ABANDON: The act of not selling an option before the expiration date.
ACCRUED INTEREST: This is the interest due on a bond proceeding from the date of the last interest payment all the way up to the settlement date. Any person wishing to buy the bond pays the market price of the bond as well as any accrued interest. On the contrary, anyone selling a bond will have the earnings increased by the amount of accrued interest.
ACQUISITION: An acquisition is when one company (A) buys enough stock of some other company (B) to take control of that company. When the buyout of company (B) is "hostile", the buying company (A) may offer a price for the other company's stock that is well above current market value. When this type of situation occurs, management of company (B) might ask for a better stock price, or in some situations try to join another company to counter company (A)'s takeover.
ADJUSTED OPTION: This is the end result of an option after an event such as a stock dividend, stock split (2 for 1 stock split), or merger. An adjusted option may represent some amount other than the one hundred shares that is standard in the U.S. On other adjusted options, the multiplier of the option may be something other than the $100 that is standard in the U.S.
AFFIDAVIT OF DOMICILE: A notarized affidavit implemented by the legal representative of an estate declaiming the residence of the decedent at the time of decease. This type of document would be needed if someone was transferring ownership of a security from a deceased person's name.
ALL-OR-NONE ORDER (AON): A buy or sell order that must be filled completely when executed or not filled at all. For example, if you send an AON order to your broker requesting 50 shares at $10, the broker will not fill the order unless he or she can obtain the 50 shares at $10.
AMERICAN DEPOSITORY RECEIPT (ADR): A negotiable certificate issued by a U.S. bank representing a specified number of shares in a foreign stock that is traded on a U.S. exchange. ADRs are denominated in U.S. dollars, with the underlying security held by a U.S. financial institution overseas. ADRs help lower administration and duty costs that would otherwise be levied on each transaction. ADRs have connection to currency volatility. ADRs facilitate the trading of foreign stocks in U.S. markets.
AMERICAN STOCK EXCHANGE (AMEX): This is one of the major stock and option exchanges in the U.S.
AMERICAN-STYLE OPTION: This is an option contract that can be exercised at any time of its life. The majority of exchange-traded options are American.
ARBITRAGE: This is the instantaneous purchase and sale of an asset in order to profit from a difference in the price. This usually takes place on different exchange or marketplace. It is also known as a "riskless profit".
ASK or OFFER: This is the opposite of bid, which is the price a buyer is willing to pay for a security, and the ask will always be higher than the bid. The terms "bid" and "ask" are used in covering stocks, bonds, currency and derivatives.
ASSIGNED: This is when you receive notification of an assignment on short options by The Options Clearing Corporation.
ASSIGNMENT: A statement received by an option writer stating that the option sold has been exercised by the purchaser of the option.
AT-THE-MONEY (ATM): The definition is when the price of the stock is at or near the strike price.
AUTOMATED ORDER ENTRY SYSTEM: Exchanges that have computerized systems designed to route orders directly to the trading pit. They are intended to speed the execution of orders.
AUTOMATED EXECUTION SYSTEM (AUTO EX): This is the computerized order routing system on the American Stock Exchange.
AUTOMATIC EXERCISE: This is when the Options Clearing Corporation (OCC) exercises in-the-money options at expiration. If not instructed otherwise by the owner of the option, The Options Clearing Corporation will exercise all expiring equity options that are held in customer accounts if they are in-the-money by .01 or more. It protects the owner of the option from losing the intrinsic value of the option due to failure to exercise.
BACK MONTHS: Refers to the classes of options with the expiration months that are further dated than the option class with the nearest expiration month.
BACKSPREAD: A type of options spread in which a trader holds more long positions than short positions. The options are all on the same stock and usually of the same expiration. An example of a backspread using call options would be selling one $45 call option for $5 and purchasing two $50 call options for $2.10 each. The trader in this case would benefit from a large move past $50 because he/she is holding more long options than short.
BANK GUARANTEE LETTER: This is a guarantee from a lending institution ensuring that the liabilities of a debtor will be met. In other terms, if the debtor fails to settle a debt, the bank will cover it.
BASIS: It is the difference between the cash price of the underlying commodity and the price of a futures contract based on that underlying commodity. More simply put it is the cash price subtracted from the futures price.
BASIS POINT: This is a unit that is equal to 1/100th of 1%, and is used to denote the change in a financial instrument. The relationship between percentage changes and basis points can be summarized as follows: 1% change = 100 basis points and 0.01% = 1 basis point.
BASIS RISK: The risk that offsetting investments in a hedging strategy will not experience price changes in entirely opposite directions from each other. This type of strategy can create excess potential for profits or losses.
BEAR: This is an investor who believes that a particular security or market is headed downward. Bears attempt to profit from a decline in prices.
BEAR MARKET: This is a market in which prices are trending lower.
BEAR SPREAD: Generally speaking, it is any spread that theoretically profits when the market moves down. In particular it refers to a vertical spread.
BETA: This is defined as a measure of the return on a stock relative to the return of an index. Beta is calculated using regression analysis, and you can think of beta as the tendency of a security's returns to respond to swings in the market. A beta of 1 indicates that the security's price will move with the market, a beta of less than 1 means that the security will be less volatile than the market. A beta of greater than 1 indicates that the security's price will be more volatile than the market.
BID: Defined as the price at which someone is willing to buy a security.
BID/ASK (OFFER) SPREAD: The difference between the bid and ask prices for a particular stock or option.
BINOMIAL MODEL: Most often used for American-style options, the model creates a binomial network to price an option, based on the stock price, days until expiration, strike price, interest rate, dividends, and the estimated volatility of the stock. This can also be defined as a mathematical model used to price options.
BLACK SCHOLES MODEL: A mathematical model used to price options. Mostly used for European-style options, the model prices options using a probability-weighted sum of stock and a bond. The model assumes that the price of heavily traded assets follow a geometric Brownian motion with constant drift and volatility. When applied to a stock option, the model incorporates the constant price variation of the stock, the time value of money, the option's strike price and the time to the options expiry.
BLOCK or BLOCK TRADE: A large amount of the same security bought or sold by institutional or other large investors. There is no official size designation constituting a block of securities, but a commonly used threshold is more than 10,000 equity shares or more than $200,000 of debt securities.
BLUE SKY LAWS: State regulations designed to protect investors against securities fraud by requiring sellers of new issues to register their offerings and provide financial details.
BOND: A debt investment in which an investor loans money to an entity (corporate or governmental) that borrows the funds for a defined period of time at a fixed interest rate. Bonds are often used by companies, municipalities, states and U.S. and foreign governments to finance projects and activities. Bonds are commonly referred to as fixed-income securities and are one of the three main asset classes, along with stocks and cash equivalents.
