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EQUITY GLOSSARY |
| [A] |
| American Style Option: |
An option contract that can be exercised at any time between the date of purchase and the expiration date. Most exchange-traded options are American style. |
| Arbitrage: |
The simultaneous purchase and sale of identical financial instruments or commodity futures in order to make a profit where the selling price is higher than the buying price.
|
| Arbitrageur: |
An individual or company that takes advantage of momentary disparities in prices between markets which enables them to lock in profits because the selling price is higher than the buying price. |
|
| [B] |
| Backspread: |
A spread in which more options are purchased than sold and where all options have the same underlying and expiration date. Backspreads are usually delta neutral. |
| Basis: |
Basis is defined as the difference between the cash and futures prices i.e., Basis = Cash Price – Futures Price. If futures price of an asset is higher than its cash price, basis for the asset is negative. In contrary, if cash price of an asset is higher than its future price, basis for the asset if positive. For example, if cash BSE sensitive index is at 4500 level and 3 months futures on SENSEX is trading at 4800, basis is negative 300 points. Similarly, if futures index is trading at 4200, basis is positive 300 points.
Basis for one-month contract would be different from the basis for two or three months contract. Definition of basis is incomplete until we define the basis viz-a-viz a futures contract i.e., basis for one month contract, two months contract etc.
Negative basis reflects the upward expectations about the market i.e., cash market is expected to go up in future. In contrary, positive basis shows the downward expectation about the market i.e., cash market to go down in future.
With change in the expectations of the market, futures contract, which is trading at 4200 may turn to 4600 or vice versa i.e., positive basis may become negative or negative basis may become positive anytime during the life of the contract with change in the expectation of the market.
Further, whatever the basis is positive or negative, it turns to zero at maturity of the future contract i.e., there can not be any difference between one month futures price and cash index at the time of maturity/expiry of this one month contract.
We must understand that when current price of July 2001 BSE SENSEX index futures contract is 4000, it means market expects the cash index to settle at 4000 at the closure of the market on last Thursday of July 2001 (last trading day of the contract). Today, every operator in the market is trying to predict the cash index at a single point – at closure of the market on last trading day of the contract. As the futures price is the expected cash price, both futures and cash indices converge at maturity / expiry of the futures contract.
Indeed, on last day of trading of the futures contract, closing cash market prices are taken as settlement prices to close / settle all open positions at the maturity / expiry of the contract.
|
| Bear: |
An investor who acts on the belief that a security or the market is falling or is expected to fall. |
| Bear Call Spread: |
| A strategy in which a trader sells a lower strike call and buys a higher strike call to create a trade with limited profit and limited risk. A fall in the price of the underlying increases the value of the spread. Net credit transaction; Maximum loss = difference between the strike prices less credit; Maximum gain = credit; requires margin. |
| Bear Market: |
| A declining stock market over a prolonged period of time usually caused by a weak economy and subsequent decreased corporate profits. |
| Bear Put Spread: |
| A strategy in which a trader sells a lower strike put and buys a higher strike put to create a trade with limited profit and limited risk. A fall in the price of the underlying increases the value of the spread. Net debit transaction; Maximum loss = difference between strike prices less the debit; no margin. |
| Bid: |
| The highest price at which a floor brokers, trader or dealer is willing to buy a security or commodity for a specified time. |
| Bid and Ask: |
| The bid (the highest price a buyer is prepared to pay for a trading asset) and the asked (the lowest price acceptable to a prospective seller of the same security) together comprise a quotation, or quote. |
| Bid-asked Spread: |
The difference between bid and asked prices constitute the bid-asked spread.
|
| Bid Up: |
| Demand for an asset drives up the price paid by buyers. |
| Block Trade: |
| A trade so large (for example, 10,000 shares of stock or Rs.200,000 worth of bonds) that the normal auction market cannot absorb it in a reasonable time at a reasonable price. |
| Break-even: |
The point at which gains equal losses.
