when the value of the option bought exceeds the value of the one sold.
Delivery
The tender and receipt of an actual commodity or financial instrument in settlement of a futures contract.
Delta
The sensitivity of an option's theoretical value to a change in the price of the underlying asset.
Delta neutral
A position where the sum total of all the positive and negative Deltas add up to near zero.
Derivative
A security that derives its value from an underlying instrument or instruments. The most common types of derivatives are futures contracts, options, and swaps.
Diagonal spread
A long call or put at one exercise price and expiration date, together with a short call or put at a different exercise price and expiration date. All options must have the same underlying asset. This is simply a time spread using different exercise prices.
Discretionary account
Accounts over which an individual or organization, other than the person in whose name the account is carried, exercises trading authority or control.
Diversification
Dividing investment funds among a variety of securities with different risk, reward, and correlation statistics so as to minimize unsystematic risk.
Dividend
An amount paid by a company to the shareholders in the company. Dividends are usually paid from one to four times annually, with the quoted dividend representing the amount paid for each share of stock held.
Down-tick
A trade made at a price less than the previous trade price, or at a price equal to the previous trade price if that price was itself made on a down-tick.
Early Exercise
The exercise or assignment of an option prior to expiration.
ECN (Electronic Communications Network)
Frequently used for routing orders into the stock markets.
E-Mini
A smaller version of a futures contract that is traded exclusively on an electronic trading facility. E-Mini is a trademark of the CME Group, Inc.
ETF (Exchange-Traded Fund)
An investment vehicle holding a group of stocks, commodity, or other assets that issues shares that are traded like a stock on a securities exchange.
European option
An option which can only be exercised at expiration.
Exchange
An organization whose members meet for the purpose of buying and selling stock commodities, foreign currencies, or other financial instruments. Depending on the type of exchange, members may conduct their trading either physically in a single location, or electronically over a computer network.
Ex-dividend date
The first day of trading when the seller, rather than the buyer, of a stock will be entitled to the most recently announced dividend payment.
Ex-dividend rate
The day on which a dividend-paying stock is trading without the right to receive the dividend.
Exercise
The process by which the holder of an option notifies the seller of his intention to take delivery of the underlying contract in the case of a call, or to make delivery of the underlying contract in the case of a put, at the specified exercise price.
Exercise price
The price at which the underlying contract will be delivered in the event an option is exercised.
Exotic option
Options that are more complex than simple puts or call options. For example, a caput is a call option on a put option.
Expiration
The date and time after which an option may no longer be exercised.
Extrinsic Value
The difference between an option's price and the intrinsic value. Also known as time value.
Fair value
An option value generated by a mathematical model given certain prior assumptions about the terms of the option, the characteristics of the underlying contract, and prevailing interest rates.
Fill
The price at which an order is executed.
Fill or Kill (OK) order
An order which will automatically be canceled unless it can be executed immediately and in its entirety.
First Notice Date
The day after which an investor who holds a futures contract may be required to take physical delivery of the contract's underlying commodity.
Foreign exchange
The currency of another country, often abbreviated as forex or FX
Futures contract
A contract, usually exchange-traded, between a buyer and a seller, whereby the buyer is obligated to take delivery and the seller is obligated to make delivery of a fixed amount of a commodity at a predetermined price on a future date. All profits and losses are realized immediately, and result in a cash credit or debit based on daily changes in the settlement price of the contract.
Gamma
The sensitivity of an option's Delta to a change in the price of the underlying contract. Gamma is the acceleration of Delta.
Garman-Kohlhagen model
A variation on the original Black-Scholes model. It was developed by Mark Garman and Steven Kohlhagen. The model is designed to evaluate European options on foreign currencies.
Good thru date
An order that works until executed or canceled or until the end of the trading session on the date specified by the trader.
Good til canceled
An order to be held by a broker until it can either be executed or is canceled by the customer.
Hedge
A secondary position taken to protect the value of a primary position. If the value of the primary position declines, the losses are at least partially offset by an increase in the value of the hedge position.
Hedge ratio
The theoretically correct number of underlying contracts to option contracts required to establish a neutral hedge.
High-Frequency Trading
Computerized or algorithmic trading in which transactions are completed in small fractions of a second.
Historical Volatility
A statistical measure of the volatility (specifically, the annualized standard deviation) of a futures contract, security, or other instrument over a specified number of past trading days.
Horizontal spread
The purchase of one option expiring on one date and the sale of another option expiring on a different date. Typically, both options are of the same type, have the same exercise price, and have the same underlying stock or commodity.
Ill-liquid
A lightly traded investment such as a stock or future that is not easily converted into cash.
Immediate or canceled (IOC) order
A market or limit price order that is to be executed in whole or in part as soon as the order is represented in the trading crowd. The portion not executed is to be treated as canceled.
Implied volatility
Assuming all other inputs are known, the volatility that would be input into a theoretical pricing model in order to yield a theoretical value identical to the price of the option in the marketplace.
Index
A number that represents the composite value of a group of similar or related items. The most common types of financial indices are stocks (a stock index), foreign currencies (a currency index), bonds (a bond index), or physical commodities (a commodity index).
