Financial Glossary: Options & Stock Market Terms

A comprehensive glossary of options trading, stock market, and financial terminology for investors and traders.

A

All-or-none order: An order that must be completely filled or not filled at all.

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. All stock options are American style.

American Stock Exchange (Amex): One of five U.S. exchanges that trade options.

Arbitrage: The process by which professional traders simultaneously buy and sell similar securities for a profit at theoretically zero risk. Risk in arbitrage occurs when historical relationships that were expected to hold no longer apply, or when expected events like an announced takeover fail to materialize.

Asked price: Lowest price a seller is willing to accept for a security (also called the “offer price”).

Asset: A resource that has economic value to its owner. Cash, accounts receivable, inventory, real estate, and securities are examples of assets.

Assignment: The receipt of an exercise notice by an option seller (writer) that obligates him or her to sell (in the case of a call) or purchase (in the case of a put) the underlying security at the specified strike price.

At-the-market order (also “market order”): An order to purchase or sell at the best available price. At-the-market orders must be executed immediately, and therefore take precedence over all other orders.

At the money: An option is “at the money” if its strike price is equal to the market price of the underlying security.

Automatic exercise: A protection procedure whereby the Options Clearing Corporation (OCC) attempts to protect the holder of an expiring in-the-money option on behalf of the trader by automatically exercising the option.

B

Bearish: An outlook that anticipates lower prices for a security.

Bearish credit spread: An option strategy implemented by selling a lower-strike call and purchasing a higher-strike call. This results in a net credit to the investor’s account.

Bearish debit spread: An option strategy implemented by selling a lower-strike put and purchasing a higher-strike put. This results in a net debit to the investor’s account.

Beta: A measure of how a stock moves more or less than the movement of a broader market index.

Bid price: The highest price a buyer is willing to pay for a security.

Bid/Ask quote: The latest available bid and asked prices for a particular option.

Bid/Ask spread: The difference in price between the latest available bid and asked quotations for a particular option.

Black-Scholes formula: This version of the option pricing model is used most often in the standardized pricing on the floors of the various options exchanges. Two of the creators won a Nobel Prize in 1997.

Bollinger Bands: Developed by John Bollinger, these bands are traditionally plotted above and below the 21-day moving average of a stock’s price.

Breakeven point: The stock price at which a particular option strategy has neither a gain nor a loss.

Bullish: An outlook that anticipates higher prices for a security.

Bullish credit spread: An option strategy implemented by selling a higher-strike put and purchasing a lower-strike put.

Bullish debit spread: An option strategy implemented by selling a higher-strike call and purchasing a lower-strike call.

Butterfly spread: Established by buying an in-the-money option, selling two at-the-money options, and buying an out-of-the-money option.

Buy to open: See “opening purchase.”

Buy to close: See “closing purchase.”

C

Calendar spread: The sale of an option with a nearby expiration and the purchase of an option with the same strike price, but a more distant expiration.

Call: An option contract that gives the buyer (or holder) the right to purchase, and gives the seller (or writer) the obligation to sell, a specified number of shares (typically 100) of the underlying stock at a given strike price on or before the expiration date.

Called away: The process by which a call option writer is obligated to surrender the underlying stock to the option buyer at a price equal to the strike price of the written call.

Call ratio backspread: A directional trade with a hedging component that allows a trader to book a small profit or break even in the event that the trade moves against them.

Capital: See “trading capital.”

Cash settlement option: An option that is exercised by a cash payment rather than the delivery of the underlying security.

Chicago Board of Trade (CBOT): Established in 1848, the world’s oldest derivatives exchange.

Chicago Board Options Exchange (CBOE): One of five U.S. options exchanges. In 1973, the CBOE created “listed options” that became the standard.

Chicago Mercantile Exchange (CME): The largest futures exchange in the U.S. and the second largest exchange in the world for trading futures and options on futures.

Class of options: Options contracts of the same type (call or put) and style (American, European, or capped) on the same underlying security.

Clearinghouse: An agency associated with an exchange that guarantees all trades, thus assuring contract delivery and/or financial settlement.

Closeout date: The predetermined date an options trader chooses to close a position if it hasn’t achieved its target profit.