BOX SPREAD: A dual option position involving a bull and bear spread with identical expiry dates. This investment strategy provides for minimal risk. A box spread is a complicated strategy for the more advanced options trader.
BREAK-EVEN POINT(S): In general, the point at which profits equal losses. An option position's break-even point(s) are calculated for the options' expiration date. Option pricing models can be used to compute a position's break-even point before the options' ending date.
BROKER: An individual or firm that charges a fee or commission for executing buy and sell orders submitted by an investor. The role of a firm is to act as an agent for a customer and charge the customer a commission for its services.
BROKER LOAN RATE: An interest rate charged to brokerage firms from banks to finance the brokerage firm's customers' positions.
BROKER-DEALER: Technically, a broker is only an agent who executes orders on behalf of clients, whereas a dealer acts as a principal and trades for his or her own account. When a broker acts in the capacity of a dealer, he may buy and sell stocks and options for his own account, which can generate profits or losses.
BULL: This is someone who believes that the price of a particular security or the market as a whole will rise.
BULLISH: This can be a person who anticipates higher prices in a particular security or the market.
BULL MARKET: This is defined as any specific market in which prices are trending higher as a whole.
BULL SPREAD: This is a spread that profits when the market moves up. Also defined as an option strategy in which maximum profit is attained if the underlying security rises in price. Either calls or puts can be used. The lower strike price is purchased and the higher strike price is sold. The options have the same expiration date.
BUTTERFLY SPREAD: An option strategy combining a bull and bear spread. It uses three strike prices. The lower two strike prices are used in the bull spread, and the higher strike price in the bear spread. Both puts and calls can be used.
BUY ON CLOSE: This is defined as buying at the end of a trading session.
BUY ON OPENING: This is defined as buying at the beginning of a trading session at a price within the opening range.
BUYING POWER: The money an investor has available to buy securities. In a margin account, the buying power is the total cash held in the brokerage account plus maximum margin available. This can also be referred to as "excess equity."
BUY-TO-COVER: This is a buy order that closes or offsets a short position.
BUY-WRITE: A trading strategy that consists of writing call options on an underlying position to generate income from option premiums. Because the options position is covered by the underlying position, the downside risk is minimized.
CABINET OR "CAB" TRADE: This is defined as an option trade which is equal to one dollar. Cabinet trades only occur with far out-of-the-money options.
CALENDAR SPREAD (TIME SPREAD): An options or futures spread established by simultaneously entering a long and short position on the same underlying asset but with different delivery months. It's an option position composed of either only calls or only puts offset by the purchase or sale of an option with the same strike price. The options are on the same stock and have the same strike price.
CALL OPTION: This gives the buyer of the call the right, but not the obligation, to buy the underlying stock at the option's strike price. The seller of the call is obligated to deliver the underlying stock at the option's strike price when the buyer exercises his right.
CALLED AWAY: This is defined as the elimination of a contract due to the obligation of delivery. This occurs if an option is exercised
CANCELED ORDER: An order to purchase or sell a security that is canceled before it has been executed on an exchange.
CAPITAL GAIN OR CAPITAL LOSS: These are the earnings from when a security is held by a mutual fund and price rises above its purchase price and the security is sold. If the security continues to be held, the gain is then considered unrealized. A capital loss would be when the opposite takes place.
CARRY/CARRYING CHARGE: The cost associated with holding a financial instrument or storing a physical commodity over a distinct period of time. The interest cost is known as the carry.
CASH ACCOUNT: This is a basic account where you deposit cash to buy stocks, bonds, mutual funds, etc.
CASH MARKET: This is the market for a cash commodity or actual, as opposed to the market for its futures contract. At these locations, you can purchase the actual physical commodity rather than just the futures contract.
CHICAGO BOARD OF TRADE (CBOT): The CBOT is a commodity exchange established in 1848 that trades in both agricultural and financial contracts. The CBOT first traded only agricultural commodities such as wheat, corn and soybeans. Now, the CBOT offers options and futures contracts.
CHICAGO BOARD OPTIONS EXCHANGE (CBOE): This exchange focuses on options contracts for individual equities, indexes and interest rates. The CBOE is the world's largest options market. It captures a majority of the options traded.
CHICAGO MERCANTILE EXCHANGE (CME): This is the world's second-largest exchange for futures and options on futures and the largest in the U.S. where products such as butter, eggs, and poultry were traded. The CME trades futures on stock indices, foreign currencies, livestock, and Eurodollars.
CLEAR/CLEARING: This is defined as the process in which an organization acts as a mediator and presumes the role of a buyer and seller. Clearing is essential for the matching of all buy and sell orders in the market.
CLEARING BROKER-DEALER: This is a member of an exchange that functions as a link between an investor and a clearing corporation. A clearing broker helps to ensure the trade is settled appropriately and successfully.
CLEARING HOUSE: An agency or separate corporation of a futures exchange responsible for settling trading accounts, clearing trades, gathering and maintaining margin, regulating delivery and reporting trading data.
CLOSE (C), THE: This is the end of a trading session for that day.
CLOSING PRICE: Defined as the final price at which a security is traded on that day.
CLOSING TRANSACTION: This happens when someone takes the opposite position of the current position thereby getting out of a position in a particular stock or security.
COMBO: When an option position is composed of calls and puts of the same asset, with the same expiration, and most often the same strike price. In a combo the amount of call options is equivalent to the amount of put options.
COMMINGLING: Simply put as mixed funds, commingling is the mixing of customer securities with firm securities for a bank loan.
COMMISSION: The fee charged by a broker to a customer when a trade is executed either long or short of that certain security.
CONFIRMATION STATEMENT: This is the written acknowledgment by a broker signifying that a trade has been completed. This includes particulars such as the price, commission, fees and settlement terms of the trade.
CONSOLIDATED TAPE: An electronic system that continuously reports data on the sales volume and price of exchange traded securities. The consolidated tape is split into two different reporting systems. One reports on the New York Stock Exchange, and also trading prices and volume from other exchanges of stocks that are listed on the New York Stock Exchange. The other tape produces reports on the American Stock Exchange, and on the trading volume and prices of AMEX-listed stock in other exchanges and the over-the-counter market.
CONTINGENCY ORDER: This is an order that is executed only when evident conditions of the security being traded, have been completed. Possible conditions may include the price of another security or the completion of another order. Brokerages do not have to accept contingency orders, but some do.
CONTRACT: This is defined as the unit of trade for a financial or commodity future.
CONTRACT MONTH: This is the month in which a future or option contract expires and during which delivery may take place according to the terms of the contract.
