Options Terms

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But here we present the standard textbook definitions for a whole slew of options terminology without any jokes, interjections or unnecessary asides. An equity call or put option is at-the-money when its strike price is the same as the current underlying stock price. An underlying stock price at which an option strategy will realize neither a profit nor a loss, generally at option expiration. An equity option that gives its buyer the right to buy shares of the underlying stock at the strike price per share at any time before it expires.

The call seller or writeron the other hand, has the obligation to sell shares at the strike price if called upon to do so. A settlement style that is generally characteristic of index options. Instead of stock changing hands after a call or put is exercised physical settlementcash changes hands. A transaction that eliminates or reduces an open option position.

A closing sell transaction eliminates or reduces a long position. A closing buy transaction eliminates or reduces a short position. The fee charged by a brokerage firm for its services in the execution of a stock option trading terms defined or option order on a securities exchange. Any cash received in an account from the sale of an option or stock position. With a complex strategy involving multiple parts legsa net credit transaction is one in which the total cash amount received is greater than the total cash amount paid.

Any cash paid out of an account for the purchase of an stock option trading terms defined or stock position. With a complex strategy involving multiple parts legsa net debit transaction is one in which the total cash amount paid is greater than the total cash amount received. The exercise or assignment of an option contract before its expiration.

This is a feature of American-style options stock option trading terms defined may be exercised or assigned at any time before they expire. A contract that gives its buyer owner the right, but not the obligation, to either buy or sell shares of a specific underlying stock or exchange-traded fund ETF at a specific price strike or exercise price per share, at any time before the contract expires.

With a complex strategy involving multiple parts legsan even money transaction results when the total cash amount received is the same as the total cash amount paid.

A security that represents shares of ownership in a fund or investment trust that holds a basket collection of specific component stocks. ETF shares are listed and traded on securities exchanges just like stock, and so may be bought and sold throughout the trading day. If you buy stock before the ex-dividend date, you will be eligible to receive the upcoming dividend payment. If you buy stock on the ex-date or afterwards, you will not receive the dividend. To employ the rights an equity option contract conveys to its buyer to either buy in the case stock option trading terms defined a call or sell in the case of a put shares of the underlying security at the strike price per share at any time before the contract expires.

A term of any equity option contract, it is the price per share at which shares of stock will change hands after an option is exercised or assigned.

The day on which an option contract literally expires and ceases to exist. For equity options, this is the Saturday following the third Friday of the expiration month. The last day on which expiring equity options trade and may be exercised is the business day prior to the expiration date, stock option trading terms defined generally the third Friday of the month.

If the option is out-of-the-money, the extrinsic value is equal to the entire premium. A measurement of the actual observed volatility of a specific stock over a given period of time in the past, such as a month, quarter or year. Implied volatility for any option can only be determined via an option pricing model.

An equity call contract is in-the-money when its strike price is less than the current underlying stock price. An equity put contract is in-the-money when its strike price is greater than the current underlying stock price. Equity LEAPS calls and puts can have expirations up to three years into the future and expire in January of their expiration years.

Instead of entering one order to establish all parts of a complex position simultaneously, one part is executed with the hope of establishing the other part s later at a better price. With respect to stock prices over a period of time, a lognormal distribution of daily price changes represents not the actual dollar amount of each change, but instead the logarithms of each change.

So in a sense a lognormal distribution could be considered to have a bullish bias. A position resulting from the opening purchase of a call or put contract and held owned in a brokerage account. Shares of stock that are purchased and held in a brokerage account and which represent an equity interest in the company that issued the shares.

For a data set, the mean is the sum of the observations divided by the number of observations. The mean is often quoted along with the stock option trading terms defined deviation: One of the most familiar mathematical distributions, it is a set of random observed numbers or closing stock prices whose distribution is symmetrical around the mean or average number. Since this a symmetrical distribution, when the numbers represent daily stock price changes, for every possible change to the upside there must be an equal price change to the downside.

The result is that a normal distribution would theoretically allow negative stock prices. Stock prices are unlimited to the upside, but in the real world a stock can only decline to zero.

A transaction that creates or increases an open option stock option trading terms defined. An opening buy transaction creates or increases a long position; an opening sell transaction creates or stock option trading terms defined a short position also known stock option trading terms defined writing. Generated by an option pricing model are the option Greeks: An stock option trading terms defined call option is out-of-the-money when its strike price is greater than the current underlying stock price.