The market price that a stock or future must reach for an option to avoid loss if exercised.
For a call, the break-even equals the strike price plus the premium paid.
For a put, the break-even equals the strike price minus the premium paid. |
| Breakout: |
| A rise in the price of an underlying instrument above its resistance level or a drop below the support level. |
| Broad-based Index: |
| An index designed to reflect the movement of the market as a whole. (For example, SENSEX, NIFTY, S&P 100, the S&P 500, and the AMEX Major Market Index). |
| Broker: |
| An individual or firm which charges a commission for executing buy and sell orders. |
| Bull: |
| An investor who believes that a market is rising or is expected to rise. |
| Bull Call Spread: |
| A strategy in which a trader buys a lower strike call and sells a higher strike call to create a trade with limited profit and limited risk. A rise in the price of the underlying increases the value of the spread. Net debit transaction; Maximum loss = debit; Maximum gain = difference between strike prices less the debit; no margin. |
| Bull Market: |
| A rising stock market over a prolonged period of time usually caused by a strong economy and subsequent increased corporate profits. |
| Bull Put Spread: |
| A strategy in which a trader sells a higher strike put and buys a lower strike put to create a trade with limited profit and limited risk. A rise in the price of the underlying increases the value of the spread. Net credit transaction; Maximum loss = difference between strike prices less credit; Maximum gain = credit; requires margin. |
| Butterfly Spread: |
| The sale (purchase) of two identical options, together with the purchase (sale) of one option with an immediately higher strike, and one option with an immediately lower strike. All options must be the same type, have the same underlying and have the same expiration date. |
| Buy IV Sell IV: |
| Many options are spreads that have a buy option leg and a sell option leg. Buy IV is the implied volatility of the option leg with a buy component. Sell IV is the implied volatility of the option leg with a sell component. |
| Buy on Close: |
| To buy at the end of a trading session at a price within the closing range. |
| Buy on Opening: |
| To buy at the beginning of a trading session at a price within the opening range. |
| Buy Stop Order: |
| An order to purchase a security entered at a price above the current offering price triggered when the market hits a specified price. |
|
| [C] |
| Calendar Spread: |
A spread consisting of one long and one short option of the same type with the same exercise price, but which expire in different months. |
| Call Option: |
An option contract which gives the holder the right, but not the obligation, to buy a specified amount of an underlying security at a specified price within a specified time in exchange for a paying a premium. |
| Call Premium: |
The amount a call option costs. |
| Capital Gain: |
| The profit realized when a capital asset is sold for a higher price than the purchase price. |
| Capital Loss |
| The loss incurred when a capital asset is sold for a lower price than the purchase price. |
| Cash Account: |
| An account in which the customer is required to pay in full for all purchased securities. |
| Cash Dividend: |
| A dividend paid in cash to a shareholder out of a corporation's profits. |
| Class of Options: |
| Option contracts of the same type (call or put), style and underlying security. |
| Clearinghouse: |
| An institution established separately from the exchanges to ensure timely payment and delivery of securities. |
| Close: |
| The price of the last transaction for a particular security each day. |
| Closing Purchase: |
| transaction to eliminate a short position. |
| Closing Range: |
| The high and low prices recorded during the period designated as the official close. |
| Closing Sale: |
| A transaction to eliminate a long position. |
| Commission: |
| A service charge assessed by a broker and his/her investment company in return for arranging the purchase or sale of a security. |
| Commodity: |
| Any bulk good traded on an exchange (for example, metals, grains and meats). |
| Condor: |
| The sale or purchase of 2 options with consecutive exercise prices, together with the sale or purchase of 1 option with an immediately lower exercise price and 1 option with an immediately higher exercise price. |
| Consumer Price Index (CPI): |
