All In the Money - Options Trading
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Options Trading
Bearish Spreads
ED (Consolidated Edison Inc.)
Trade Date: September 22, 2008
A 97.5% Return
Covered Calls
CHK (Chesapeake Energy Corporation)
Trade Date: August 4, 2008
A 16.57% Return
Buy Straddles
BRO (Brown & Brown Inc.)
Trade Date: September 22, 2008
A 191.38% Return


Abandon - The act of not exercising or selling an option before its expiration.

Adjusted Option - An option resulting after an event such as a stock split (2 for 1 stock split), stock dividend, merger, or spin-off. An adjusted option may represent some amount other than the one hundred shares that is standard in the U.S. For example, after a 2 for 1 stock split, the adjusted option will represent 200 shares. For certain adjusted options, the multiplier of the option may be something other than the $100 that is standard in the U.S.

American Option - An option which may be exercised at any time prior to expiration. This right to exercise at any time during the option life, normally makes the option more expensive i.e. it has a higher premium. See also European Option.

Ask Price - The price a buyer is willing to pay (the price at which they will buy the instrument from you).

At The Money (ATM) - An option where the strike price is approximately equal to the underlying price.

Automatic Exercise - The Options Clearing Corporation (OCC) uses this procedure to exercise in-the-money options at expiration. Doing so protects the owner of the option from losing the intrinsic value of the option because of the owner’s failure to exercise. Unless instructed not to do so by the owner of the option (through the owner’s broker), The Options Clearing Corporation will exercise all expiring equity options that are held in customer accounts if they are in-the-money by 25 cents (3/4 of a point) or more.

Bear / Bearish - A person who believes (or the belief) that the price of a particular security or the market as a whole will go lower.

Bear Market - Any market in which instrument prices are trending lower.

Bearish Spread - In general terms, it is any Spread that theoretically profits when the market moves down. Specifically it refers to a Vertical Spread.

Bid Price - The price at which the seller is willing to make a deal.

Binomial Option Tree - Option Pricing method which assumes that the price of the underlying can go up or down by fixed multiples. Each price jump is assigned a probability and a tree of possible underlying prices is built. Working from the tree points or nodes at the option maturity date, the worth of the option can be back calculated until the option can be valued at the desired date. This technique is commonly used to price path dependent options, such as average rate and lookback options, where the option price is dependent on the underlying's price history. A more advanced technique, the Trinomial tree, as its name suggests, assumes that option prices cam move up, down or stay the same.

Black-Scholes Analysis - An analytical option pricing formula which is used to price European options on non-dividend paying equity.

Bull / Bullish - A person who believes (or the belief) that the price of a particular instrument or the market as a whole will go higher.

Bull Market - Any market in which prices are trending higher.

Call Option - A contract between a buyer and seller whereby the buyer acquires the right, but not the obligation, to buy a specified stock, commodity or index at a predetermined price on or before a predetermined date. The seller of the option assumes the obligation of delivering the underlying, should the buyer exercise the option.

Cash Account - A brokerage account in which all positions must be paid for in full. No short positions in stocks or options are allowed in a cash account.

Chicago Board Options Exchange (CBOE) - The Chicago Board Options Exchange is currently (2000) the largest option exchange in the U.S. Formed in 1973, the CBOE pioneered "listed options" with standardized contracts. Equity and index options are traded at the CBOE.

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

Contract - The basic unit of trading for options. An option, whether it’s a put or a call, is an agreement between two parties (the buyer and the seller) to abide by the terms of the option contract as defined by an exchange.

Cost Basis - The original price paid for a stock or option, plus any commissions or fees. It is used to determine capital gains or losses when the stock or option is sold.

Cover - Used to describe the purchase of an option or stock to exit or close an existing short position.

Covered Call - An option strategy composed of a short call option and long stock. For example, selling a number of calls while owning the underlying instrument to support the sale of those calls is a Covered Call position.

Delivery - When referring to stock options, delivery is the process of delivering stock after an option is exercised. If a trader is long a call, and he exercises that call, the person who is short that call must deliver the underlying stock to the trader who is long the call. If a trader is long a put, and he exercises that put, the trader will deliver the underlying stock to the person who is short that put. Actually, the delivery of the stock takes place through clearing firms under very specific terms and procedures established by the exchange where the option is traded. See assignment and exercise.

Delta - The rate of change of fair value of an option with respect to the change in price of the underlying. One of the Greeks.