CONTRACT SIZE: The number of shares of stock that an options contract or underlying futures contract would deliver if exercised. Contract sizes are generally 100 shares, unless the contract size has been adjusted.
CONVERSION: This is the procedure of converting an exchangeable security, such as a bond or preferred stock, into common stock.
CORRECTION: A reverse movement, usually negative, of at least 10% in a stock, bond, commodity or index. A correction is most often used to describe a decline after a period of rising prices. A correction is often considered beneficial for the long term health of the market, in that the prices had risen too quickly and the drop put them back to more realistic levels.
COST BASIS: The purchase price paid for a security, plus any commissions and fees. The cost basis is used to determine capital gains and capital losses for tax purposes.
COVER: To repurchase a previously sold contract, also known as a short cover.
COVERED WRITE OR COVERED CALL OR PUT/COVERED CALL OR PUT WRITING (SELLING): An options strategy whereby an investor holds a long position in an asset and writes (sells) call options on that same asset in an attempt to generate increased income from the asset. This is an attempt to take advantage of a neutral or declining stock. If the option expires unexercised, the writer keeps the premium. If the holder exercises the option, the stock must be delivered, but, because the writer already owns the stock, risk is limited. This is the opposite of an uncovered call, when the writer sells a call for a stock that he/she does not already own, a dangerous strategy with unlimited risk. This is an attempt to take advantage of a neutral or declining stock.
CREDIT SPREAD: A spread option position in which the price of the option sold is greater than the price of the option bought.
CURRENT MARKET VALUE (CMV): This is the present worth of a portfolio of securities, at latest market prices.
CUSTOMER: This can be a person, company, or other entity which buys goods and services produced by another person, company, or other entity.
DATE OF RECORD (RECORD DATE): The date set by the issuing company, on which an individual must own shares in order to be eligible to receive a declared dividend or capital gains distribution. Basically, a date of record ensures the dividend checks get sent to the right people.
DAY TRADE: A buy or sell order which automatically expires if it is not executed during that trading day.
DAY TRADING: This can be a very active stock, option, futures or forex trader who holds positions for a short time and makes several trades each day. Day traders are traders who are trying to make a career out of going long or short on a security multiple times in a day.
DEALER: An individual or entity, such as a securities firm, when it acts as a principal and stands ready to buy and sell for its own account or a clients account.
DEBIT BALANCE (DR): This is the amount that a business or individual owes a lender, seller, or factor. In other words, the amount of money a client owes his/her brokerage firm.
DEBIT SPREAD: A spread option position in which the price of the option bought is greater than the price of the option sold. The debit takes place when the price of the premium paid for the option purchased surpasses the premium received for the option sold.
DECK: The deck refers to the open orders held by floor brokers on an exchange. The deck consists of buy and sells orders for futures and options.
DECLARATION DATE: The date a company's directors meet to announce the date and amount of the next dividend payment. Once it is authorized, the dividend is known as a declared dividend and it becomes the company's legal liability to pay it.
DELAYED OPENING: A delay of the start of the trading day for a specific issue resulting from circumstances deemed serious enough by the relevant officials to warrant the delay. These circumstances may include a large influx or imbalance of buy and sell orders or a piece of corporate news that may have a significant effect on demand for the stock.
DELIVERY: This is the legal transfer and receipt of ownership rights. Delivery instrument covering a contract is tendered and received by the contract holder. Delivery can occur in option, or futures contracts. In most instances, the delivery of the actual underlying is rare and contracts are typically closed before settlement.
DELTA: The change in price of a call option for every one-point move in the price of the underlying security. This can sometimes referred to as the "hedge ratio".
DESIGNATED ORDER TURNAROUND (DOT): This is the electronic system that increases order efficiency by routing orders for listed securities directly to professionals on the trading floor, instead of through a broker. It can also be known as "SuperDOT.".
DISCOUNT RATE: The rate at which member banks may borrow short term funds directly from a Federal Reserve Bank. The discount rate is one of the two interest rates set by the Fed, the other being the Federal funds rate. The discount rate allows the Federal Reserve to control the supply of money and is used to assure stability in the financial markets.
DIVIDEND: A taxable payment declared by a company's board of directors and given to its shareholders out of the company's current or retained earnings, usually quarterly. Dividends are usually cash payments and can also be in the form of additional shares of company stock.
DIVIDEND YIELD: This is the annual percentage of return that received from dividend payments on stock. The yield a company pays out to its shareholders in the form of dividends. It is calculated by taking the amount of dividends paid per share over the course of a year and dividing by the stock's price.
DON'T KNOW (DK) NOTICE: In this kind of a trade, one of the parties is unaware of the trade. This is usually a result from lack of information or inaccurate trading instructions.
DOWN-TICK: This happens when a trade is made at a price lower than the previous trade.
DOWNTREND: This is the constant descending price movements in a financial market over duration of time.
DUAL/MULTIPLE LISTED: A company's securities are listed on more than one exchange the purpose of this is to add liquidity to the shares and give investors a greater choice in where they have the ability to trade their shares.
EARLY EXERCISE: This is defined as the exercise or assignment of an option prior to its maturity date.
EQUITY: This is ownership interest in a corporation in the form of common stock or preferred stock. It also refers to total assets minus total liabilities, in which case it is also referred to as shareholder's equity or net worth or book value.
EUROPEAN-STYLE OPTIONS: This is an option that can only be exercised at the maturity date. This can also be known as an option which can only be exercised for a short, specified period of time just prior to its expiration, usually a single day.
EXCHANGE: This is any organization, association or group which provides or maintains a marketplace where securities, options, futures, commodities or other derivatives can be traded. The exchange function is to ensure fair trading, as well as efficient distribution of price information for any securities trading on that exchange.
EX-DIVIDEND: A classification of trading shares when a declared dividend belongs to the seller and not the buyer. A stock will be given ex-dividend status if a person has been confirmed by the company to receive the dividend payment. A security becomes ex-dividend on the ex-dividend date (set by the NASD), which is usually two business days before the record date (set by the company issuing the dividend). In general, a stock's price drops the day the ex-dividend period starts, since the buyer will not receive the benefit of the dividend payout till the next dividend date.
EX-DIVIDEND DATE: This is the first day of the ex-dividend period. The ex-dividend date was created to allow all pending transactions to be completed before the record date. If an investor does not own the stock before the ex-dividend date, they will be ineligible for the dividend payout. For all pending transactions that have not been completed by the ex-dividend date, the exchanges automatically reduce the price of the stock by the amount of the dividend. This is done because a dividend payout automatically reduces the value of the company (it comes from the company's cash reserves), and the investor would have to take in that reduction in value (because neither the buyer nor the seller are eligible for the dividend).