| A measure of price changes in consumer goods and services. This index is used to identify periods of economic inflation or deflation. |
| Contract: |
| A unit of trading for a financial or commodity future, or option. |
| Correction: |
| A sudden decline in the price of a security after a period of market strength. |
| Covered Call: |
| A short call option position against a long position in an underlying stock or futures. |
| Covered Put: |
| A short put option position against a short position in an underlying stock or futures. |
| Credit Spread: |
| The difference in value between 2 options, where the value of the short position exceeds the value of the long position. |
| Cross Rate: |
| The current exchange rate between differing currencies. |
|
| [D] |
| Daily Range: |
The difference between the high and low price of a security in one trading day. |
| Day Order: |
An order to buy or sell a security which expires if not filled by the end of the day. |
| Day Trade: |
The purchase and sale of a position in the same day. |
| Day Trading: |
| An approach to trading in which the same position is entered and exited within one day. |
| Debit Spread: |
| The difference in value between 2 options, where the value of the long position exceeds the value of the short position. |
| Deep-in-the-Money: |
| A deep-in-the-money call option has a strike price well below the current price of the underlying instrument. A deep-in-the-money put option has a strike price well above the current price of the underlying instrument. Both primarily consist of intrinsic value. |
| Delayed Time: |
| Quotes from a data service provider which are delayed up to 20 minutes from real time quotes. |
| Delta: |
| The amount by which the price of an option changes for every dollar move in the underlying instrument. |
| Delta-Hedged: |
| An options strategy protecting an option against price changes in the option's underlying instrument by balancing the overall position delta to zero. |
| Delta Neutral: |
| A position arranged by selecting a calculated ratio of short and long positions that balance out to an overall position delta of zero. |
| Delta Position: |
| A measure of option or underlying securities delta. |
| Derivative: |
| Financial instruments based on the market value of an underlying asset. |
| Discount Brokers: |
| Brokerage firms that offer lower commission rates than full service brokers, but do not offer services such as advice, research and portfolio planning. |
| Divergence: |
| When 2 or more averages or indices fail to show confirming trends. |
| Dividend: |
| A sum of money paid out to a shareholder from the stock's profits. |
| Dow Jones Industrial Average (DJIA): |
| Used as an overall indicator of market performance, this average is composed of 30 blue chip stocks which are traded daily on the New York Stock Exchange. |
| Downside: |
| The potential for prices to decrease. |
| Downside Risk: |
| The potential risk one takes if prices decrease in directional trading. |
|
| [E] |
| End of Day: |
The close of the trading day when market prices settle. |
| Equilibrium: |
A price level in a sideways market equal-distance from the resistance and support levels. |
| European Style Option: |
An option contract that can only be exercised on the expiration date. |
| Exchange: |
| An area where an asset, option, future, stock or derivative is bought and sold. |
| Exchange Rate: |
| The price at which one country's currency can be converted into another country's currency. |
| Exercise: |
| Implementing an option's right to buy or sell the underlying security. |
| Exercise Price: |
| A price at which the stock or commodity underlying a call or put option can be purchased (call) or sold (put). |
| Expiration: |
| date and time after which an option may no longer be exercised. |
| Expiration Date: |
| The last day on which an option may be exercised. |
| Explosive: |
| An opportunity that can yield large profits with usually a limited risk in a short amount of time. |
| Extrinsic Value: |
| The price of an option less its intrinsic value. An out-of-the money option's worth consists of nothing but extrinsic or time value. |
|
| [F] |
| Fade: |
Selling a rising price or buying a falling price. |
| Fair Market Value: |
The value of an asset under normal conditions. |
| Fair Values: |
The theoretical value of what an option should be worth usually generated by an option-pricing model such as the Black-Scholes option-pricing model. |