Dividends - Regular payments made by companies to their stock holders, which can vary over time. These payments compensate the investors for not receiving interest which they might have received with other investments. Investors can also make a profit if the stock price increases over time. Future dividends can have an impact on the worth of an option as the equity or underlying price normally drops when a dividend payment is made.

Early Exercise - A feature of the American Style Option allows the buyer to exercise a call or put at any time prior to its expiration date.

European Option - An option which may only be exercised at expiration. See also American Option.

Exchange Traded Option (XT) - Exchange Traded Options are similar to normal options - they are traded on the floor of an exchange or electronically and have a market price like other financial instruments. Exchange Traded Options, are constructed to meet a clients needs, so prices for these can only be obtained by approaching a financial institution.

Exercise - The process by which the buyer of an option converts the option into a long position (in the case of a call) or a short position (in the case of a put).

Exercise Date - The date when the option matures. If the option has not been exercised by this date, it expires and ceases to have any value.

Expiration - The date and time after which the option may no longer be exercised.

Extrinsic Value - lso known as time value. Extrinsic value is the price of an option minus its intrinsic value. As out of the money options have no intrinsic value, their option premium is based entirely on extrinsic value.

Fair Value - An estimate of an options worth produced by a mathematical pricing model, such as the Black-Scholes Equation or a Binomial Option Tree based on certain assumptions about prevailing interest rates and option volatility.

Fundamental Research - Analysis of companies based on such factors as revenues, expenses, assets, debt level, earnings, products, management, and various financial ratios. As is relates to the economy, fundamental research includes analysis of gross national product, interest rates, unemployment, savings, etc.

Fundamentals - Factors that are used to analyze a company and its potential for success, such as earnings, revenues, cash flow, debt level, financial ratios, etc

Fungibility - Interchangeability resulting from identical characteristics or value. Options on a stock with the same expiration date, type (call or put) and strike price as standardized by the Options Clearing Corporation (OCC) are fungible. Therefore, dual-listed options traded on the CBOE can be liquidated or closed on the AMEX.

Gamma - The rate of change of an option's delta with respect to underlying price. The second derivative of option value with respect to underlying price. Also referred to as an options curvature.

Greeks - Commonly used to indicate an options value and how this value will change as market conditions change.

Holder - A person or entity who has bought or option or owns a security.

In The Money (ITM) - A call (put) whose exercise price is lower (higher) than the current price of the underlying; i.e. an option which, if exercised immediately would result in a profit for the buyer of the option.

Instrument - Any tradable commodity whose price can be obtained from a Financial Market.

Intrinsic Value - The amount by which the option is in the money. For a call, this is the current underlying price minus the exercise price. For a put, this is the exercise price minus the current underlying price. An out of the money has no intrinsic value. An in the money option, has some intrinsic value.

Last Trading Day - The last business day prior to the option's expiration date during which options can be traded. For equity options, this is generally the third Friday of the expiration month. Note: If the third Friday of the month is an exchange holiday, the last trading day will be the Thursday immediately preceding the third Friday.

Liquidity - A market in a financial instrument is said to have liquidity if the market is active with many participants buying and selling. In a liquid market, large transactions can be made without a substantial change in the instrument's price.

Listed Options - An exchange-approved call or put traded on an options exchange with standardized terms. Listed options are fully fungible. In contrast, over-the-counter (OTC) options usually have non-standard or negotiated terms.

Long Position - A position which in theory will increase in value should the underlying price increase. Opposite of a short position.

Margin - The amount of equity contributed by a customer (in the form of cash or margin-eligible securities) as a percentage of the current market value of the stocks or option positions held in the customer’s margin account.

Margin Account - An account that allows a customer to borrow money from a brokerage firm against cash and margin-eligible securities held in the customer’s margin account at that brokerage firm.

Margin Call - A brokerage firm's demand of a customer for additional equity in order to bring margin deposits up to a required minimum level. If the customer fails to deliver more equity in the account, the customer’s positions may be liquidated.

Market Order - An order to buy or sell stock or options that is to be executed as soon as possible at the best possible price. Compare to a limit order or stop order, which specifies requirements for price or time of execution.

Naked Call or Put - Refers to a short option position that doesn’t have an offsetting stock position. For example, a customer has a naked call if he sells a call without being long the quantity of stock represented by his short call or a long another call spread against it. He has a naked put if he sells a put without being short the quantity of stock represented by his short put or long another put spread against it. Compare to covered call or put.

Open Interest - he number of outstanding option contracts in a particular class or series. Each opening transaction (as opposed to a closing transaction) has a buyer and a seller, but for the calculation of open interest, only one side of the transaction is counted.

Open Order - An order that is active until it is either executed or cancelled.

