Glossary of Options Trading & Stock Market Terms

Accumulation - That which results from a stock which shows higher volume on the upside than on the downside. Generally, this is a period of price equilibrium after a decline. The forces of demand become dominant, and the trend of the stock turns up.

Advance / Decline line - A line plotted on a cumulative basis that shows the difference between the number of stocks advancing and the number declining each day. A declining line marks the beginning of a downward trend but should be confirmed by other indicators before action is taken. A rising line is a sign that the market is moving up.

Arbitrage - the process by which professional traders simultaneously buy and sell the same or equivalent securities for a riskless profit.

Asked - As used in the phrase 'bid and asked' it is the price at which a potential seller is willing to sell. Another way of saying this is the asking price for what someone is selling.

Assign - to designate an option writer for fulfillment of his obligation to sell stock (call option writer) or buy stock (put option writer). The writer receives an assignment notice from the Options Clearing Corporation.

At the Money - An option which is selling at the strike price of the underlying index or stock.

Automatic Exercise - a protection procedure whereby the Options Clearing Corporation attempts to protect the holder of an expiring in-the-money option by automatically exercising the option on behalf of the holder.

Average Down - Buying additional shares of a stock as it declines in price.

Average Up - Buying additional shares as the price of the stock rises. A good technique with a winner.

Backspread - see Reverse Strategy.

Bearish -  An opinion  that expects a decline in price, either by the general market or by an underlying stock, or both.

Bear Spread - an option strategy that makes its maximum profit when the underlying stock declines and has its maximum risk if the stock rises in price. The strategy can be implemented with either puts or calls. In either case, an option with a higher striking price is purchased and one with a lower striking price is sold, both options generally having the same expiration date. See also Bull Spread.

Bear Trap - Any technically unconfirmed downward move that encourages investors to be bearish. It usually precedes strong rallies and often catches the unwary.

Beta - A figure that indicates the historical propensity of a stock price to move with the stock market as a whole. The lowest theoretical Beta is zero indicating no movement. The highest Beta is 2 indicating wild gyrations for small movements in the market.

Bid - The price at which a potential buyer is willing to buy. He is bidding the amount to purchase the security offered. As used in 'bid and asked' prices, the two prices give the current market for an option.

Box Spread - a type of option arbitrage in which both a bull spread and a bear spread are established for a riskless profit. One spread is established using put options and the other is established using calls. The spreads may both be debit spreads (call bull spread vs. put bear spread), or both credit spreads (call bear spread vs. put bull spread).

Break - Even Point-the stock price (or prices) at which a particular strategy neither makes nor loses money. It generally pertains to the result at the expiration date of the options involved in the strategy. A "dynamic" break-even point is one that changes as time passes.

Breadth - The net number of stocks advancing versus those declining. When advances exceed declines the breadth of the market is inclining. When the declines exceed advances the market is declining.

Breakout - What occurs when a stock price or average moves above a previous high resistance level or below a previous low support level. The odds are that the trend will continue.

Broad-Based-Generally referring to an index, it indicates that the index is composed of a sufficient number of stocks or of stocks in a variety of industry groups. Broad-based indices are subject to more favorable treatment for naked option writers.

Bullish - An opinion  in which one expects a rise in price, either by the general market or by an individual security.

Bull Spread - an option strategy that achieves its maximum potential if the underlying security rises far enough, and has its maximum risk if the security falls far enough. An option with a lower striking price is bought and one with a higher striking price is sold, both generally having the same expiration date. Either puts or calls may be used for the strategy.

Bull Trap - Any technically unconfirmed move to the upside that encourages investors to be bullish. Usually precedes important declines and often fools those who do not wait form confirmation by other indicators.

Butterfly Spread - an option strategy that has both limited risk and limited profit potential, constructed by combining a bull spread and a bear spread. Three striking prices are involved, with the lower two being utilized in the bull spread and the higher two in the bear spread. The strategy can be established with either puts or calls; there are four different ways of combining options to construct the same basic position.

Buying Panic - A period of time when buyers will buy at ever increasing price without regard to intrinsic value or fundamentals. Buying Panics are always terminal.

