Option Volatility And Pricing (Natenberg) Appendix

Front 1

All or None (AON)

Back 1

An order which must be filled in its entirety or not at all

Front 2

American Option

Back 2

An option which can be exercised at any time prior to expiration

Front 3

Arbitrage

Back 3

The purchase and sale of the same product in different markets to take advantage of a price disparity between the two markets

Front 4

Asian Option

Back 4

Average price option

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Assignment

Back 5

The process by which the seller of an option is notified of the buyer's intention to exercise

Front 6

At-the-Money

Back 6

An option whose exercise price is equal to the current price of the underlying contract.

Front 7

Automatic Exercise

Back 7

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.

Front 8

Average Price Option

Back 8

An option whose value at expiration is determined by the average price of the underlying instrument over some period of time.

Front 9

Backspread

Back 9

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.

Front 10

Backwardation

Back 10

A futures market where the more distant delivery months trade at a discount to the nearterm delivery months.

Front 11

Barrier Option

Back 11

An option which will either become effective or cease to exist if the underlying instrument trades at some predetermined price prior to expiration.

Front 12

Bear Spread

Back 12

Any spread which will theoretically increase in value with a decline in the price of the underlying contract.

Front 13

Box

Back 13

A long call and short put at one exercise price, together with a short call and long put at a different exercise price. All options must have the same underlying contract and expire at the same time.

Front 14

Bull Spread

Back 14

Any spread which will theoretically increase in value with a rise in the price of the underlying contract.

Front 15

Butterfly

Back 15

The sale (purchase) of two options with the same exercise price, together with the purchase (sale) 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 th same underlying contract, and expire at the same time, and there must be an equal increment between exercise prices.

Front 16

Buy/Write

Back 16

The purchase of an underlying contract together with the sale of a call option on that contract.

Front 17

Cabinet Bid

Back 17

On some exchanges, a bid smaller than the minimum increment permissible between traders desiring to close out positions in vary far out-of-the-money options.

Front 18

Calendar Spread

Back 18

A time spread.

Front 19

Call Option

Back 19

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 his option.

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Cap

Back 20

A contract between a borrower and a lender of floating rate funds, whereby the borrower is assured of paying no more than some maximum interest rate for borrowed funds. This is analogous to a call option where the underlying instrument is an interest rate on borrowed funds.

Front 21

Chooser Option

Back 21

A straddle where the owner must decide by some predetermined date whether to keep either the call or the put.

Front 22

Christmas Tree

Back 22

A spread involving three exercise prices. One or more calls (puts) are purchased at the lowest (highest) exercise price and one or more calls (puts) are sold at each of the higher (lower) exercise prices. All options must expire at the same time, be of the same type, and have the same underlying contract.

Front 23

Class

Back 23

All options of the same type with the same expiration date and same underlying instrument.

Front 24

Clearing House

Back 24

The organization which guarantees the integrity of all trades made on an exchange.

Front 25

Clearing Member

Back 25

A member firm of an exchange which is authorized by the clearing house to process trades for its customers, and which guarantees, through the collection of margin and variation monies, the integrity of its customers' trades.

Front 26

Collar

Back 26

A contract between a borrower and a lender of floating rate funds, whereby the borrower is assured of paying no more than some maximum interest rate for borrowed funds, an whereby the lender is assured of reciving no less than some minimum interest rate on loaned funds. This is analogous to an option fence where the underlying instrument is an interest rate on borrowed funds.

Front 27

Combination

Back 27

A two-sided option spread which does not fall into any well defined category of spreads. Most commonly it is used to refer to a long call and short put, or short call and long put, which together make up a synthetic position in the underlying contract.

Front 28

Compound Option

Back 28

An option to purchase an option

Front 29

Condor

Back 29

The sale (purchase) of two options with different exercise prices, together with the purchase (sale) 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 price.

Front 30

Contango

Back 30

A futures market where the more distant delivery months trade at a premium to the nearterm delivery months.

Front 31

Contingency Order

Back 31

An order which becomes effective only upon the fulfillment of some predetermined condition(s) in the marketplace.

Front 32

Conversion

Back 32

A long underlying position together with a short call and long put, where both options have the same exercise price and expire at the same time.

Front 33

Covered Write

Back 33

The sale of a call (put) option against an existing long (short) position in the underlying contract.

Front 34

Cylinder

Back 34

A fence or collar.