Closing price: The price of a stock or option at the last transaction of the day.

Closing purchase (buy to close): A transaction where an investor who initially sold an option intends to liquidate his or her written position.

Closing sale (sell to close): A transaction where an investor who initially bought an option intends to liquidate his or her purchased position.

Collar: An options strategy that involves the purchase of a put option and the sale of a call option on the same pre-owned underlying stock.

Combination (position): Involves two different option positions and can take a variety of forms, including straddles and strangles.

Commission: A fee paid to a brokerage firm when entering or exiting a position.

Confirmation statement: A statement issued to the customer by the brokerage firm after an option position has been initiated or closed.

Consensus estimate: The average of all analysts’ earnings forecasts for a company’s quarterly results.

Contingency order: A type of order that specifies parameters that must be met before an order is filled.

Contract: A call or put option issued by the Options Clearing Corporation.

Contract size: The number of shares of the underlying asset covered by an options contract (usually 100 shares).

Contrarian theory: The philosophy that the crowd is most likely to be right when it is supportive of the current price trend and most likely to be wrong when it rejects the current price trend.

Convexity: A benefit of buying options where the option’s delta changes as the underlying stock moves, reducing risk on declines and increasing participation on advances.

Cover: Indicates the repurchase of previously sold contracts or shares, known as “covering” a short position.

Covered call writing: A short option position where the seller (writer) owns the number of shares of underlying stock represented by the sold options.

Credit spread: See “bearish credit spread” or “bullish credit spread.”

D

Day order: An order that automatically expires at the end of the session if not executed during the day it’s entered.

Day trader: Stock or options traders who usually initiate and offset a position during the same trading session.

Debit spread: See “bearish debit spread” or “bullish debit spread.”

Deep discount broker: A broker that offers stripped-down services in exchange for very low commission rates.

Deep in the money: An option that is so far in the money that it’s unlikely to move out of the money prior to expiration.

Deep out of the money: An option that is so far out of the money that it’s unlikely to move in the money prior to expiration.

Delta (also “neutral hedge ratio”): The percentage of price movement in the underlying stock that will be translated into the price movement in a particular option.

Delta hedging: The process of buying an increasing quantity of stock as it moves closer to the money relative to a sold call position.

Derivative security: A financial security whose value is derived in part from the value and characteristics of another security (the “underlying security”).

Diagonal spread: A strategy that utilizes options with different strike prices and expiration dates.

Discount broker: A broker whose commission rates are lower than typical full-service brokers.

Diversification: An investing or trading strategy that maintains positions in a variety of underlying stocks or stock options.

Dividend: Compensation paid by a company on a regular basis to existing shareholders.

Double top: A technical formation in which a stock makes two sets of significant highs at a similar price level.

Downtrend: A process of successive downward price movements in a security over time.

E

Efficient Market Hypothesis (EMH): The view that information is instantaneously absorbed into stock prices as soon as it’s released to the public.

Equity options: See “stock options.”

European-style option: An option contract that can be exercised only during a specified period just prior to the expiration date.

Exchange: An association of people who participate in the business of buying or selling securities.

Exchange Traded Funds (ETFs): Investments that contain a pool of securities representing a specific index. ETFs trade like stocks and are priced continually throughout the trading day.

Execution: The actual completion of a buy or sell order on the exchange floor.

Exercise: The process by which an option holder/owner invokes the terms of the option contract.

Exercise price: See “strike price.”

Expectational Analysis®: Pioneered by Bernie Schaeffer, an investment analysis approach that measures the beliefs of investors and speculators relative to technical trends and fundamental facts.

Expiration calendar: A calendar showing when various option classes cease trading and/or expire.

Expiration cycle: The cycle related to the dates on which options on a particular underlying security expire.

Expiration date: The date on which an option and the right to exercise it expire. For equity options, this is the Saturday following the third Friday of the month.

Expiration Friday: The last trading day prior to an option’s expiration date (typically the third Friday of the month for equity options).

F

Far out of the money: See “deep out of the money.”

Fill: The price at which an order is executed.

Fill or kill order: A trading order that is canceled unless executed within a designated time period.