Calendar Spread - an option strategy in which a short-term option is sold and a longer-term option is bought, both having the same striking price. Either puts or calls may be used. A calendar combination is a strategy that consists of a call calendar spread and a put calendar spread at the same time. The striking price of the calls would be higher than the striking price of the puts. A calendar straddle would consist of selling a near-term straddle and buying a longer-term straddle, both with the same striking price.

Calendar Straddle or Combination-see Calendar Spread.

Call-an option which gives the holder the right to buy the underlying security at a specified price for a certain, fixed period of time.

Capitalization - The total amount of securities issued by a corporation. This may include: bonds, debentures, preferred stock, common stock and surplus.

Carrying Cost - the interest expense on a debit balance created by establishing a position.

Cash Based - Referring to an option or future that is settled in cash when exercised or assigned. No physical entity, either stock or commodity, is received or delivered.

CBOE - The Chicago Board Options Exchange; the first national exchange to trade listed stock options.

Churning - Unethical trading of a customer's account by a broker to create extra commissions. Churning is also when there is high volume with very little movement in price.

Class - a term used to refer to all put and call contracts on the same underlying security.

Closing Transaction - a trade that reduced an investor’s position. Closing buy transactions reduce short positions and closing sell transactions reduce long positions.

Collateral - the loan value of marginable securities; generally used to finance the writing of uncovered options.
Combination-any position involving both put and call options that is not a straddle.

Commodities - See Futures Contract.

Contingent Order - An order to buy stock and sell a covered call option that is given as one order to the trading desk of a brokerage firm. Also called a "net order." This is a "not held" order.

Contrary Opinion - The belief opposite that of the general public and/or Wall Street. It is most significant at major market turning points. An overall consensus of opinion, whether bullish or bearish, usually marks an extreme. An investor taking a contrary view will usually benefit in time.

Conversion Arbitrage - a riskless transaction in which the arbitrageur buys the underlying security, buys a put, and sells a call. The options have the same terms.

Converted Put - see Synthetic Put.

Convertible Security - a security that is convertible into another security. Generally, a convertible bond or convertible preferred stock is convertible into the underlying stock of the same corporation. The rate at which the shares of the bond or preferred stock are convertible into the common is called the conversion ratio.

Cover - to buy back as a closing transaction an option that was initially written.

Covered Call Write - a strategy in which one writes call options while simultaneously owning an equal number of shares of the underlying stock.

Covered Put Write - a strategy in which one sells put options and simultaneously is short an equal number of shares of the underlying security.

Covered Straddle Write - the term used to describe the strategy in which an investor owns the underlying security and also writes a straddle on that security. This is not really a covered position.

Crash Proof Advisors - Stock Market gurus using the latest automated system for buying and selling of stocks, options and other marketable securities trackable on computer available data.

Credit - Money received in an account. A credit transaction is one in which the net sale proceeds are larger than the net buy proceeds (cost), thereby bringing money into the account.

Day Trader - Buying or selling on the same day. This requires minimal margin but is best suited for professionals who pay no commissions.

Debit - An expense, or money paid out from an account. A debit transaction is one in which the net cost is greater than the net sale proceeds.

Deliver - to take securities from an individual or firm and transfer them to another individual or firm. A call writer who is assigned must deliver stock to the call holder who exercised. A put holder who exercises must deliver stock to the put writer who is assigned.

Delivery - The process of satisfying an equity call assignment or an equity put exercise. In either case, stock is delivered. For futures, the process of transferring the physical commodity from the seller of the futures contract to the buyer. Equivalent delivery refers to a situation in which delivery may be made in any of various, similar entities that are equivalent to each other (for example, Treasury bonds with differing coupon rates).

Delta - the amount by which an option’s price will change for a corresponding change in price by the underlying entity. Call options have positive deltas, while put options have negative deltas. Technically, the delta is an instantaneous measure of the option’s price change, so that the delta will be altered for even fractional changes by the underlying entity. Consequently, the terms "up delta" and "down delta" may be applicable. They describe the option’s change after a full 1-point change in price by the underlying security-either up or down. The "up delta" may be larger than the "down delta" for a call option, while the reverse is true for put options.

Delta Spread - A ratio spread that is established as a neutral position by utilizing the deltas of the options involved. The neutral ratio is determined by dividing the delta of the purchased option by the delta of the written option.