Initial margin requirement
When buying securities on margin, the proportion of the total market value that the broker sets aside in the trader’s account.
Inside bid
The highest price at which someone is willing to buy a security.
Interest rate
The cost or value of money. Interest rates are typically quoted as an annual percentage that can be earned on funds that have been loaned, or that must be paid on funds that have been borrowed.
In-the-money
An option which could be exercised and immediately closed out against the underlying for a cash credit. A Call is in-the-money if its exercise price is lower than the current market price of the underlying. A Put is in-the-money if its exercise price is higher than the current market price of the underlying.
Intrinsic value
The amount by which an option is in-the-money. Out-of-the-money options have no intrinsic value.
Iron butterfly
A long straddle, together with a short strangle. All options must expire at the same time and have the same underlying contract.
Jelly roll
A long call and short put with one expiration date, together with a short call and long put with a different expiration date. All four options must have the same exercise price and the same underlying contract.
Kurtosis
Measures the peakedness of a probability distribution.
Last Notice Day
The final day on which notices of intent to deliver on futures contracts may be issued.
Last Trading Day
The day on which trading ceases for the maturing (current) delivery month.
Latency
The amount of time that elapses between the placement of an order and the reported fill notification.
Leaps
Long-term options with expirations up to 2-1/2 years.
Leg
One side of a spread position, or component in a multi-leg option position or strategy.
Leverage
The ability to control large currency amounts of a commodity with a comparatively small amount of capital.
Limit
The maximum allowable price movement over a specific time period for an exchange traded contract.
Limit order
An order to be executed at a specific price or better.
Lognormal
A statistical distribution that implies that a stock price can rise forever, but cannot fall below zero.
Long
A position resulting from the purchase of a contract. The term is also used to describe a position that will theoretically increase in value should the underlying market rise. Note that a long put position is a short market position.
Long premium
A position that will theoretically increase in value should the underlying contract make a large move in either direction. The position will theoretically decrease in value, because of time decay, if the underlying market sits still.
Maintenance call
A call for additional money or securities when a margin account falls below its exchange-mandated required level.
Margin
Money deposited by a trader with the clearinghouse to ensure the integrity of his trades.
Mark-to-market
The adjustment of the book value or collateral value of a security to reflect current market value.
Marked-to-market
An arrangement whereby the profits or losses on a futures contract are settled each day.
Market maker
An independent trader or trading firm that stands ready to buy or sell shares or contracts in a designated market. Market makers perform duties similar to locals on commodity exchanges, the primary difference being that a market maker is obligated to make a two-sided (bid and ask) market in his designated contract.
Market-on-close (MOC) order
A market order to be executed as closely as possible to the close of that day's trading.
Market order
An order to be executed immediately at the current market price.
Momentum
In technical analysis, the relative change in price over a specific time interval. Often equated with speed or velocity and considered in terms of relative strength.
Naked
A short market position with no offsetting long market position.
Nearest month
The expiration date of an option or future that is closest to the present.
Neutral
A position that has no particular preference as to changes in a given market condition.
Neutral spread
A spread that is Delta neutral.
Normal distribution
A theoretical distribution resulting from an infinite number of random events. A normal distribution is symmetrical, with most events concentrated near the middle of the distribution and progressively fewer events falling at the tails. A normal distribution is often referred to as a bell-curve distribution.
Not held
An order submitted to a broker, but over which the broker has discretion as to when and how it is executed.
Notice Day
Any day on which notices of intent to deliver on futures contracts may be issued.
Opening price
The price at which the first transaction occurs for a security on an exchange.
Option
The right to buy or sell a specific security within a specific time period, at a predetermined price.
Out-of-the-money (OTM)
An option that currently has no intrinsic value. A call is out-of-the-money if its exercise price is higher than the current market price of the underlying. A put is out-of-the-money if its exercise price is lower than the current price of the underlying.
Over-the-counter(OTC)
A stock/security that is not listed on a major stock exchange.
Parity
The amount by which an option is in-the-money.
Pip
The smallest price movement increment of a commodity or currency.
Portfolio
A collection of investments or positions.
Position
The sum total of a trader's open contracts in a particular underlying market.
Premium
The price of an option.
Present value
Given a prevailing interest rate, the amount of money that would have to be invested at the present time in order to yield a given amount at the end of a specific period of time. This can often be approximated by deducting the carrying costs over the period from the terminal amount.
Program trading
An arbitrage strategy involving the purchase or sale of mispriced stock index futures contracts against an opposing position in the stocks underlying the index.
Put-call parity
An option pricing principle that says, given a stock`s price, a put and call of the same class must have a static price relationship because arbitrage opportunities or activities will always reestablish such a relationship.
Put option
A contract between a buyer and a seller whereby the buyer acquires the right, but not the obligation, to sell a specified underlying contract at a fixed price on or before a specified date. The seller of the put option assumes the obligation of taking delivery of the underlying contract should the buyer wish to exercise his option.