EXECUTION: This is the completion of an order to buy or sell securities. Furthermore, brokers are required to give investors the best execution possible.
EXERCISE: This is the process of exchanging a right or warrant for the appropriate amount of stock. This can also be known as an action by a stockholder taking advantage of a privilege offered by a company or other financial institution. This includes warrants, options and other exotic financial instruments. When you exercise your stock option, you "trade in" your options for the actual stock. To apply the rights of an option, by buying (in the case of call options) or selling (in the case of put options) the underlying asset.
EXERCISE PRICE (STRIKE PRICE): This is the specified price on an option contract at which the contract may be exercised, whereby a call option buyer can buy the underlying or a put option buyer can sell the underlying. The exercise price is also known as the strike price in which the strike prices is mostly used to describe stock and index options, in which strike prices are fixed in the contract.
EXPIRATION CYCLE: This is defined as a sequence of dates on which the options of a particular security expire. All options (other than LEAPS) are placed in one of 3 cycles: January Cycle: Expirations in January, April, July, October (the first month of each quarter)
February Cycle: Expirations in February, May, August, November (second month)
March Cycle: Expirations in March, June, September, December (third month). Some options may have contracts in every month of the year, such as ETFs on the S&P 500. Options such as these are often used to hedge because they represent a group of stocks, the security is more constant.
EXPIRATION (EXPIRATION DATE): The day on which an options or futures contract is no longer valid and, therefore, ceases to exist. The expiration date for stock options listed in the U.S. is the third Friday of the expiration month (except when it falls on a holiday, in which case it is on Thursday).
FAST MARKET: This is a financial market experiencing high trading volume and increased volatility. During this time, brokers are not guaranteed to any fills if trading through a limit order.
FED FUNDS (FEDERAL FUNDS): Funds deposited by commercial banks at Federal Reserve Banks. It is designed to enable banks that are temporarily short of their reserve requirement to borrow reserves from banks with excess reserves.
FED FUNDS RATE: This is the interest rate that banks charge each other for the use of Federal funds. It changes daily and is an indicator of general interest rate trends.
FEDERAL OPEN MARKET COMMITTEE (FOMC): This is the branch of the Federal Reserve Board that determines the direction of monetary policy. The FOMC is composed of the Board of Governors, which has seven members, and five reserve bank presidents. The FOMC meets eight times per year to set key interest rates, such as the discount rate, and to decide whether to increase or decrease the money supply, which the Fed does through buying and selling government securities.
FEDERAL RESERVE BOARD (FRB): The 7-member Board of Governors that oversees Federal Reserve Banks, establishes monetary policy (interest rates, credit, etc.), and monitors the economic health of the country.It administers the supply of money and credit to control inflation and help promote a stable economy.
FENCE: An option and stock position that emulates a bull spread. On the other hand, a reverse fence can be an option and stock position that emulates a bear spread. Both types of options have the same expiration date.
FILL: Completing or satisfying an order for a security or commodity. It is the basic act in transacting stocks, bonds or any other type of security.
FILL OR KILL (FOK): This is an order that must immediately be filled in its entirety or, if this is not possible, totally canceled, which is similar to an all-or-none trade (AON).
FINANCIAL INDUSTRY REGULATORY AUTHORITY AUTOMATIC QUOTATION SYSTEM (FIRAAQ): An electronic information network that allows brokers and dealers to see the price quotations for the more actively traded common stock issued in the exchange.
FINANCIAL INDUSTRY REGULARY AUTHORITY (FINRA): This was the merger of the National Association of Securities Dealers and the New York Stock Exchange's regulation committee. The Financial Industry Regulatory Authority (FINRA) is responsible for governing business between brokers, dealers and the investing public. Consolidating these two regulators has helped reduce regulatory overlap and costs.
FLAT: A price which is neither rising nor falling; here also called sideways. In Forex, this is the condition of being neither long nor short in a particular currency, also known as "being square."
FLOAT: This is the total number of shares publicly available for trading. The float is calculated by subtracting the restricted shares from the outstanding shares. Float is also known as "free float".
FLOOR: A floor is the minimum allowable limit. An example of floor is when the issuing corporation declares a minimum acceptable amount at which an investment bank can purchase the securities.
FLOOR BROKER: This is an exchange member who executes orders on the floor of an exchange on behalf of others who do not have access to the trading floor, also referred to as a pit broker.
FLOOR TRADER: This is an exchange member who executes orders on the floor for his/her own account. This type of trader is also known as a local.
FREE CREDIT BALANCE: The cash held by a broker in a customer's margin account that can be withdrawn by the customer at any time without restriction. The credit balance is calculated as the total remaining money in a margin account after margin requirements.
FROZEN ACCOUNT: This is an account where no withdrawals or purchases can be charged. This occurs when the account holder fails to pay promptly for purchases charged to the account.
FULL POWER OF ATTORNEY: A legal document that allows someone other than the owner of an account, to execute trades, makes deposits or withdrawals for that customer.
FULL TRADING AUTHORIZATION: This is permission given by a customer granting his/her brokerage the power of attorney in making trades.
FUNDAMENTAL ANALYSIS: A method of security valuation which involves examining the company's financials and operations, especially sales, earnings, growth potential, assets, debt, management, products, and competition. The end goal of performing fundamental analysis is to generate a value that an investor can compare with the security's current price in hopes of figuring out what sort of position to take with that security.
FUNDAMENTALS: These include any factor that could be considered important to the understanding of a particular business. Examples of fundamentals include a company's growth, revenues, earnings, management, and capital structure.
FUNGIBILITY: The term is often used to apply to financial instruments which are identical in specifications. For example, options and futures contracts are highly fungible, since they are highly standardized arrangements. On the other hand, forwards and swaps are not, since they are customized arrangements. Instruments that are highly fungible tend to be very liquid, and so transaction costs tend to be low.
FUTURE(S) CONTRACT: Futures contracts are forward contracts, meaning they represent a pledge to make a certain transaction at a future date. A futures contract requires a standardized, transferable, exchange-traded contract that requires delivery of a commodity, bond, currency, or stock index, at a specified price, on a specified future date. Unlike options, futures convey an obligation to buy. The risk to the holder is unlimited, and because the payoff pattern is symmetrical, the risk to the seller is unlimited as well.
GAMMA: A measurement of how fast delta changes, given a unit change in the underlying futures price. Mathematically, gamma is the first derivative of delta and is used when trying to gauge the price of an option relative to the amount it is in or out of the money.