Depository Trust Corporation (DTC) - A corporation that will hold securities for member institutions. Generally used by option writers, the DTC facilitates and guarantees delivery of underlying securities if assignment is made against securities held in DTC.

Diagonal Spread - Any spread in which the purchased options have a longer maturity than do the written options as well as having different striking prices. Typical types of diagonal spreads are diagonal bull spreads, diagonal bear spreads, and diagonal butterfly spreads.

Discount - An option is trading at a discount if it is trading for less than its intrinsic value. A future is trading at a discount if it is trading at a price less than the cash price of its underlying index or commodity. See also Intrinsic Value and Parity.

Discount Arbitrage - A riskless arbitrage in which a discount option is purchased and an opposite position is taken in the underlying security. The arbitrageur may either buy a call at a discount and simultaneously sell the underlying security (basic call arbitrage) or may buy a put at a discount and simultaneously buy the underlying security (basic put arbitrage). See also Discount.

Discretion - See Limit Order and Market Not Held Order.

Dividend Arbitrage - In the riskless sense, an arbitrage in which a put is purchased and so is the underlying stock. The put is purchased when it has time value premium less than the impending dividend payment by the underlying stock. The transaction is closed after the stock goes ex-dividend. Also used to denote a form of risk arbitrage in which a similar procedure is followed except that the amount of the impending dividend is unknown and therefore risk is involved in the transaction.

Divisor - A mathematical quantity used to compute an index. It is initially an arbitrary number that reduces the index value to a small, workable number. Thereafter the divisor is adjusted for stock splits (price-weighted index) or additional issues of stock (capitalization weighted index).

Downside Protection - Generally used in connection with covered call writing, this is the cushion against loss, in case of a price decline by the underlying security, that is afforded by the written call option. Alternatively, it may be expressed in terms of the distance the stock could fall before the total position becomes a loss (an amount equal to the option premium), or it can be expressed as percentage of the current stock price.

Early Exercise (assignment) - The exercise or assignment of an option contract before its expiration date.

Equity Option - An option that has common stock as its underlying security.

Equity Requirement - A requirement that a minimum amount of equity must be present in a margin account. Normally, this requirement is $2,000, but some brokerage firms may impose higher equity requirements for uncovered option writing.

Equivalent Positions - Positions that have similar profit potential, when measured in dollars, but are constructed with differing securities. Equivalent positions have the same profit graph. A covered call write is equivalent to an uncovered put write, for example.

Escrow Receipt - A receipt issued by a bank in order to verify that a customer (who has written a call) in fact owns the stock and therefore the call is considered covered.

European Exercise - A feature of an option that stipulates that the option may only be exercised at its expiration. Therefore, there can be no early assignment with this type of option.

Ex-Dividend - The process whereby a stock’s price is reduced when a dividend is paid. The ex-dividend date (ex-date) is the date on which the price reduction takes place. Investors who own stock on the exdate will receive the dividend, and those who are short stock must pay out the dividend.

Exercise - To invoke the right granted under the terms of a listed options contract. The holder is the one who exercises. Call holders exercise to buy the underlying security, while put holders exercise to sell the underlying security.

Exercise Limit - The limit on the number of contracts which a holder can exercise in a fixed period of time. Set by the appropriate option exchange, it is designed to prevent an investor or group of investors from "cornering" the market in a stock.

Exercise Price - The price at which the option holder may buy or sell the underlying security, as defined in the terms of his option contract. It is the price at which the call holder may exercise to buy the underlying security or the put holder may exercise to sell the underlying security. For listed options, the exercise price is the same as the Striking Price.

Expected Return - A rather complex mathematical analysis involving statistical distribution of stock prices, it is the return which an investor might expect to make on an investment if he were to make exactly the same investment many times throughout history.

Expiration Date - The day on which an option contract becomes void. The expiration date for listed stock options is the Saturday after the third Friday of the expiration month. All holders of options must indicate their desire to exercise, if they wish to do so, by this date.

Expiration Time - The time of day by which all exercise notices must be received on the expiration date. Technically, the expiration time is currently 5:00 PM on the expiration date, but public holders of option contracts must indicate their desire to exercise no later than 5:30 PM on the business day preceding the expiration date. The times are Eastern Time.

Facilitation - The process of providing a market for a security. Normally, this refers to bids and offers made for large blocks of securities, such as those traded by institutions. Listed options may be used to offset part of the risk assumed by the trader who is facilitating the large block order.