Quotation
The actual price or the bid or ask price of either cash commodities, futures, or options contracts at a particular time.
Ratio back-spread
A spread, usually Delta neutral, where more options are purchased than sold, and where all options have the same underlying contract and expire at the same time.
Ratio spread
A spread where the number of long market contracts (long underlying, long call, or short put) and short market contracts (short underlying, short call, or long put) are unequal.
Ratio vertical spread
A spread, usually Delta neutral, where more options are sold than are purchased, and where all options have the same underlying contract and expire at the same time.
Ratio write
The sale of multiple options against an existing position in an underlying contract. This is simply a covered write using more than one option.
Rho
The sensitivity of an option's theoretical value to a change in interest rates.
Roll
To move a position to the following delivery date by closing the
current position and taking a new position in a future delivery date.
Scale in
Gradually taking a position in a security or market over time.
Scalper
A trader on who hopes to profit by continually buying at the bid price and selling at the ask price in a specific market.
Sell order
Sell refers to the selling of a security.
Series
A set of calls or puts on the same underlying security in the same class, and with the same strike price and expiration date.
Short
A position resulting from the sale of a contract. The term is also used to describe a position that will theoretically increase in value should the underlying market fall.
Short premium
A position that will theoretically increase in value should the underlying market sit still. The position will theoretically decrease in value should the underlying contract make a large move in either direction.
Short ratio spread
A spread, usually Delta neutral, where more options are sold than are purchased, and where all options have the same underlying contract and expire at the same time.
Short sale
The sale of a security that is not owned by the seller. In order to complete a short sale, the seller must borrow the security to make delivery to the buyer.
Skewness
Asymmetry from a normal distribution.
Spot exchange rates
The exchange rate on currency for immediate delivery.
Spread
A long market position and an offsetting short market position usually, but not always, in the same underlying market.
Squeeze
A period when stocks or commodities futures increase in price and investors who have sold short must cover their positions to prevent the loss of large amounts of money.
Standard deviation
In a normal distribution, a measure of how events are distributed. A low standard deviation indicates that a large number of events are concentrated near the middle of the distribution. A high standard deviation indicates that more events fall near the tail.
Stop limit order
A contingency order that becomes a limit order if the contract trades at a specific price.
Stop market order
A contingency order that becomes a market order if the contract trades at a specific price.
Straddle
A long call and a long put, where both options have the same underlying contract, expiration date, and exercise price
Strangle
A long call and a long put, where both options have the same underlying contract and expiration date, but different exercise prices.
Strike price
The price at which the underlying contract will be delivered in the event an option is exercised.
Synthetic
A combination of contracts the have approximately the same characteristics as a different contract.
Synthetic call
A long underlying position together with a long put.
Synthetic long underlying
A long call and a short put, where both options have the same underlying contract, expiration date, and exercise price.
Synthetic put
A short underlying position together with a long call.
Synthetic short underlying
A short call and a long put, where both options have the same underlying contract, expiration date, and exercise price.
Target price
The price that an investor hopes a stock will reach in a certain time period.
Theoretical pricing model
A mathematical model designed to evaluate a security or contract given certain assumptions about the characteristics of the contract as well as other conditions in the marketplace.
Theoretical value
An option value generated by a mathematical model based on the inputs to the model, which are the terms of the option contract, the price of the underlying contract, and prevailing interest rates.
Theta
The sensitivity of an option's theoretical value to a change in the amount of time remaining to expiration.
Tick
The minimum price change up or down for a financial instrument. An up-tick means that the last trade was at a higher price than the one preceding it. A down-tick means that the last price was lower than the one preceding it.
Time premium
The price of an option less its intrinsic value. The entire premium of an out-of-the-money option consists of time value.
Time spread
The purchase of one option expiring on one date and the sale of another option expiring on a different date. Typically, both options have the same type, exercise price, and underlying stock or commodity. Calendar spreads are sometimes referred to as time spreads.
Time value
The price of an option less its intrinsic value. The entire premium of an out-of-the-money option consists of time value.
Type
The designation of an option as either a call or put.
Uncovered call
A short call option position in which the writer does not own shares of the underlying stock represented by the option contracts.
Uncovered put
A short put option position in which the writer does not have a corresponding short stock position or has not deposited, in a cash account, cash or cash equivalents equal to the exercise value of the put.
Underlying asset
The stock, commodity, futures contract, or cash index to be delivered in the event an option is exercised.
Up-tick
A trade made at a price higher than the previous trade price, or at a price equal to the previous trade price if that price was itself made on an up-tick.
Up-tick rule
A rule that sets the conditions under which a stock may be sold short. An up-tick is when the current inside bid moves higher.
Vega
The sensitivity of an option's theoretical value to a change in volatility.
Vertical spread
The purchase of one option and sale of one option, where both options are of the same type, have the same underlying contract, and expire at the same time, but have different exercise prices.
Volatility
The degree to which the price of an underlying asset tends to fluctuate over time.
Volatility skewing
The characteristic of most option markets to have different volatilities at different exercise prices, even though the options have the same underlying contract and expire at the same time.
Write
To sell an option.