GOOD-TIL-CANCELED (GTC): An order to buy or sell which remains in effect until it is either executed or canceled (although brokers usually set a limit of 30 to 60 days, after which the broker will automatically cancel it or ask the customer if he/she wants to keep it active).
GREEKS: These are a collection of calculations which represent different characteristics of risk that a stock may exhibit, such as sensitivity to changes in price or interest rates. The measures include delta, gamma, theta, rho, and vega.
HANDLE: The whole dollar price, or stem, of a quote, it is usually used in the foreign currency and money markets.
HEDGE: An investment made in order to reduce the risk of price movements in a security, by taking an opposite position in a related security, such as an option or a short sale.
HIGH (H): This is the highest price that was paid for a security during a certain market session.
HISTORICAL VOLATILITY: This is defined as the realized volatility of a financial instrument over a given time period. Generally, this measure is calculated by determining the average deviation from the average price of a financial instrument in the given time period.
HOLDER: One who is in possession of a security, usually the purchaser and owner.
HYPOTHECATION: The pledging of securities or other assets as collateral to secure a loan, an example could be a debit balance in a margin account.
IMMEDIATE OR CANCEL (IOC): This is an order requiring that all or part of the order be executed immediately, most often seen when filling large orders can be difficult. These can include any fraction of the order not executed immediately are automatically cancelled.
IMPLIED VOLATILITY: A theoretical value designed to represent the volatility of the security underlying an option as determined by the price of the option. The factors that affect implied volatility are the exercise price, the rate of return, maturity date and the price of the option. Implied volatility increases when the market is bearish and decreases when the market is bullish. This is because of the common belief that bearish markets are more risky than bullish markets.
INDEX: This is a statistical indicator providing a representation of the value of the securities which constitute it. Indices often serve as barometers for a given market or industry and benchmarks against which financial or economic performance is measured.
INDEX OPTION: This is an option whose underlying security is an index. If exercised, settlement is made by cash payment, since physical delivery is not possible. Investors trading index options are essentially betting on the overall movement of the stock market as represented by a basket of stocks.
INITIAL MARGIN REQUIREMENT: The percentage of the purchase price of securities (that can be purchased on margin) that the investor must pay for with his or her own cash or marginable securities. According to Regulation T of the Federal Reserve Board, the initial margin is currently 50%. This level is only a minimum and some brokerages require you to deposit more than 50%.
INITIAL PUBLIC OFFERING (IPO): The Initial Public Offering is the first sale of stock by a company to the public.
INSTITUTIONAL INVESTORS: Entity with large amounts to invest, such as investment companies, mutual funds, brokerages, insurance companies, pension funds, investment banks and endowment funds. Institutional investors are covered by fewer protective regulations because it is assumed that they are more knowledgeable and better able to protect themselves.
INTEREST: The fee charged by a lender to a borrower for the use of borrowed money, usually expressed as an annual percentage of the principal; the rate is dependent upon the time value of money, the credit risk of the borrower, and the inflation rate.
INTEREST RATE: This is a rate which is charged or paid for the use of money.
INTEREST RATE RISK: This includes the possibility of a reduction in the value of a security, especially a bond, resulting from a rise in interest rates. This risk can be condensed by diversifying the durations of the fixed-income investments that are held at a given time.
IN-THE-MONEY (ITM): This can be a situation in which an option's strike price is below the current market price of the underlier (for a call option) or above the current market price of the underlier (for a put option). In other words, this is when your stock option is worth money and you can turn around and sell or exercise it for a profit. INTRINSIC VALUE: This is the actual value of a security, as opposed to its market price or book value. The intrinsic value includes other variables such as brand name, trademarks, and copyrights that are often difficult to calculate and sometimes not accurately reflected in the market price.
INVESTOR: This is an individual who commits money to investment products with the expectation of financial return. The primary concern of an investor is to minimize risk while maximizing return.
IRON BUTTERFLY SPREAD: This is an options strategy that is created with four options at three consecutively higher strike prices. The two options located at the middle strike create a long or short straddle (one call and one put with the same strike price and expiration date) depending on whether the options are being bought or sold.
IRON CONDOR SPREAD: This is an advanced options strategy that involves buying and holding four different options with different strike prices. The iron condor is constructed by holding a long and short position in two different strangle strategies. A strangle is created by buying or selling a call option and a put option with different strike prices, but the same expiration date.
ISSUE: This is stock or bond which has been offered for sale by a corporation or government entity, usually through an underwriter or in a private placement.
ISSUER: This is a company or municipality offering (or having already offered) securities for sale to investors. Examples include corporations, investment trusts, and government entities.
JOINT ACCOUNT: This is defined as a brokerage account that is owned by two or more people.
JOINT TENANTS (JT): There are two types of joint tenant accounts: 1) Joint Tenants with Rights of Survivorship - all tenants have an equal right to the account's assets and are afforded survivorship rights in the event of the death of another account holder. 2) Joint Tenants in Common - in the event of the death of one party, a surviving tenant of the account does not necessarily acquire the rights (and account assets) of the deceased person. Rather, each tenant in the account can stipulate in a written will how his/her assets will be distributed upon his/her death.
JUNK BOND (HIGH-YIELD BOND): A high-risk, non-investment-grade bond with a low credit rating, usually BB or lower; as a consequence, it usually has a high yield.
KEOGH PLAN: A tax-deferred qualified retirement plan for self-employed individuals and unincorporated businesses, this plan is also referred to as self-employed pension or an HR (10) plan. Keogh plans can invest in the same set of securities as 401(k) s and IRAs, including stocks, bonds, certificates of deposit and annuities. KNOW YOUR CUSTOMER: A guideline stated or implied by various securities regulatory bodies that requires brokers determine the suitability of investments for customers before making recommendations. It is also called Rule 405 or Suitability Rules.
LAST (PRICE): This is the closing price of a stock or option that results in the last transaction for a trading session.
LAST TRADING DAY: The final business day scheduled for a specific options expiration date during which, an option can be traded. The last trading day for equity options is usually the third Friday of the expiration month. Please note: If the third Friday of that month is an exchange holiday, the last trading day will then be the Thursday prior to the third Friday.
Long-term Equity AnticiPation Securities (LEAPS): LEAPS are call or put options that are publicly traded contracts with expiration dates that are longer than one year. These LEAPS function exactly like any other, shorter-term exchange-traded option.
LEG(S) (LEGGING): This is a term describing one order entry technique used by brokers involving an option position. An example is when a broker attempts to execute an option straddle order as two separate transactions. The likelihood for profit and loss can occur though the fluctuating of price for that specific option. Note: Legging is a higher-risk method of establishing a spread position.