Fair Value - Normally, a term used to describe the worth of an option or futures contract as determined by a mathematical model. Also sometimes used to indicate intrinsic value.

First Notice Day - The first day upon which the buyer of a futures contract can be called upon to take delivery.

Float - The number of shares outstanding of a particular common stock.

Floor Broker - A trader on the exchange floor who executes the orders of public customers or other investors who do not have physical access to the trading area.

Follow up Action - Any trading in an option position after the position is established. Generally, to limit losses or to take profits.

Fundamental Analysis - A method of analyzing the prospects of a security by observing accepted accounting measures such as earnings, sales, assets, and so on.

Futures Contract - A standardized contract calling for the delivery of a specified quantity of a commodity at a specified date in the future.

Good Until Canceled (GTC) - A designation applied to some types of orders, meaning that the order remains in effect until it is either filled or canceled.

Hedge - A transaction consisting of two or more separate transactions with the objective of providing a greater chance of making a profit, although perhaps a smaller one than with a single transaction.

Hedge Ratio - The mathematical quantity that is equal to the delta of an option. It is useful in facilitation in that a theoretically riskless hedge can be established by taking offsetting positions in the underlying stock and its call options.

Holder - The owner of a security.

Horizontal Spread - An option strategy in which the options have the same striking price, but different expiration dates.

Implied Volatility - A measure of the volatility of the underlying stock, it is determined by using prices currently existing in the market at the time, rather than using historical data on the price changes of the underlying stock.

Incremental Return Concept - A strategy of covered call writing in which the investor is striving to earn an additional return from option writing against a stock position which he is targeted to sell-possibly at substantially higher prices.

Index - A compilation of the prices of several common entities into a single number.

Index Option - An option whose underlying entity is an index. Most index options are cash-based.

Insider - Any person who directly of indirectly owns more that ten (10) percent of any class of stock listed on a national exchange or who is an officer or director of the company in question.

Institution - An organization, probably very large, engaged in investing in securities. Normally a bank, insurance company, or mutual fund.

In the Money - A term describing any option that has intrinsic value. A call option is in-the-money if the underlying security is higher than the striking price of the call. A put option is in-the-money if the security is below the striking price.

Intrinsic Value - The value of an option if it were to expire immediately with the underlying stock at its current price; the amount by which an option is in-the-money. For call options, this is the difference between the stock price and the striking price, if that difference is a positive number, or zero otherwise. For put options it is the difference between the striking price and the stock price, if that difference is positive, and zero otherwise.

Last Trading Day - The third Friday of the expiration month. Options cease trading at 3:00 PM Eastern Time on the last trading day.

Leg - A risk oriented method of establishing a two-sided position. Rather than entering into a simultaneous transaction to establish the position (a spread, for example), the trader first executes one side of the position, hoping to execute the other side at a later time and a better price. The risk materializes from the fact that a better price may never be available, and a worse price must eventually be accepted.

Letter of Guarantee - A letter from a bank to a brokerage firm which states that a customer (who has written a call option) does indeed own the underlying stock and the bank will guarantee delivery if the call is assigned. Thus the call can be considered covered. Not all brokerage firms accept letters of guarantee.

Leverage - In investments, the attainment of greater percentage profit and risk potential. A call holder has leverage with respect to a stock holder-the former will have greater percentage profits and losses than the latter, for the same movement in the underlying stock.

Limit - See Trading Limit.

Limit Order - An order to buy or sell securities at a specified price (the limit).

Listed Option - A put or call option that is traded on a national option exchange. Listed options have fixed striking prices and expiration dates.

Local - A trader on a futures exchange who buys and sells for his own account and may fill public orders.

Lognormal Distribution - A statistical distribution that is often applied to the movement of stock prices. It is a convenient and logical distribution because it implies that stock prices can theoretically rise forever but cannot fall below zero, a fact which is of course, true.

Long - To be long is to own something.

Major Channel - A series of high and low points, which when connected create parallel lines on a chart for a stock, market index or other derivative. Channels may move up, down or sideways.

Mania - see Buying Panic

Margin - To buy a security by borrowing funds from a brokerage house. The margin requirement-the maximum percentage of the investment that can be loaned by the brokerage firm-is set by the Federal Reserve Board.