Flat price risk: Taking a position either long or short that doesn’t involve spreading.

Float: The number of shares of a particular security available for public trading.

Foreign currency option: An option that conveys the right to buy or sell a specified amount of foreign currency at a specified price within a specified period.

Forward price: The price at which a security is expected to be trading at a defined point in the future.

Free market price: The price established by buyers and sellers in the free market with no restrictions.

Full fungibility: A right of option ownership in which an option buyer is free to sell his or her contract at any time on an options exchange.

Full-service broker: A broker who provides investment research, information, and advice, as well as purchasing and selling services.

Fundamental analysis: The study of specific factors that influence supply and demand and consequently prices in the marketplace.

Fundamental beta: The product of a statistical model to predict the fundamental risk of a security.

G

Gamma: The unit change in the delta of an option for each point change in the price of the underlying stock or index.

Gap: A term used by technicians to describe an opening price that is substantially higher or lower than the previous day’s closing price.

Good-til-cancelled (GTC): A qualifier for any kind of order extending its life indefinitely until it is either filled or cancelled.

H

Handle: The whole-dollar price of a bid or offer.

Hedge: A conservative strategy used to limit investment loss (or risk) by implementing a transaction that offsets an existing position.

Hedge fund: A fund that may employ a variety of techniques to enhance returns, such as both buying and shorting stocks.

Hedged portfolio: A portfolio consisting of a long position in stock, a short position in a call option, and a long position in a put option.

Historical volatility: A statistical measurement of a stock’s past price movement over a specific time period.

Holder: The buyer or owner of an option.

Horizontal spread: The simultaneous purchase and sale of two options that differ only in their expiration date.

I

Implied volatility: The assumption of the stock’s volatility that helps determine the option’s price — calculated as a plug-in factor after other options pricing components are taken into account.

In the money: An option is “in the money” when it has intrinsic value. A call is in the money when the stock price is greater than the strike price; a put is in the money when the stock price is lower than the strike price.

Index: A statistical compilation of several stocks that are related in some manner into one number.

Index fund: An investment fund designed to match the returns on a stock market index.

Index option: An option whose underlying security is a stock index, usually cash settled.

Initial margin: See “margin requirement.”

Initial public offering (IPO): A company’s first sale of stock to the public.

Institutional investors: Organizations that invest, including insurance companies, pension funds, mutual funds, and endowment funds.

International Securities Exchange (ISE): One of five U.S. exchanges that trade options, launched in May 2000 as the nation’s first entirely electronic options market.

Internet broker: A broker offering online trading over the World Wide Web.

Intraday Insights (also “Market Observations”): Daily reports focusing on notable stock and options activity, published throughout each trading day.

Intrinsic value: The difference between an in-the-money option’s strike price and the current market price of the underlying security.

L

Lambda: The ratio of change in option price relative to a small change in option volatility.

Last sale price: The price of a stock or option at the most recent transaction.

Last trading day: The final day under an exchange’s rules during which trading may take place in a particular options contract.

LEAPS: An acronym for Long-term Equity AnticiPation Securities — put or call options with expiration dates as far as 39 months into the future.

Leverage: The control of a larger number of shares with a smaller amount of capital — a major benefit of options trading.

Limit orders: A customer sets a limit on price or time of execution of a trade.

Limited risk: A concept describing the option buyer’s position — loss can be no greater than the premium paid.

Liquid or liquidity: The ease with which a purchase or sale can be made without disrupting existing market prices.

Listed options: Options traded on one or more of the options exchanges, fully fungible with an active secondary market.

Long position: A position where a person’s interest is as a net holder (contracts bought exceed contracts sold).

Longer-term option: See “LEAPS.”

M

Maintenance margin: See “margin call.”

Margin call: A call from the clearinghouse to a clearing member or from a broker to a customer to add funds to their margin account to cover an adverse price movement.

Margin requirement (for options): The amount an uncovered (naked) option seller is required to deposit and maintain.

Market maker: Those who maintain the best bid and ask prices on the trading floor of the options exchanges.

Market order: An order to buy or sell a security as soon as possible at the best available price.

Market Observation: See “Intraday Insights.”