LEVERAGE: This is the ability to control a larger sum of money or assets with a smaller sum of money or assets. If prices move favorably for a leveraged position, it increases the potential of profits to be larger than on an unleveraged position. Conversely, if prices move against a leveraged position, the losses can also be larger than on an unleveraged position, but not necessarily with an options position. Leverage can be created through options, futures, margin and other financial instruments. A long option position is leveraged because it "manages" a large number of shares with less money than it would take to maintain a position with the same number of shares.
LIMIT MOVE: Relating to futures markets, a limit move is the largest amount of change that the price of a commodity futures contract is allowed to go through. It is not possible to trade a futures contract at a price either above or below the futures contract price after a limit move. The limit price is set by the exchange on which the futures contract trades and approved by the Commodity Futures Trading Commission (CFTC).
LIMIT (PRICE) ORDER: This is an order that has a limit on the price, the time of execution, or both. A limit order to buy is usually placed below the current ask price. A Limit order to sell is usually placed above the current bid price.
LIMITED POWER OF ATTORNEY (LPOA): An authorization giving someone other than the beneficial owner of an account the discretion to perform certain investment decisions regarding functions in a client's account.
LIMITED TRADING AUTHORIZATION: This authorization, usually provided by a limited power of attorney, grants an agent or broker, the trading privileges in an account. These privileges given through the limited trading authorization allows the agent to act on behalf of an investor, but does not allow for the disbursement of account funds. Which limits the agent or broker to purchases and sales; withdrawals from a clients account are not allowed.
LIQUIDATION: This can be any transaction that offsets or closes out a long or short position regarding a stock or option.
LIQUIDITY: The ease with which a stock or option can be bought or sold in the market without significantly affecting their price.
LIQUIDITY RISK: This is the potential that an investor is not able to buy or sell a security when desired stemming from the lack of marketability of an investment.
LISTED OPTIONS: A call or put option that is sold on a registered exchange with standardized terms. All listed options have stated exercise prices and expiration dates.
LISTED STOCK: This is the stock of a corporation that has been accepted for trading purposes, and recognized on a securities exchange.
LOAN CONSENT AGREEMENT: An agreement permitting a brokerage firm to lend margined securities to other brokers; this agreement is between a brokerage firm and its margin customer.
LOAN VALUE: This is the maximum amount of money that can be borrowed in a margin account at a brokerage firm using eligible securities as collateral.
LOCKED LIMIT: Refers to a futures market that has moved its daily maximum amount and no one is willing to buy or sell.
LONG: In the context of options, going long is the buying of an options contract. This can also include the buying of a security such as a stock, commodity or currency, with the expectation that the security will rise in value. Note: Opposite of short.
LONG HEDGE: The strategy of buying puts as protection against the decline in the value of long securities.
LONG MARKET VALUE (LMV): The current market value of stocks held (i.e. having a long position) in a brokerage account, calculated on a daily basis.
LOT: This can also be a contract; the consistent quantity of a financial instrument set by an exchange. For exchange-traded securities, a lot might represent the minimum quantity of that security that can be traded.
LOW (L): "L" represents the low price of the session.
MAINTENANCE MARGIN: This is the minimum amount of equity, or margin-sufficient securities that must be maintained in an account to maintain a particular position. If a customer's equity in his/her account drops to, or under, the maintenance margin level, the account may be frozen or liquidated until the customer deposits more money or margin-sufficient securities in the account to bring the equity above the maintenance margin level.
MARGIN: The amount of equity added by a customer as a percentage of the current market value of the stocks or option positions held in the customer's margin account.
MARGIN ACCOUNT: This is a brokerage account in which the broker lends the customer cash to purchase securities. The Federal Reserve limits margin borrowing to at most 50% of the amount invested. Some brokerages have even stricter requirements, especially for volatile stocks.
MARGIN BALANCE: The amount a customer has borrowed, using equity or margin-sufficient securities as collateral, in his/her margin account.
MARGIN CALL: A broker's demand of an investor for additional equity in order to bring the margin deposits up to its required minimum level. Also called a "fed call" or "maintenance call" If the customer fails to deliver more equity to the account, their positions may be liquidated.
MARGIN-ELIGIBLE SECURITIES: These are securities that can be used as collateral in a margin account. Options are not margin-eligible securities.
MARGIN REQUIREMENT: The minimum amount of equity required for an investor to deposit in an account to begin or maintain a position in stock or options.
MARKET: This is a quote that is a bid and ask price for a stock or option
MARKET ARBITRAGE: This is the instantaneous purchase and sale of the same security in different markets to take advantage of price disparity between the two markets.
MARKET IF TOUCHED (MIT): This is a type of order that becomes a market order if and when a specific price is reached. A buy MIT order is placed below the market; and a sell MIT order is placed above the market. The order is submitted at the first available price after the specified price is reached.
MARKET MAKER: This is a term for a trader at an exchange who trades for his own account. They compete with each other to provide the best bid and ask prices for options to the public.
MARKET ON CLOSE (MOC): A buy or sell order for stock or options at the end of the trading session. This order is to be executed at a price within the closing range of prices. Market on close orders must be placed at least 45 minutes before the close of that trading day.
MARKET (PRICE) ORDER: A buy or sell order in which the broker is to execute the order at the best price currently available. This is also called at the market. The Market order differs from other orders such as a limit order or stop order, because these orders specify requirements for the price or time of execution.
MARK-TO-MARKET: This is the daily recording of the price or value of a security, portfolio, or account, to calculate profits and losses or to confirm that margin requirements are being met.
MARRIED PUT: This is an option strategy to purchase a put option and the underlying stock on the same day. This is done to protect against depreciation in the stock's price.
MERGER: This is the act of combining two or more corporations into one corporate entity.
MINIMUM PRICE FLUCTUATION: This is the smallest possible increment of price movement for a stock or option. This can often be referred to as a "tick".
MODEL: A variety of option pricing models used to calculate the value of an option and calculate the "Greeks". Models normally use six factors in their calculations: the volatility of the stock, the strike price, dividends, and the amount of time until the option expires interest rates, and the primary stock price.
MONEY MARKET FUND: This is a type of mutual fund that invests low-risk, short-term, fixed-income securities. Note: Although money market funds might consist of guaranteed securities money market funds are not federally insured.
MULTIPLE LISTED: Having the same stock or option listed on two or more different financial exchanges.
MULTIPLIER: Referring to a number used to calculate combined strike prices and premiums for options. The multiplier will affects profit and/or loss calculations on options positions.
NAKED CALL: This is an options position in which the investor doesn't have an offsetting stock position. Naked Call's are also known as "uncovered calls" or "short calls."