Market Basket - A portfolio of common stocks whose performance is intended to simulate the performance of a specific index.

Market Maker - An exchange member whose function is to aid in the making of a market, by making bids and offers for his account in the absence of public buy or sell orders. Several market-makers are normally assigned to a particular security. The market-maker system encompasses the market-makers and the board brokers.

Market Not Held Order - Also a market order, but the investor is allowing the floor broker who is executing the order to use his own discretion as to the exact timing of the execution. If the floor broker expects a decline in price and he is holding a "market not held" buy order, he may wait to buy, figuring that a better price will soon be available. There is no guarantee that a "market not held" order will be filled.

Market Order - An order to buy or sell securities at the current market. The order will be filled as long as there is a market for the security.

Married Put and Stock-a put and stock are considered to be married if they are bought on the same day, and the position is designated at that time as a hedge.

Model - A mathematical formula designed to price an option as a function of certain variables-generally stock price, striking price, volatility, time to expiration, dividends to be paid, and the current risk-free interest rate. The Black-Scholes model is one of the more widely used models.

Naked Option - see Uncovered Option.

Narrow Based - Generally referring to an index, it indicates that the index is composed of only a few stocks, generally in a specific industry group. Narrow-based indices are NOT subject to favorable treatment for naked option writers.

Net Order - See Contingent Order.

Neutral - Describing an opinion that is neither bearish or bullish. Neutral option strategies are generally designed to perform best if there is little or no net change in the price of the underlying stock.

Non-Equity Option - An option whose underlying entity is not common stock; typically refers to options on physical commodities, but may also be extended to include index options.

Not Held - see Market Not Held Order.

Notice Period - The time during which the buyer of a futures contract can be called upon to accept delivery. Typically, the 3 to 6 weeks preceding the expiration of the contract.

Opening Transaction- A trade which adds to the net position of an investor. An opening buy transaction adds more long securities to the account. An opening sell transaction adds more short securities.

Open Interest - The net total of outstanding open contracts in a particular option series. An opening transaction increases the open interest, while any closing transaction reduces the open interest.

Option - The right to buy or sell specific securities at a specified price within a specified time. A put gives the holder the right to sell the stock, a call the right to buy the stock. In recent years options on specific stocks have been listed in several exchanges so that it is now possible to trade these instruments in the same way that the underlying stocks can be bought and sold.

Option Pricing Curve - A graphical representation of the projected price of an option at a fixed point in time. It reflects the amount of time value premium in the option for various stock prices, as well. The curve is generated by using a mathematical model. The delta (or hedge ratio) is the slope of a tangent line to the curve at a fixed stock price.

Options Clearing Corporation (OCC) - The issuer of all listed option contracts that are trading on the national option exchanges.

Out of the Money - Describing an option that has no intrinsic value. A call option is out-of-the-money if the stock is below the striking price of the call, while a put option is out-of-the-money if the stock is higher than the striking price of the put.

Over-the-Counter Option (OTC) - An option traded over-the-counter, as opposed to a listed stock option. The OTC option has a direct link between buyer and seller, has no secondary market, and has no standardization of striking prices and expiration dates.

Overvalued - Describing a security trading at a higher price than it logically should. Normally associated with the results of option price predictions by mathematical models. If an option is trading in the market for a higher price than the model indicates, the option is said to be overvalued.

Parity- Describing an in-the-money option trading for its intrinsic value: that is, an option trading at parity with the underlying stock. Also used as a point of reference-an option is sometimes said to be trading at a half-point over parity or at a quarter-point under parity, for example. An option trading under parity is a discount option.

Physical Option - An option whose underlying security is a physical commodity that is not stock or futures. The physical commodity itself typically a currency or Treasury debt issue-underlies that option contract.

Position - Specific securities in an account or strategy. A covered call writing position might be long 1,000 XYZ and short 10 XYZ January 30 calls. It also refers to facilitate; buy or sell a block of securities, thereby establishing a position.

Position Limit - The maximum number of put or call contracts on the same side of the market that can be held in any one account or group of related accounts. Short puts and long calls are on the same side of the market. Short calls and long puts are on the same side of the market.