Market Recap: A daily review of outperforming and underperforming sectors and trading activity, published after the market close.

Market timing: The process of buying and selling securities based on indicators that predict meaningful swings in price.

Married Put: The simultaneous purchase of stock and puts that represent an equivalent number of shares — a hedging strategy.

Maturity date: See “expiration date.”

Money market fund: A mutual fund that invests only in short-term securities, maintaining a net asset value of $1.00 per share.

Moving average: An average of prices over a specified time period, used by technicians to spot changes in trends.

Multiply listed options: Options on the same underlying security that are traded on more than one options exchange.

Mutual fund inflows/outflows: A measure of the amount of money investors put into or take out of mutual funds during a given time period.

N

Naked call writing: See “uncovered call options.”

Naked put writing: See “uncovered put options.”

NASDAQ: The largest U.S. stock market (by listings) with nearly 4,000 companies listed — an electronic quotation system for the OTC market.

Nasdaq-100 Trust (QQQ, or “cubes”): A unit investment trust that corresponds to the price and dividend yield performance of the Nasdaq-100 Index.

Nasdaq-100 Trust Volatility Index (QQV): An indicator of investor sentiment about the future volatility of the QQQ, expressed as an annualized standard deviation of returns.

NAV Effect: Asset growth in a mutual fund attributed to a change in net asset value, not investor sentiment.

Neutral hedge ratio: See “Delta.”

Neutral spread: An option spread created to profit from little net price movement of the underlying stock in either direction.

New York Stock Exchange (NYSE): Also known as the Big Board, the oldest U.S. stock exchange (founded in 1792).

No-load mutual fund: An open-end investment company whose shares are sold without a sales charge.

Nominal price (or “nominal quotation”): A price quotation calculated for futures or options during a period when no actual trading occurred.

O

Offering price: The lowest price a potential seller is willing to accept for a particular option (see also “asked price”).

On the money: See “at the money.”

Open interest: The number of outstanding options contracts on a given series for a particular underlying stock.

Open Interest Configuration: The number of outstanding contracts at all strikes for a given underlying security.

Opening price: The price of a stock or option at the first transaction of the day.

Opening purchase (buy to open): A transaction where an investor becomes the holder of an option, adding to the investor’s long position.

Opening sale (sell to open): A transaction where an investor becomes the writer of an option, adding to the investor’s short position.

Opportunity cost: A factor in the pricing of an option as a function of the prevailing level of interest rates.

Option: A contract that entitles the holder to buy or sell a number of shares (usually 100) of a particular common stock at a predetermined price on or before a fixed date.

Option pricing model: The conventional method to assess option prices, incorporating six factors: underlying security price, strike price, time until expiration, dividends, interest rates, and volatility.

Option spread: A position that results from two different options on the same security.

Option writing: Selling options in an opening transaction (see also “covered call writing” and “uncovered call/put options”).

Options Clearing Corporation (OCC): Founded in 1973, the world’s largest equity derivatives clearing organization.

Option contract: A contract that gives the buyer the right, but not the obligation, to buy (or sell) a financial asset at the exercise price within a specified time period.

Option exchange: Any of the five markets where options are traded: Amex, ISE, CBOE, Pacific, and Philly.

Option price: Also called the option premium — the price paid by the buyer for the right to buy or sell a security at a specified price in the future.

Options specialized broker: A broker that focuses on options trading and strategies.

Order: An instruction to purchase or sell an option, transmitted to a broker and then to the exchange floor.

Oscillators: Indicators of the movement of a stock’s price relative to an assumed cycle of highs and lows.

Out of the money: An option that has no intrinsic value. A call is out of the money if the strike price exceeds the stock price; a put is out of the money if the strike price is less than the stock price.

Overbought/oversold: A condition where a stock has reached the top of its cycle (overbought) or declined to where selling is exhausted (oversold).

P

Pacific Stock Exchange: One of five U.S. exchanges that trade options.

Philadelphia Stock Exchange: One of five U.S. exchanges that trade options.

Position: Established when an investor makes an opening purchase or sale of an option, or establishes an option spread.

Premium: The price of an option contract, determined in the competitive marketplace, paid by the buyer to the seller for the rights conveyed.