NAKED PUT: This is a put option where the writer of the option does not have a short position in the stock on which he or she has written. This can also be sometimes referred to as an "uncovered put." Compare to covered call or put.
NAKED OPTION: This is an option position where the buyer or seller has no underlying security position.
NET CHANGE: This is the difference in the price of either a stock or option from the closing price of that previous day.
NET POSITION: This is the difference between an investors open long and short positions in any equity.
NEW YORK STOCK EXCHANGE (NYSE): This is the largest stock exchange in the U.S., located on Wall Street in New York City. The NYSE is responsible for setting policy, supervising member activities, listing securities, overseeing the transfer of member seats, and evaluating applicants. It traces its origins back to 1792. Options are not traded on the NYSE.
NOMINAL OWNER: When customer securities are held in street name, a brokerage firm will be the Nominal Owner.
NON-MARGIN SECURITY: These are securities that cannot be purchased on margin at a brokerage firm or financial institution. This is a security that must be paid for in full. Specific examples of a non-margin security would include call and put option contracts.
NOT HELD ORDER (NHO): An order that is given to a floor broker, in which he/she has discretion on the specific time and price to get the best possible fill for an investor. This type of order gives the broker full control over the order and the investor agrees ahead of time to not hold that broker responsible if the best price is not acquired.
ODD LOT: This happens when a stock is bought in less than the typical round lot increment of 100 shares. OEX: is the symbol for the S&P's 100 cash Index.
OFFER: This is the price of an equity at which a seller is offering to sell. Another name for the ask price.
ONE CANCELS OTHER (OCO): This is an order type in which two orders will be submitted at the same time, by one customer. Once the two orders are placed, if one order is filled, the other order is instantly canceled.
OPEN (O), THE: This is the start of trading on a securities exchange.
OPEN EQUITY: In stock and options, the open equity is the total value of all open positions, minus the margin requirements of those positions.
OPEN INTEREST: The total number of overdue options and/or futures contracts that are not closed or delivered on a given day. Also, The number of buy market orders before the stock market opens.
OPEN (PRICE) ORDER: An order placed to buy or sell securities that have not been executed or canceled.
OPEN OUTCRY: The use of bids and asks, for securities on the floor of an exchange.
OPEN POSITION: As defined in securities, a long or short position.
OPENING PRICE/RANGE: The ranges of the initial bid and ask prices made on a specific equity, or the prices of the first transactions for that equity.
OPENING ROTATION: This is the procedure by which options are priced after the opening of the underlying stock.
OPENING TRADE/TRANSACTION: This is an initial transaction that adds long stock or options to a position, or an initial sale transaction that adds short stock or options to a position. Also; Rights for a buyer are created as is the obligation of the seller.
OPTION: A financial contract sold by one party, the option writer, to another party, the option holder. The contract gives the buyer the right, but not the obligation, to buy (call) or sell (put) a security at an agreed-upon price (the strike price) during either a specific period of time or date, also known as the exercise date.
OPTION CHAIN: A technique of quoting options prices through a list of all of the options on a particular stock.
OPTION CLASS: See CLASS OF OPTIONS
OPTION PRICING MODEL: Any model based technique for calculating the accurate value of an option. Models typically use six factors in their calculations: the volatility of the stock, the strike price, dividends, and the amount of time until the option expires interest rates, and the primary stock price.
OPTIONS CLEARING CORPORATION, THE (OCC): A clearing firm that acts as both the issuer and underwriter for an option and futures contract. The corporation also oversees the listing of options and futures to guarantee performance on both option and futures contracts.
ORDER: This is a request from an investor to a broker to buy or sell a particular amount of a specific security or commodity at a certain price or at the market price.
ORDER BOOK OFFICIAL (OBO): This is an employee of a specific exchange that will supervise investors' orders on the floor of that exchange.
ORDER FLOW: The collective, small securities orders, to either buy or sell a specific security that a broker will send to dealers.
ORDER ROUTING SYSTEM (ORS): The system used by the Chicago Board Options Exchange (CBOE) to collect, store, route and execute orders for investors of the exchange.
OTC (Over-The-Counter) OPTION: Exotic options traded on the over-the-counter (OTC) market, where investors can choose the unique terms of the options traded.
OUT-OF-THE-MONEY (OTM): When trading options; an OTM for a call, is when an option's strike price is higher than the market price of the underlying security. For a put, it is when the strike price is below the market price of the underlying asset. Out-of-the-money options have zero essential value.
OUT-TRADE(S): A situation in where there is some error on a trade.
OVER-THE-COUNTER (OTC) MARKET: A securities market where there is no physical exchange floor. The OTC market is made up of dealers who may or may not be members of a securities exchange.
PACIFIC EXCHANGE (PCX): The PCX or Pacific Exchange is one of four U.S. exchanges that trade equity options and is located in San Francisco, California.
PARITY: The term "parity" refers to equality, a term used to express an option when its total premium is equal to its natural value.
PARTIAL FILL: This is an order that is partly executed and filled at a specific price due to the total number of shares of a security not being bought or sold at that specific price.
PAYABLE DATE: The dividend for a stock is paid to the shareholders on this date.
PHILADELPHIA STOCK EXCHANGE (PHLX):
The PHLX is located in Philadelphia, Pennsylvania and is one of four U.S. exchanges that trade equity options.
PIN RISK: A risk that the writer of an options or futures contract faces when he/she is short an option position that, once expires, the underlying asset is now equal to or pinned to that short option's strike price.
PLUS TICK or UP TICK: This is a price description referring to the trading of a security at a price higher than the prior sale price for the same security.
POINT: This is the minimum change in the processing of an asset's price. For equities such as stock or options, a point means $1.
POSITION: This is the Long or short of an asset in an account.
POSITION LIMIT: The maximum number allowed for an open option contract to have on the same underlying stock.
POSITION TRADING: Establishing a position in an asset and holding it for an extended period of time.
PREFERRED STOCK: A class of ownership in a stock or option with a claim on a company's earnings before dividends may be made on the common stock. Preferred stock usually has a dividend that must be paid out before dividends to common stockholders
PREMIUM: This is the price of an option.
PRIME RATE: This is the lowest interest rate that commercial banks charge to their largest investors.
PUT OPTION: This is an option contract giving the owner the right, but not the obligation, to sell a specific amount of an underlying option at a specified price within a specified time. This is the opposite of a call option.
QUOTE: The last price in which a security or commodity is traded. "Quote" is also meaning the bid or ask quotes for the most recent price and amount at which the security or commodity can be bought or sold at. Also known as "quoted price"
RALLY: This is a rise in the price of a security or in the entire market.