Premium - For options, the total price of an option contract. The sum of the intrinsic value and the time value premium. For futures, the difference between the futures price and the cash price of the underlying index or commodity.

Present Worth - A mathematical computation that determines how much money would have to be invested today, at a specified rate, in order to produce a designated amount at some time in the future.
Price Weighted Index - A stock index which is computed by adding the prices of each stock in the index, and then dividing by the divisor.

Profit Range - The range within which a particular position makes a profit. Generally used in reference to strategies that have two break-even points-an upside break-even and a downside breakeven. The price range between the two break-even points would be the profit range.

Profit Table - A table of results of a particular strategy at some point in time. This is usually a tabular compilation of the data drawn on a profit graph.

Protected Strategy - A position that has limited risk. A protected short sale (short stock, long call) has limited risk, as does a protected straddle write (short straddle, long out-of-the-money combination).

Public Book (of orders) - The orders to buy or sell, entered by the public, that are away from the current market. The board broker or specialist keeps the public book. Market-makers on the CBOE can see the highest bid and lowest offer at any time. The specialist’s book is closed (only he knows at what price and in what quantity the nearest public orders are).

Put - An option granting the holder the right to sell the underlying security at a certain price for a specified period of time. See also Call.

Ratio Calendar Combination - A strategy consisting of a simultaneous position of a ratio calendar spread using calls and a similar position using puts, where the striking price of the calls is greater than the striking price of the puts.

Ratio Calendar Spread - Selling more near-term options than longer-term ones purchased, all with the same strike; either puts or calls.

Ratio Spread - Constructed with either puts or calls, the strategy consists of buying a certain amount of options and then selling a larger quantity of out-of-the-money options.

Ratio Strategy - A strategy in which one has an unequal number of long securities and short securities. Normally, it implies a preponderance of short options over either long options or long stock.

Ratio Write - Buying stock and selling a preponderance of calls against the stock that is owned.

Resistance - A term in technical analysis indicating a price area higher than the current stock price where an abundance of supply exists for the stock, and therefore the stock may have trouble rising through the price.

Return (on investment) - The percentage profit that one makes, or might make, on his investment.

Return If Exercised - The return that a covered call writer would make if the underlying stock were called away.

Return If Unchanged - The return that an investor would make on a particular position if the underlying stock were unchanged in price at the expiration of the options in the position.

Reversal Arbitrage - A riskless arbitrage that involves selling the stock short, writing a put, and buying a call. The options have the same terms.

Reverse Hedge - A strategy in which one sells the underlying stock short and buys calls on more shares than he has sold short. This is also called a synthetic straddle and is an outmoded strategy for stocks that have listed puts trading.

Reverse Strategy - A general name that is given to strategies which are the opposite of better known strategies. For example, a ratio spread consists of buying calls at a lower strike and selling more calls at a higher strike. A reverse ratio spread also known as a backspread consists of selling the calls at the lower strike and buying more calls at the higher strike. The results are obviously directly opposite to each other.

Risk Arbitrage - A form of arbitrage that has some risk associated with it. Commonly refers to potential takeover situations where the arbitrageur buys the stock of the company about to be taken over and sells the stock of the company that is effecting the takeover. See also Dividend Arbitrage.

Roll Down - Close out options at one strike and simultaneously open other options at a lower strike.

Roll Forward - Close out options at a near-term expiration date and open options at a longer-term expiration date.

Rolling - A follow up action in which the strategist closes options currently in the position and opens other options with different terms, on the same underlying stock.

Roll Up - Close out options at a lower strike and open options at a higher strike.

Rotation - A trading procedure on the option exchanges whereby bids and offers, but not necessarily trades, are made sequentially for each series of options on an underlying stock.

Secondary Market - Any market in which securities can be readily bought and sold after their initial issuance. The national listed option exchanges provided, for the first time, a secondary market in stock options.

Selling Climax - Exceptionally heavy volume created when panic-stricken investors dump stocks.Often this marks the end of a bear market and is a spot to buy.

Series - An option contracts on the same underlying stock having the same striking price, expiration date, and unit of trading.

Short (to be short) - Short Selling is normally a speculative operation undertaken in the belief that the prices of the shares will fall. It is accomplished by selling shares one does not own by borrowing stock from a broker. Most stock exchanges prohibit the short sales of a security below the price at which the last board lot was traded.