Front 35

Deferred Start Option

Back 35

A forward start option.

Front 36

Delta

Back 36

The sensitivity of an option's theoretical value to a change in the price of the underlying contract.

Front 37

Delta Neutral

Back 37

A position where the sum total of all the positive and negative deltas adds up to approximately zero.

Front 38

Diagonal Spread

Back 38

A long call (put) at one exercise price and expiration date, together with a short call (put) at a different exercise price and expiration date. All options must have the same underlying stock or commodity. This is simply a time spread using different exercise prices.

Front 39

Elasticity

Back 39

The percent change in an option's value for a given percent change in the value of the underlying instrument. Sometimes referred to as the leverage value.
Elasticity=underlying pirce/theoretical value (times) the delta

Front 40

Exchange Option

Back 40

An option to exchange one aset for another asset.

Front 41

Ex-dividend

Back 41

The day on which a dividend paying stock is trading without the right to receive the dividend.

Front 42

Exercise

Back 42

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.

Front 43

Exercise Price

Back 43

The price at which the underlying contract will be delivered in the event an option is exercised.

Front 44

Expiration (Expiry)

Back 44

The date and time after which an option may no longer be exercised.

Front 45

European Option

Back 45

An option which may only be exercised at expiration.

Front 46

Extrinsic Option

Back 46

Time Value.

Front 47

Fair Value

Back 47

Theoretical Value.

Front 48

Fence

Back 48

A long (short) underlying position, together with a long (short) out-of-the-money put and a short (long) out-of-the-money call. All options must expire at the same time.

Front 49

Fill or Kill (FOK)

Back 49

An order which will automatically be cancelled unless it can be executed immediately and in its entirety.

Front 50

Flex Option

Back 50

An exchange-traded option where the buyer and the seller are permitted to negotiate the exact terms of the option contract. Typically, this includes the exercise price, the expiration date, and the terms of exercise (either European or American).

Front 51

Floor

Back 51

A contract between a borrower and a lender of floating rate funds, whereby the lender is assured of receiving no less than some minimum interest rate for loaned funds. This is analogous to a put option where the underlying instrument is an interest rate on loaned funds.

Front 52

Forward Contract

Back 52

A contract 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 specified future date. Payment in full is due at the time of delivery.

Front 53

Forward Price

Back 53

Taking into consideration all carrying costs on a contract, the pirce at which a contract would have to be trading on some future date such that a trade made at today's price would just break even.

Front 54

Forward Start Option

Back 54

An option whose exercise price will be equal to the price of the underlying instrument on some predetermined date.

Front 55

Fugit

Back 55

The expected amount of time remaining to optimum early exercise of an American option.

Front 56

Futures Contract

Back 56

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 some 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 on the contract.

Front 57

Futures-Type Settlement

Back 57

A settlement procedure used by commodity exchanges whereby an initial margin desposit is made, but under which no immediate cash payment is made by the buyer to the seller. Cash settlement takes place at the end of each trading day based on the difference between the current day's settlement price and the previous day's settlement price or the original trade price.

Front 58

Gamma

Back 58

The sensitivity of an option's delta to a change in the price of the underlying contract.

Front 59

Good 'til Cancelled (GTC)

Back 59

An order to be held by a broker until it can either be executed or is cancelled by the customer.

Front 60

Guts

Back 60

A strangle where both the call and the put are in-the-money.

Front 61

Haircut

Back 61

On equity option exchanges, money deposited by a trader with the clearing house to ensure the integrity of his trades. This is simular to a margin requirement on a commodity exchange.

Front 62

Hedge Ratio

Back 62

Delta.

Front 63

Hedger

Back 63

A trader who enters the market with the specific intent of protecting an existing position in an underlying contract.

Front 64

Horizontal Spread

Back 64

A time spread.

Front 65

Immediate or Cancel (IOC)

Back 65

An order which will automatically be cancelled if it is not filled immediately. An IOC order need not be filled in its entirety.

Front 66

Implied Volatility

Back 66

Assuming all other inputs are known, the volatility which would have to be input into a theoretical pricing model in order to yield a theoretical value identical to the price of the option in the marketplace.

Front 67

In-Option

Back 67

A type of barrier option which becomes effective only if the underlying instrument trades at some predetermined price prior to expiration.

Front 68

In-Price

Back 68

The price at which the underlying instrument must trade before an in-option becomes effective.