| Fast Market: |
| A stock with so much volume that the order entry systems have difficulty processing all of the orders. |
| Financial Instruments: |
| The term used for debt instruments. |
| Fixed Delta: |
| A delta figure that does not change with the change in the underlying. A futures contract has a fixed delta of plus or minus 100. |
| Front Month: |
| The first expiration month in a series of months. |
| Fundamental Analysis: |
| An approach to trading research to predict futures and stock price movements based on a balance sheet and income statements, past records of earnings, sales, assets, management, products and services. |
| Futures: |
| All contracts covering the purchase and sale of financial instruments or physical commodities for future delivery. These orders are transacted on a commodity futures exchange. |
| Futures Contract: |
Agreement to buy or sell a set number of shares of a commodity or financial instruments in a designated future month at a price agreed upon by the buyer and seller. |
|
| [G] |
| Gamma: |
| The degree by which the delta changes with respect to changes in the underlying instrument's price. |
| Go Long: |
| To buy securities, options or futures. |
| Go Short: |
| To sell securities, options or futures. |
| Guts: |
| A strangle where the call and the put are in the money. |
|
| [H] |
| Hammering the Market: |
The intense selling of stocks by speculators who think the market is about to drop because they think prices are inflated. |
| Hedge: |
Reducing the risk of loss by taking a position through options or futures opposite to the current position they hold in the market. |
| High and Low: |
Refers to the high and low transactions prices that occur each trading day. |
| Historic Volatility: |
| A measurement of how much a contract's price has fluctuated over a period of time in the past; usually calculated by taking a standard deviation of price changes over a time period. |
| Holder: |
| One who purchases an option. |
|
| [I] |
| Illiquid Market: |
Market which has no volume that subsequently creates a lot of slippage due to lack of trading volume. |
| Index: |
An index is a group of stocks which can be traded as one portfolio, such as the S&P 500. Broad-based indexes cover a wide range of industries and companies and narrow-based indexes cover stocks in one industry or economic sector. |
| Index Options: |
Call options and put options on indexes of stocks are designed to reflect and fluctuate with market conditions. Index options allow investors to trade in a specific industry group or market without having to buy all the stocks individually. |
| Interest Rate: |
| The charge for the privilege of borrowing money, usually expressed as an annual percentage rate. |
| Inter-market Spread: |
| A spread consisting of opposing positions in instruments with two different markets. |
| In-the-Money: |
| If you were to exercise an option and it would general a profit at the time, it is known to be in the money. |
A "call" option is in-the-money if the strike price is less than the market price of the underlying security. A "put" option is in-the-money if the strike price is greater than the market price of the underlying security Intrinsic Value
The amount by which a market is in-the-money. Out-of-the-money options have no intrinsic value. Calls = underlying -strike price. Puts = strike price - underlying. |
| Iron Butterfly: |
| The combination of a long (short) straddle and a short (long) strangle. All options must have the same underlying and have the same expiration. |
|
| [L] |
| LEAPS: |
Long-term stock or index options which are available with expiration dates up to three years in the future. |
| Leg: |
One side of a spread. |
| Limit Move: |
The maximum daily price limit for an exchange traded contract. |
| Limit Order: |
| An order to buy a stock at or below a specified price or to sell a stock at or above a specified price. |
| Liquidity: |
| The ease with which an asset can be converted to cash in the marketplace. A large number of buyers and sellers and a high volume of trading activity provide high liquidity. |
| Long: |
| term used to describe the buying of a security, contract, commodity, or option. |
|
| [M] |
| Make a Market: |
A market maker stands ready to buy or sell a particular security for his/her own account to keep the market liquid. |
| Margin: |