An equity put option is stock option trading terms defined when its strike price is less than the current underlying stock price. The settlement style of all equity options in which shares of underlying stock change hands when an option is exercised. The price paid or received for an option in the marketplace. Equity option premiums are quoted on a price-per-share basis, so the total premium amount paid by the buyer to the seller in any option transaction is equal to the quoted amount times underlying shares.

Option premium consists of intrinsic value if any plus time value. A representation in graph format of the possible profit and loss outcomes of an equity option strategy over a range of underlying stock prices at a given point in the future, most commonly at option expiration. An equity option that gives its buyer the right to sell shares of the underlying stock at the strike price per share at any time before it expires. The put seller or writeron the other hand, has the stock option trading terms defined to buy shares at the strike price if called upon to do so.

Rolling a long position involves selling those options and buying others. Rolling a short position involves buying the existing position and selling writing other options to create a new short position. A position resulting from making the opening sale stock option trading terms defined writing of a call or put contract, which is then maintained in a brokerage account.

If the shares can be stock option trading terms defined at a price lower than their initial sale, a profit will result. If the shares are purchased at a higher price, a loss will be incurred. Unlimited losses are possible when taking a short stock position. A complex option position established by the purchase of one stock option trading terms defined and the sale of another option with the same underlying security.

A spread order is executed as a package, with both parts legs traded simultaneously, at a net debit, net credit, or for even money. By definition, the premium of at- and out-of-the-money options consists only of time value. It is time value stock option trading terms defined is affected by time decay as well as changing volatility, interest rates and dividends.

The fluctuation, up or down, in the price of stock option trading terms defined stock. To sell a call or put option contract that has not already been purchased owned. Stock option trading terms defined is known as an opening sale transaction and results in a short position in that option. The seller writer of an equity option is subject to assignment at any time before expiration and takes on an obligation to sell in the case of a short call or buy in the case of a short put underlying stock if assignment does occur.

Options involve risk and are not suitable for all investors. For more information, please review the Characteristics and Risks of Standardized Options brochure before you begin trading options. Options investors may lose the entire amount of their investment in a relatively short stock option trading terms defined of time.

Multiple leg options strategies involve additional risksand may result in complex tax treatments. Please consult a tax professional prior to implementing these strategies. Implied volatility represents the consensus of the marketplace as to the future level of stock price volatility or the probability of reaching a specific price point. The Greeks represent the consensus of the marketplace as to how the option will react to changes in certain variables associated with the pricing of an option contract.

There is no guarantee that the forecasts of implied volatility or the Greeks will be correct. Ally Invest provides self-directed investors with discount brokerage services, and does not stock option trading terms defined recommendations or offer investment, financial, legal or tax advice. System response and access times may vary due to market conditions, system stock option trading terms defined, and other factors.

Content, research, tools, and stock or option symbols are for educational and illustrative purposes only and do not imply a recommendation or solicitation to buy or sell a particular security or to engage in any particular investment strategy.

The projections or other information regarding the likelihood of various investment outcomes are hypothetical in nature, are not guaranteed for accuracy or completeness, do not reflect actual investment results and are not guarantees of future results. All investments involve risk, losses may exceed the principal invested, and the past performance of a security, industry, sector, market, or financial product does not guarantee future results or returns.

The Options Playbook Featuring 40 options strategies for bulls, bears, rookies, all-stars and everyone in between. At-the-money An equity call or put option is at-the-money when its strike price is the same as the current underlying stock price.

Back month For an option spread involving two expiration months, the month that is farther away in time.

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The basic fundamentals of options trading are relatively easy to learn, but this is a very complex subject once you get into the more advanced aspects.

As such it's no surprise that there is a fair amount of terminology and jargon involved that you may not be familiar with. We have compiled this comprehensive glossary of terms to be a useful reference tool for anyone learning about trading options.

Although we always try and explain any terminology we use in the context that we are using it in any particular page or article we write, there may be occasions when you come across a term that you don't understand. This glossary of terms is here to be used if you ever require an explanation for what a particular word or phrase means. This is an advanced strategy that can be used to profit from an underlying security remaining neutral. Learn how to use an Albatross Spread.

All Or None Order: Often abbreviated as AON, this is a type of order that must be either filled entirely or not at all. A contract that gives the holder the flexibility of choosing to exercise their option at any point between buying the contract and the contract expiring.

More on American Style. Taking advantage of price discrepancies by buying and selling to create a risk free trade.

Strategies that involve the use of arbitrage. Read more at Arbitrage Strategies. When the writer of a contract is required to fulfill their obligations under the terms of that contract — for example buying the underlying security if they have written calls or selling the underlying security if they have written puts.