Short Covering - The process of buying back stock that has already been sold short.

SIPC - The Securities Investor Protection Corporation. Established by Congress to protect customers of brokerage firms.

Specialist - An exchange member whose function it is to both make markets-buy and sell for his own account in the absence of public orders-and to keep the book of public orders. Most stock exchanges and some option exchanges utilize the specialist system of trading.

Spread Order - An order to simultaneously transact two or more option trades. Typically, one option would be bought while another would simultaneously be sold. Spread orders may be limit orders, not held orders, or orders with discretion. They cannot be stop orders, however. The spread order may be either a debit or credit.

Spread Strategy - Any option position having both long options and short options of the same type on the same underlying security.

Standard Deviation - A measure of the volatility of a stock. It is a statistical quantity measuring the magnitude of the daily price changes of that stock.

Stop Limit Order - Similar to a stop order, the stop-limit order becomes a limit order, rather than a market order, when the security trades at the price specified on the stop.

Stop Order - An order, placed away from the current market, that becomes a market order if the security trades at the price specified on the stop order. Buy stop orders are placed above the market while sell stop orders are placed below.

Straddle - The purchase or sale of an equal number of puts and calls having the same terms.

Strategy - With respect to option investments, a preconceived, logical plan of position selection and follow-up action.

Strike Price - The price at which the buyer of a call can purchase the stock during the life of the option or the price at which the buyer of a put can sell the stock during the life of the option.
Subindex - see narrow-based index.

Suitable - Describing a strategy or trading philosophy in which the investor is operating in accordance with his financial means and investment objectives.

Support - A term in technical analysis indicating a price area lower than the current price of the stock, where demand is thought to exist. Thus a stock would stop declining when it reached a support area. See also Resistance.

Synthetic Put - A security which some brokerage firms offer to their customers. The broker sells stock short and buys a call, while the customer receives the synthetic put. This is not a listed security, but a secondary market is available as long as there is a secondary market in the calls.

Synthetic Stock - An option strategy that is equivalent to the underlying stock. A long call and a short put is synthetic long stock. A long put and a short call is synthetic short stock.

Technical Analysis - The method of predicting future stock price movements based on observation of historical stock price movements.

Terms - The collective name denoting the expiration date, striking price, and underlying stock of an option contract.

Theoretical Value - The price of an option, or a spread, as computed by a mathematical model.

Thin Market - A market for a stock in which there are comparatively few bids to buy or offers to sell, or both. Price fluctuations between transactions are usually larger that when the market is liquid.

Time Spread - see Calendar Spread.

Time Value Premium - The amount by which an option’s total premium exceeds its intrinsic value.

Topping Out - A peak point where the sellers begin to outnumber the buyers.

Total Return Concept - A covered call writing strategy in which one views the potential profit of the strategy as the sum of capital gains, dividends, and option premium income, rather than viewing each one of the three separately.

Tracking Error - The amount of difference between the performance of a specific portfolio of stocks and a broad-based index with which they are being compared. See market basket.

Trader - A speculative investor or professional who makes frequent purchases and sales.

Trading Limit - The exchange imposed maximum daily price change that a futures contract or futures option contract can undergo.

Treasury Bill/ Option Strategy - A method of investment in which one places approximately 90% of his funds in risk-free, interest-bearing assets such as Treasury bills, and buys options with the remainder of his assets.

Trend - The direction of a price movement. A trend in motion is assumed to remain intact until there is a clear change.

Type - The designation to distinguish between a put or call option.

Uncovered Option - A written option is considered to be uncovered if the investor does not have a corresponding position in the underlying security.

Underlying Security - The security which one has the right to buy or sell via the terms of a listed option contract.

Undervalued - Describing a security that is trading at a lower price than it logically should. Usually determined by the use of a mathematical model.

Variable Ratio Write - An option strategy in which the investor owns 100 shares of the underlying security and writes two call options against it, each option having a different striking price.

Vertical Spread - Any option spread strategy in which the options have different striking prices, but the same expiration dates.

Volatility - A measure of the amount by which an underlying security is expected to fluctuate in a given period of time. Generally measured by the annual standard deviation of the daily price changes in the security, volatility is not equal to the Beta of the stock.

Write - To sell an option. The investor who sells is called the writer.