A deposit contributed by a customer as a percentage of the current market value of the securities held in a margin account is thus the margin amount. This amount changes as the price of the investment changes. |
| Margin Account: |
A customer account in which a brokerage firm lends the customer part of the purchase price of a trade. |
| Margin Call: |
| A call from a broker signaling the need for a trader to deposit additional money into a margin account to maintain a trade. |
| Margin Requirements (Options): |
| The amount of cash an uncovered (naked) option writer is required to deposit and maintain to cover his daily position price changes. |
| Mark-to-Market: |
| The daily adjustment of margin accounts to reflect profits and losses. In this way, losses are never allowed to accumulate. |
| At the end of each business day the open positions carried in an account held at a brokerage firm are credited or debited funds based on the settlement price of the open positions that day. |
| Market Maker: |
| An independent trader or trading firm that is prepared to buy and sell shares or contracts in a designated market. Market makers must make a 2-sided market (bid and ask) in order to facilitate trading. |
| Market Order: |
| Buying or selling securities at the price given at the time the order reached the market. A market order is to be executed immediately at the best available price, and is the only order that guarantees execution. |
| Market Price: |
| The most recent price at which a security transaction took place. |
| Market Value: |
| The price at which investors buy or sell a share of common stock or a bond at a given time. Market value is determined by the interaction between buyers and sellers. |
| Momentum: |
| When a market continues in the same direction for a certain time frame, the market is said to have momentum. |
| Moving Averages: |
| The moving average is probably the best known, and most versatile, technical indicator. A mathematical procedure in which the sum of a value plus a selected number of previous values are divided by the total number of values. Used to smooth or eliminate t he fluctuations in data and to assist in determining when to buy and sell. |
|
| [N] |
| Naked Option: |
An option written (sold) without an underlying hedge position. |
| Naked Position: |
A securities position not hedged from market risk. |
| Narrowing the Spread: |
The closing spread between the bid and asked prices of a security as a result of bidding and offering. |
| NASDAQ: |
| National Association of Securities Dealers Automated Quotations system -- a computerized system providing brokers and dealers with price quotations for securities traded over-the-counter as well as for many New York Stock Exchange listed securities. |
| Near-the-Money: |
| An option with a strike price close to the current price of the underlying tradable. |
| Net Change: |
| The daily change from time frame to time frame. For example, the change from the close of yesterday to the close of today. |
| Net Profit: |
| The overall profit of a trade. |
| New York Stock Exchange (NYSE): |
| The largest stock exchange in the United States. |
|
| [O] |
| OEX: |
This term, pronounced as three separate letters, is Wall Street shorthand for Standard & Poor's 100 stock index. |
| Offer: |
The lowest price at which a person is willing to sell. |
| Offset: |
To liquidate a futures position by entering an equivalent but opposite transaction. To offset a long position, a sale is made; to offset a short position, a purchase is made. |
| On-the-Money: |
The option in question is trading at its exercise price (also referred to as at-the-money).
|
| Open Order: |
An order to buy or sell a security at a specified price, valid until executed or canceled.
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| Open Outcry: |
| A system of trading where an auction of verbal bids and offers is performed on the trading floor. This method is slowly disappearing as exchanges become automated. |
| Open Trades: |
| A current trades that is still held active in a customer's account. |
| Opening: |
| The period at the beginning of the trading session at an exchange. |
| Opening Call: |
| A period at the opening of a futures market in which the price for each contract is established by outcry. |
| Opening Price: |
| The range of prices at which the first bids and offers were made or first transactions were completed. |
| Opportunity Costs: |
The theoretical cost of using your capital for one investment versus another.