Put: An option contract that gives the buyer the right to sell, and the seller the obligation to buy, a specified number of shares (typically 100) of the underlying stock at a given strike price on or before expiration.

Put ratio backspread: A directional trade with a hedging component that allows a trader to book a small profit or break even if the trade moves against them — designed for a bearish outlook.

Put Writing (or “Put Selling”): A strategy that involves selling a put, placing upon the seller the obligation to buy the shares at the strike price if exercised.

Put/call ratio: The number of puts traded divided by calls traded each day, or put open interest divided by call open interest — a contrary indicator at extremes.

R

Ratio backspread: See “call ratio backspread” or “put ratio backspread.”

Regression channels: A best-fit trendline through a given set of data points, with upper and lower channels seeking to contain price action.

Relative Strength Index (RSI): Developed by Welles Wilder, an oscillator measuring oversold or overbought conditions, ranging from zero to 100.

Resistance: A price level where a stock tends to find significant selling pressure.

Return if called: The percentage gain a covered writer would achieve if the underlying stock is called away.

Rho: The sensitivity of an option to a one percentage-point change in interest rates.

Rolling out: Substituting an option of the same class and strike price with one of a later expiration.

Rolling up: Substituting a call option of the same class and expiration with one of a higher strike price.

Rydex Nova/Ursa Ratio: A ratio of assets in the bullish Nova fund and bearish Ursa fund, providing sentiment indication toward the broader market.

Rydex OTC/Arktos Ratio: A ratio of assets in the bullish OTC fund and bearish Arktos fund, providing sentiment indication toward the technology sector.

S

Schaeffer’s Put/Call Open Interest Ratio (SOIR): A ratio of open puts to open calls that expire in the front three months of options for a given underlying security.

SchaeffersResearch.com: The website for Schaeffer’s Investment Research, featuring free stock and options quotes, research, strategies, and market commentary.

Sell to close: See “closing sale.”

Sell to open: See “opening sale.”

Sentiment: The sum total of all bullish and bearish outlooks among all market participants on a particular stock, index, or the market.

Sentiment analysis: The analysis of crowd opinions to find extremes, based on the principle that expectations are often already factored into current prices.

Sentiment surveys: Polls measuring the percentage of investors, analysts, or strategists who are bullish, bearish, or neutral on various financial markets.

Series: All option contracts of the same class that have the same unit of trade, expiration date, and exercise price.

Short interest: The number of shares of a particular stock that bearish traders and investors have sold short.

Short-interest ratio: The number of days it would take to cover all existing short positions at the stock’s average daily trading volume.

Short position: A position where one’s interest is as a net seller or writer (contracts sold exceed contracts bought).

Short seller: An individual betting on a decline in a stock’s price by selling it short.

Short squeeze: Occurs when short sellers feel pressure from a rising stock, forcing them to buy back bearish positions and often resulting in dramatic price gains.

Short-life option: An option contract having from several weeks to a few months until expiration.

Slippage: A cost resulting from buying at the higher asked price and selling at the lower bid price.

SPDR (“Spyders”): Standard & Poor’s Depositary Receipts (SPY) that mirror the performance of the S&P 500 Index at approximately 1/10th the value.

Specialist: An exchange member whose function is to maintain a fair and orderly market in a given stock or option class.

Spread: A position consisting of two parts, each of which alone would profit from opposite directional price moves, executed simultaneously to limit risk.

S&P 100 Index (OEX): A capitalization-weighted index measuring the overall change in stock values of 100 of the largest U.S. companies.

S&P 500 Index (SPX): A capitalization-weighted index measuring the overall change in stock values of 500 of the largest U.S. companies.

Stock or equity option: A contract to buy or sell a stock at a predetermined price on or before a fixed date.

Stock split: The creation of a lower share price with additional shares of stock (e.g., 2-for-1 split).

Stop-loss: A price threshold that triggers the exit of a position when reached.

Stop-limit: A contingency order that can be placed to trigger an entry or exit if a stock trades at a certain price.

Straddle: The purchase or sale of an equivalent number of puts and calls on a given underlying stock with the same exercise prices and expiration dates.

Strangle: The purchase or sale