The writer will be issued with an assignment notice in such circumstances. At the Money Option: An option where the price of the underlying security is the same as the strike price. The process by which in the money options are automatically exercised if they are in the money at the point of expiration.

A trading method that involves using a third party to select your trades and having your broker automatically execute them. Read more on Auto Trading. A type of option that is based on a group of underlying securities rather than just one.

A type of option that can come into existence or go out of existence based on specific criteria is usually related to the price of the underlying security.

More about Barrier Options. This is an advanced strategy that can be used when the outlook of an underlying security is bearish. Learn how to use a Bear Butterfly Spread. A simple strategy, using calls, that can be used when the expectation is that the underlying security will decline in price.

Learn how to use a Bear Call Spread. An expectation that an option, or any financial instrument, will decrease in price. Strategies that can be used to profit from a downward move in the price of a financial instrument.

List of Bearish Strategies. Bear Put Ladder Spread: This is an advanced strategy that can be used when the outlook on an underlying security is bearish. Learn how to use a Bear Put Ladder Spread. A simple strategy using puts that can be used when the expectation is that the underlying security will decline in price. Learn how to use a Bear Put Spread.

This is a strategy that can be used when the outlook on an underlying security is bearish. Learn how to use a Bear Ratio Spread. An unconfirmed market movement which suggests a bear market, but is unconfirmed and ends up with the market moving upwards. The difference between the bid price and the ask price of an option. An indicator of liquidity, and often referred to simply as the spread. A type of option that pays a fixed return if it expires in the money or nothing if it expires at the money or out of the money.

More about Binary Options. Binomial Options Pricing Model: Read more about the Binomial Pricing Model. Black Scholes Options Pricing Model: A pricing model that is based on factors that include the strike price, the price of the underlying security, the length of time until expiration, and volatility. Read about the Black Scholes Pricing Model. The price or price range of the underlying security at which a strategy will break even, with no profits and no losses.

When the price of a security moves above an existing resistance level or below an existing support level. The expectation is that the security will continue to move in the prevailing direction. An individual or a company that executes orders to buy and sell financial instruments on behalf of clients. The charge from a broker for executing orders on behalf of clients. This is a strategy that can be used when the outlook on an underlying security is bullish. Learn how to use a Bull Butterfly Spread.

Bull Call Ladder Spread: Learn how to use a Bull Call Ladder Spread. A simple strategy, involving calls, which can be used when the expectation is that the underlying security will increase in price. Learn how to use a Bull Call Spread. This is an advanced strategy that can be used when the outlook on an underlying security is bullish.

Learn how to use a Bull Condor Spread. An expectation that an option, or any financial instrument, will increase in price. Strategies that can be used to profit from an upward move in the price of a financial instrument.

List of Bullish Strategies. A simple strategy, involving puts, which can be used when the expectation is that the underlying security will increase in price. Learn how to use a Bull Put Spread. An unconfirmed market movement which suggests a bull market, but is unconfirmed and ends up with the market moving downward. Learn how to use a Butterfly Spread. Buy to Close Order: An order that is placed when you want to close an existing short position through buying contracts that you have previously written.

Read more about the Buy to Close Order. Buy To Open Order: An order that is placed when you want to open a new position through buying contracts. Read more about the Buy to Open Order. This is a simple strategy that can be used to profit from an underlying security remaining neutral. Also known as a Time Call Spread. Learn how to use a Calendar Call Spread. Also known as a Time Put Spread. Learn how to use a Calendar Put Spread.

A type of spread that is created using multiple contracts with different expiration dates. Also referred to as a time spread. Read more about Calendar Spreads. Learn how to use a Calendar Straddle. Learn how to use a Calendar Strangle.

The process that takes place when the writer of calls is required to fulfill their obligation and sell the underlying security at the agreed strike price.

A type of option which grants the holder the right, but not the obligation, to buy the relevant underlying security at an agreed strike price. Read more about Calls. An advanced strategy that can be used for profit in a volatile market, when there is a bullish outlook. Learn how to use a Call Ratio Backspread. Learn how to use a Call Ratio Spread. The implied cost of using capital to purchase financial instruments based on interest incurred from borrowing that capital or interest lost from taking that capital from an interest bearing account.

A type of option in which any profits due to the holder at the point of exercise or expiration are paid in cash rather than an underlying security being transacted. Read more about Cash Settled Options. Tables that are used to show various information related to specific options. Read more about Chains. A type of option that allows the holder to choose whether it's a call or a put at some point during the term of the contract.

The point at the end of a trading day when the market closes and final prices are calculated. An order which is used to close an existing position. A type of order that combines multiple orders into one.