|
| Option: |
| A security that represents the right, but not the obligation, to buy or sell a specified amount of an underlying security (stock, bond, futures contract, etc.) at a specified price within a specified time. |
| Option Holder: |
| The buyer of either a call or put option. |
| Option Premium: |
| This is the price of an option. |
| Option Writer: |
| The seller of either a call or put option. |
| Order Flow: |
| The volume of orders being bought or sold on the exchanges. |
| Out-of-the-Money: |
| An option whose exercise price has no intrinsic value. |
| Out-of-the-Money Option (OTM): |
| A call option is out-of-the-money if its exercise or strike price is above the current market price of the underlying security. A put option is out-of-the-money if its exercise or strike price is below the current market price of the underlying security. |
| Overvalued: |
| term used to describe a security or option whose current price is not justified. |
|
| [P] |
| Paper Trading: |
The ability to simulate a trade without actually putting up the money for the purpose of gaining additional trading experience. |
| Par: |
The stated or "nominal" value of a bond (typically Rs.1,000) that is paid to the bondholder at maturity. |
| Perceived Risk: |
The theoretical risk of a trade in a specific time frame. |
| Position: |
| The total of a trader's open contracts. |
| Position Delta: |
| The sum of all positive and negative deltas in a hedged position. |
| Position Limit: |
| The maximum number of open contracts in a single underlying instrument. |
| Premium: |
| The amount of cash that an option buyer pays to an option seller |
| Put Option: |
| An option contract giving the owner the right, but not the obligation, to sell a specified amount of an underlying security at a specified price within a specified time. The put option buyer hopes the price of the shares will drop by a specific date while the put option seller (or writer) hopes that the price of the shares will rise, remain stable, or drop by an amount less than their profit on the premium by the specified date. |
|
| [Q] |
| Quote: |
The price being offered or bid by a market maker or broker-dealer for a particular security. |
| Quoted Price: |
Refers to the price at which the last sale and purchase of a particular security or commodity took place. |
|
| [R] |
| Ratio Back spread: |
A delta neutral spread where an uneven amount of contracts are bought and sold with a ratio less than 2 to 3. Optimally no net credit or net debit occurs. |
| Ratio Call Spread: |
A bearish or stable strategy in which a trader buys 2 higher strike calls and sell1 lower strike call. This strategy offers limited risk and unlimited profit potential. |
| Ratio Put Spread: |
A bullish or stable strategy ion which a trader buys 1 higher strike put and sells two lower strike puts. This strategy offers limited risk and unlimited profit potential. |
| Real-time: |
| Data received from a quote service as the prices change. |
| Resistance: |
| A price level the market has a hard time breaking through to the upside. |
| Return: |
| The income profit made on an investment. |
| Risk: |
| The potential financial loss inherent in the investment. |
| Risk Graph: |
| A graphic representation of risk and reward on a given trade as prices change. |
| Risk Profile: |
| A graphic determination of risk on a trade. This would include the profit and loss of a trade at any given point for any given time frame. |
|
| [S] |
| Securities and Exchange Commission (SEC): |
Commission created by Congress to regulate the securities markets and protect investors.
|
| Security: |
A trading instrument such as stocks, bonds, and short-term investments. |
| Selling Short: |
The practice of could borrow a stock, future or option from a broker and selling it because the investor forecasts that the price of a stock is going down. |
| Series (Options): |
| All option contracts of the same class that also have the same unit of trade, expiration date, and exercise price. |
| Shares: |
| Certificates representing ownership of stock in a corporation or company. |
| Short: |
| The selling of a security, contract or commodity not owned by the seller.. |
| Short Premium: |
| Expectation that a move of the underlying in either direction will result in a theoretical decrease of the value of an option. |
| Short Selling: |
| The sale of shares or futures that a seller does not currently own. The seller borrows them (usually from a broker) and sells them with the intent to replace what s/he has sold through later repurchase in the market at a lower price. |
| Speculator: |
| A trader who hopes to profit from a directional move in the underlying instrument. The speculator has no interest in making or taking delivery. |
| Spike: |
| A sharp price rise in one or two days indicating the time for an immediate sale. |
| Spread: |
The difference between the bid and the ask prices of a security.