Option - A call or a put, an option is a contract that entitles the buyer to buy (in the case of a call) or sell (in the case of a put) a number of shares of stock at a predetermined price (strike price) on or before a fixed expiration date.

Option Chain - A list of all options on a particular stock.

Option or Derivative - Any financial instrument who's price is based on or derived from the price of another financial instrument. Options can be categorized by the type of instrument they are based on - Equity Derivatives, Bond Options, and Interest Rate Derivatives.

Options Disclosure Document - OPTIONS DISCLOSURE DOCUMENT This document is published by The Options Clearing Corporation (OCC) and must be distributed to all customers intending to open an option account with a brokerage firm. The document itself outlines the risks and rewards of investing in options. The document is also called the OCC Risk Disclosure Document.

Out of the Money (OTM) - A call (put) whose exercise price is higher (lower) than the current price of the underlying.

Over The Counter Option - OTC or Over the Counter options are constructed specifically to meet certain financial requirements. A single OTC option will often only be traded once. This is in direct contrast to exchange traded options which are more liquid.

Position - The sum of a trader's open contracts or trades in a particular instrument.

Premium - The up front payment made by the buyer of an option for the right to exercise the option in the future. If the buyer of an option decides not to exercise the option, then the option will expire and the buyer will have simply lost the premium. The seller or writer of the option, will have gained the premium.

Put Option - A contract between a buyer and seller whereby the buyer acquires the right, but not the obligation, to sell a specified stock, commodity or cash index at a predetermined price on or before a predetermined date. The seller of the option assumes the obligation of taking delivery of the underlying, should the buyer exercise the option. Opposite of a Call Option.

Rho - The sensitivity of an options value to a change in interest rates. The first derivative of option worth with respect to interest rates.

Settlement - The conclusion of a stock or options trade through the transfer of the security (from the seller) or cash (from the buyer).

Settlement Date - Date on which a transaction must be settled. Buyers pay for securities with cash and sellers deliver securities.

Settlement Price - The closing price of a stock or option used for account statements and to calculate gains and losses in an account

Short Position - A position which in theory will increase in value if the underlying price falls. Opposite of a long position.

Straddle - An option position composed of calls and puts, with both calls and puts at the same strike. The options are on the same stock and of the same expiration, and either both long or both short with the quantity of calls equal to the quantity of puts (with the exception of a ratioed straddle). For example, a long 50 straddle is long 1*50 call and long 1*50 put. A long straddle requires a large move in the stock price, an increase in implied volatility or both for profitability, while a short straddle performs well when the stock is in during a tight trading range, decreased implied volatility or both.

Strike Price - The price at which the buyer and seller agree the underlying will be exchanged for, if the option is exercised. The deal is said to be struck at the selected level.

Symbols - Every corporation whose stock is traded on the NYSE, AMEX or NASDAQ, and every option traded on the CBOE, AMEX, PHLX, or PCX is given a unique identification symbol of up to five letters. Generally, these symbols abbreviate the corporation’s complete name and, in the case of options, their strike price, expiration date, and whether they are calls or puts.

Theta - The rate at which the option loses value as time to maturity decreases. Also referred to as the time decay of the option.

Transfer Agent - Usually a division of a large bank or other financial institution that keeps records of the names of registered shareholders of a particular stock, the shareholders’ addresses, the number of shares owned by each shareholder, and oversees the transfer of stock certificates from one shareholder to another.

Underlying - The instrument which the option is based or written on. This can be any tradable instrument which has a defined market price. Common examples include stocks, commodities and cash indexes.

Vega - The sensitivity of an options value to a change in volatility. Also known as Kappa. The first derivative of option worth with respect to volatility.

Volatility - One of the major factors in deciding an options worth. The degree to which the underlying price tends fluctuate over time. Historical volatility can be calculated by looking at price fluctuations over a specific period in the past. Implied volatility can be implied from option prices observed in the market place. This is achieved by using the Black-Scholes Equation, or one of its derivatives to calculate an option volatility which gives the current market option price. Historical and implied volatility can be used to estimate the price of OTC options.

Volume - The total number of shares of stock or option contracts traded on a given day.

Writer - An individual who sells an option short.

**All In The Money and H2O-iGroup is an Educational Information Network, which does not recommend nor offer to buy or sell securities. The publishers of All In The Money are not stock brokers. The information provided is obtained from sources deemed reliable, but without warranty as to its accuracy and should be used as a research tool. If you invest money in the stock market, you run a risk of losing your entire investment. Always consult your stock broker or appropriate professional.



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