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93 Cards in this Set
- Front
- Back
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Aquisition
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when a company buys a majority of another company's public stock
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American-Style
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options that can be exercised before their expiration date
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Arbitrage
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buying and selling similar instruments to make a risk-free profit
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ask/offer
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the lowest available price to buy
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assigned
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being forced to fulfill the obligation of an option contract
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at-the-money (ATM)
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an option with a strike price at or near the price of the underlying
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automatic exercise
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automatic performance of an option contract, due to the option expiring in-the-money
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back month
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an option expiration month later than the current month
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backspread
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a spread in which more options are purchased than sold
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basis (futures-cash)
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the difference between the price of futures and the cash price
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basis point
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an incremental change in interest rates of 0.01%
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bearish
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the outlook that the price of a stock or the market will drop
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bear spread
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a spread that profits from a drop in the price of the underlying security
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b/a spread
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the difference between the bid and ask price of a security
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bond
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the debt of a company to its lenders, to be repaid over time with interest
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break-even-point
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the point at which a position generates neither a profit nor a loss
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bullish
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the outlook that the price of a stock or the market will rise
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bull spread
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a spread that profits from a rise in the price of the underlying security
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butterfly spread
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a 3-strike price spread that profits from the underlying expiring at a specific price
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buying power
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the amount available for the purchase and short sale of securities. Includes cash and margin
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buy-write
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the simultaneous purchase of stock and sale of a covered call
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calendar-spread
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an option trade that benefits from the passage of time, also called a time spread
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call-option
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an option that gives the holder the right to buy stock at a specific price
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call writer
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a person who sells a call and receives a premium
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carrying cost
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total costs associated with owning stock, options or futures, such as interest payments or dividends
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combo
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a combination of options positions that replicates owning the underlying stock
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cost-basis
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original price paid for a stock, plus any commissions or fees
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covered-call
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a combination of a long stock position with a short call
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credit spread
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a spread trade that, when opened, results in a credit to your account
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day order
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an order that expires at the end of the regular market session
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day trade
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a trade that is opened and closed in the same trading session
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debit spread
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a spread trade that, when opened, results in money being debited from your account
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delta
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the expected change in price of an option for a $1 move in the underlying security
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dividend yield
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the total annual dividend divided by the price of the stock
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equity
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ownership in a company, expressed in shares of stock
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ETF
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an exchange-traded fund, a basket of stocks meant to track an index or sector
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ex-div date
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the date when all shareholders are guaranteed a dividend, and the stock's price is adjusted downward
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expiration
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the date at which an option stops trading, and all contracts are exercised or become worthless
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extrinsic value
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the value of an option beyond it's intrinsic value, also known as time value
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float
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number of shares of a company available for public trading
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gamma
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the expected change in delta for a $1 move in the underlying security
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greeks
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analytic measurements of different types of risk
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hedge
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to own a position in an instrument that lessens the risk of a similar instrument
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Historical Volatility
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measure of the range of stock prices in the previous year, in percentage terms
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Holder
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someone who has bought an option or owns a security
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Implied Volatility
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measure of the expected range of stock prices in the future, in percentage terms
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IPO
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Initial Public Offering, a company's first attempt to sell its stock in the marketplace
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ITM
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an option that could be exercised, and the stock position immediately closed, at a profit to the trader
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Iron Condor
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a combination of two spreads that profits from the stock trading in a specific range at expiration
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Junk Bond
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a bond with a low credit rating, indicating a higher risk of default by the borrower
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LEAPS
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options with an expiration month more than one year in the future
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Legging In
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trading a spread by buying or selling each leg at different times
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Leverage
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the use of a small amount of money to control a large number of securities
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Limit Order
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an order to buy or sell at a specific price, or better
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Liquidity Risk
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the risk that a position can't be closed when desired
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Margin
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the amount being borrowed to purchase securities
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Mark
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the average of the bid and ask price
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Market Order
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an order to buy or sell immediately at the best available price
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Market Put
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a combination of a long stock position with a long put
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Merger
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the act of combining two or more companies into one
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Naked call or put
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a call or put that does not have an offsetting stock or option position
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Open interest
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the number of outstanding option contracts of a certain issue
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Open Position
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a long or short position in stocks or options
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OTM
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an option that could not be exercised, and the stock position closed, at an immediate profit
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Over the Counter
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a security that is not listed on a stock exchange
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Parity
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when an option trades with no additional time premium
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Preferred Stock
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a type of stock with a claim on a company's earnings before dividends are paid
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Probability of Profit/ Success
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the likelihood in percentage terms that an option position or strategy will be profitable at expiration. For spreads like short verticals or iron condors, you can estimate the probability of success by taking the max loss of that position and divide it by the distance between the long and short strikes. So, if you sell a 100/105 call spread for 2.00 credit, the max potential loss is $300. If you take $300 divided by $500, you get a probability of success of 60%.
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Probability of Expiring
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the likelihood in percentage terms that a stock or index will land above or below some price on the day of expiration. The probability of expiring doesn’t care about what happens between now and expiration. It only considers the probability that the stock will be above some higher price or below some lower price at expiration.
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Probability of Touching
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the likelihood in percentage terms that a stock or index will reach some higher or lower price at any time between now and expiration. The probability of touching takes into account all the possible prices that might occur in between now and expiration. It is always higher than the probability of expiring
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put/ call ratio
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the total number of puts traded on a stock, divided by the total number of calls
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Put Option
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an option that gives the holder the right to sell stock at a specific price
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Ratio Smith
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a spread in which more options are sold than purchased
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Return on Capital
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this is potential maximum return you could make on an option trade. It’s calculated by taking the maximum potential profit and dividing it by the margin requirement of the position. For example, if you sell a 100/105 call vertical for 2.00 credit, the return on capital would be the max profit of $200 divided by the margin requirement of $300. That yields a max return on capital of 66%.
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Roll
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to close an existing option and replace it with an option of a later date or different strike price
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Scalp/ Scalper
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a trader who enters and exits a position quickly for a small profit or loss
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Short Sale
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a position that is opened by selling borrowed stock, with the expectation the stock price will fall
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spin-off
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when a company divides its assets into two companies and issues shares of the new company
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Spread
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a position involving a long and short option of different strike prices or expirations, or both
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Straddle
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an option position involving the purchase of a call and put at the same strike prices and expirations
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Strangle
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an option position involving the purchase of a call and put at different strike prices
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Strike Price
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the price at which stock is purchased or sold when an option is exercised
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Synthetic
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a position that emulates another, using calls, puts or stock
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Systematic Risk
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risk inherent to the marketplace that cannot be eliminated with diversification
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Technical Analysis
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calculations that use stock price movement and volume to identify predictive patterns
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Theoretical Value
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estimated price of an option, derived from a mathematical model
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Theta
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an estimate of the amount an option's value decreases with each passing day
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unsystematic risk (non-systematic risk)
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company-specific risk that can, in theory, be reduced or eliminated through diversification
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Vega
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an estimate of the amount an option's value changes due to a 1% change in implied volatility
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Vertical
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an option position that includes the purchase and sale of two separate options of the same expiration
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VIX
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an index that calculates the implied volatility of the S&P 500 index
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Volatility
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a measure of the change in stock prices, either historical or predicted in the future
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Warrant
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what you get for not paying speeding tickets
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