A trading strategy in which a trader offsets the purchase of one trading unit against another. |
| Stock: |
| A share of a company's stock translates into ownership of part the company. |
| Stops: |
| Buy stops are orders that are placed at a specified price over the current price of the market. Sell stops are orders that are placed with a specified price below the current price. |
| Straddle: |
| A position consisting of a long (short) call and a long (short) put, where both options have the same strike price and expiration date. |
| Strangle: |
| A position consisting of a long (short) call and a long (short) put where both options have the same underlying, the same expiration date, but different strike prices. Most strangles involve OTM options. |
| Strike Price (Exercise Price): |
| A price at which the stock or commodity underlying a call or put option can be purchased (call) or sold (put) over the specified period. |
| Synthetic Long Call: |
| A long put and a long stock or future. |
| Synthetic Long Put: |
| A long call and a short stock or future. |
| Synthetic Long Stock: |
| A short put and a long call. |
| Synthetic Short Call: |
| A short put and a short stock or future. |
| Synthetic Short Put: |
| A short call and a long stock or future. |
| Synthetic Short Stock: |
| A short call and a long put. |
| Synthetic Straddle: |
| Futures and options combined to create a delta neutral trade. |
| Synthetic Underlying: |
A long (short) call together with a short (long) put. Both options have the same underlying, the same strike price and the same expiration date. |
| |
|
| [T] |
| Technical Analysis: |
A method of evaluating securities and commodities by analyzing statistics generated by market activity, such as past prices, volume, momentum and stochastic's. |
| Theoretical value: |
An option value generated by a mathematical option's pricing model to determine what an option is really worth. |
| Theta: |
The Greek measurement of the time decay of an option. |
| Tick: |
| A minimum upward or downward movement in the price of a security. For example, bonds trade in 32nds, while most stocks trade in eighths. |
| Time Decay: |
| The amount of time premium movement within a certain time frame on an option due to the passage of time in relation to the expiration of the option itself. |
| Time Premium: |
| The additional value of an option due to the volatility of the market and the time remaining until expiration. |
| Time Value (Extrinsic Value): |
| The amount that the current market price of a right, warrant or option exceeds its intrinsic value. |
| Triple Witching Day: |
| The third Friday in March, June, September and December when U.S. options, index options and futures contracts all expire simultaneously often resulting in massive trades. |
| Type: |
| The classification of an option contract as either a put or a call. |
|
| [U] |
| Uncovered Option: |
A short option position, also called a "naked" option, in which the writer does not own shares of underlying stock. This is a much riskier strategy than a covered option.
|
| Underlying Instrument: |
A trading instrument subject to purchase upon exercise. |
| Undervalued: |
A security selling below the value the market value analysts believe it is worth. |
| Upside: |
| The potential for prices to move up. |
| Upside break-even: |
| The upper price at which a trade breaks-even. |
|
| [V] |
| Variable Delta: |
A delta that can change due to the change of an underlying asset or a change in time expiration of an option. |
| Vega: |
The amount by which the price of an option changes when the volatility changes. Also referred to as volatility. |
| Volatility: |
A measure of the amount by which an underlying is expected to fluctuate in a given period of time. Volatility is a primary determinant in the valuation of options premiums and time value. There are two basic kinds of volatility, implied and historical (statistical). Implied volatility is calculated by using an option pricing model (Black-Scholes for stocks and indices and Black for futures). Historical volatility is calculated by using the standard deviation of underlying asset price changes from clos e to close trading going back 21 to 23 days. |
| Volatility Skew: |
| The theory that options that are deeply out-of-the-money tend to have higher implied volatility levels that at-the-money options. Volatility skew measures and accounts for the limitation found in most options pricing models and uses it to give the tra der an edge in estimating an option's worth. |
| Volume (Vol): |
| The amount of shares bought and sold on a stock exchange. |
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| [W] |
| Whipsaw: |
Losing money on both sides of a price swing. |
| Wide Opening: |
Refers to an unusually large spread between the bid and asked prices. |
| Witching Day: |
A day on which two or more classes of options and futures expire. |
| Writer: |
| An individual who sells an option. |
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| [Y] |
| Yield: |
The rate of return on an investment. |
|
| [Z] |
| Zeta – Vega: |
The percentage change in an options price per 1% change in implied volatility. |
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