Glossary of Terms

Glossary Of Terms

Accumulation – When stocks start moving sideways after a significant drop as investors start accumulating.

Adjusted Options – Non-standardized stock options with customized terms in order to price in major changes in the underlying stock’s capital structure. Read the full tutorial on Adjusted Options.

All-or-None (AON) Order – An order that must be completely filled or else it will not be executed. This is a useful order for option traders executing complex option strategies which needs to be precisely filled.

American-Style Option – An option contract that may 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 financial instruments in order to benefit from price discrepancies. Option traders frequently look for price discrepancies of the same option contract between different option exchanges, thereby benefiting from a risk free trade.

Ask Price- 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. You buy option contracts and stocks on their Ask price.

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 – When an option’s strike price is the same as the prevailing stock price.

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.

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

Bearish Options Strategies – Different ways to use options in order profit from a downwards move in the underlying market.

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.

Bid/Ask Spread – The difference between the prevailing bid and ask price. Generally, option contracts that are more liquid tend to have a tighter Bid/Ask Spread while option contracts that are less liquid and are thinly traded tend to have a wider Bid/Ask Spread.

Black-Scholes 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.

Box Spread – A complex 4 legged options trading strategy meant to take advantage of discrepanies in options prices for a risk-free arbitrage.

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

Bullish Options Strategies – Different ways to use options in order profit from an upwards move in the underlying market.