RANGE: This is the high and low prices of a security at a specific time during the trading day.
RATIO SPREAD: An option strategy composed of an unequal number of calls or puts, with long and short options at two different strike prices.
REACTION: The typical descending movement in the price of a security after the price as a whole had previously risen.
REALIZED GAINS OR LOSSES: This is the profit or loss that is acquired to an account when a closing trade of a security corresponds with an open position in the same security.
RECORD DATE (DATE OF RECORD): The date established by someone who is registered as an issuer of a security in order to receive an affirmed dividend.
REGISTERED OPTIONS PRINCIPAL(ROP): This is an employee at a brokerage firm who has passed the FINRA Series 4 exam, and is responsible for overseeing activities dealing with different securities in an investor's accounts.
REGISTERED REPRESENTATIVE: This is an employee of a brokerage firm who is licensed to sell securities and also has the legal power of an agent. This registered representative has also passed the Series 7 and Series 63 examination.
REGULATION T (REG T): This is a regulation that is established by the Federal Reserve Board. The Regulation T governs customer cash accounts and the amount of credit by which brokers and dealers can give to customers to purchase securities.
REHYPOTHECATION: This is the practice of pledging securities in a customer's margin account as collateral for a bank loan.
REJECTED ORDER: This is an order that is not carried out due to it being invalid in some way.
RESTRICTED ACCOUNT: This is a margin account which has less equity than is required by the Regulation T.
RETAIL AUTOMATIC EXECUTION SYSTEM (RAES): Used by retail customers who need to execute option market and limit orders on the CBOE through the exchange's ORS.
REVERSAL (MARKET REVERSAL): A change in a market's general direction in which the price movement stops and goes in the opposite direction.
REVERSAL (REVERSE CONVERSION): A Method used by a brokerage, which can allow them to earn interest on its customers' stock by selling a similar position short and investing the proceeds of that position The short position is sometimes used to hedge in order to protect against risk from, the market.
REVERSE SPLIT: A stock split in which the number of outstanding shares is reduced and thus increasing the price per share. This is usually used during times in which a stock's price is falling.
RHO: This is an estimate of the dollar change in a given option's price due to a typical 1% change in interest rates.
ROLL, THE: An option strategy in which the goal is to profit from two positions composed of both calls and puts. The options all have the same strike price on the same stock, but on two different expiration dates.
ROLL, TO: This is when an investor decides to change an option's position by closing out an existing position and opening a new position on the same stock, but with a different expiration date or strike price.
ROUND LOT: This is a normal quantity of trading of a security. For example, in U.S. equities, a round lot is 5 bonds or 100 shares of stock.
SCALP: This is a trade that is made quickly with an entry and an exit within one day.
SCALPER/SCALPING: An investor who uses a trading strategy that enters and exits a securities position quickly, resulting in small profits or losses, rarely holding a position for more than a day.
SEAT: A membership on an exchange also required to do any business transaction on the exchange.
SECONDARY MARKET: This is a Market in which an investor buys securities from another investor rather than an issuer, following the sale of securities to the public for the first time.
SECURITIES AND EXCHANGE COMMISSION (SEC): This is the primary government agency that regulates the securities industry, which deals in stocks, options and bonds. The SEC's responsibility is to protect investors from deceitful and controlling practices within the securities markets.
SECURITIES INVESTOR PROTECTION CORPORATION (SIPC): This is a nonprofit membership corporation established by Congress to insure investors in the event of a brokerage firm running out of money or forced into bankruptcy. The Securities Investor Protection Corporation (SIPC) insures securities and cash to meet investor claims up to $500,000 in securities and cash, with a cash maximum of $100,000. Note: The SIPC is also funded by its members who are brokers and dealers.
SECURITY: This is a term for an investment or trading instrument, which is issued by a government, corporation and/or other organizations. Securities can be any note, stock, bond, or derivative like options or futures.
SEGREGATION: The SEC regulations require holding of a customer's funds separate from securities owned by other customer and securities by the brokerage firm.
SELF REGULATORY ORGANIZATION (SRO): Non-government organizations that have a responsibility to the SEC to regulate and supervise the securities practices of their own members.
SERIES: All options contracts that have the same class, strike price, and expiration date. .
SETTLEMENT: This is the delivery of a securities certificate in exchange for a payment after a securities trade.
SETTLEMENT DATE: This is the date by which an executed transaction must be settled for securities.
SETTLEMENT PRICE: The closing prices after a trading session of securities; used to evaluate profits and losses for account statements and deliveries in futures market accounts.
SHARES: This is a certificate that represents one entity of ownership in Stock.
SHORT: Investors who have sold a security in expectation that it will fall in price. To relate this to options, it is the sale of an option's contract.
SHORT COVERING: This is to purchase a security in order to close a previous short position.
SHORT HEDGE: This is the sale of futures or options contracts to protect against a possible decline in the price of a long position.
SHORT INTEREST: This is the number of shares of a security that have been sold short but not yet purchased.
SHORT SELLER: An investor who sells a security with the knowledge that they will have to buy it back at a later time.
SHORT SQUEEZE: A situation where investors buy a security as it is rising to help cover their short positions. In this situation, the investors who were short selling that security now are trying to buy back their short positions in order to cut their losses.
SKEW: See volatility skew.
SLIPPAGE: When an investor places an order to get filled at a specific price, but doesn't get filled until another price, different from expected.
SPECIAL MEMORANDUM ACCOUNT (SMA): A limit on the amount of money a customer can borrow against collateral in his/her account.
SPECIALIST: This is a member of a specific market whose purpose is to maintain the market inventory by buying and selling in a particular security class.
SPECULATOR: An investor who takes risks buying or selling securities anticipating to profit from large moves in their price or instability.
SPIN-OFF: This is another company being created from a corporation when it divides its resources into two companies. Then shares of stock in the newly formed company are issued to stockholders of the original corporation.
SPLIT: When a corporation decides to increase the number of outstanding shares and decrease the price per share.
SPREAD: The difference between the current bid and current offer prices of a security. This can be an options position that involves buying one option and then at the same time selling another option that is in the same related class.
SPREAD ORDER: This is an order type that deals with the same underlying security, but involves two different option contracts.
SPX: The symbol for the Standard & Poor's 500 cash index.
"SPYDERS" (SPDR): This is a short version of Standard & Poor's Depository Receipt, an exchange-traded fund (ETF) that trades like a stock, but is actually one tenth of the S&P Index and is worth around one tenth of the dollar-value of the S&P 500.
STATEMENT: This is a written outline of a brokerage firm's financial information.
STOCK: This is another type of security that corresponds to some amount of ownership in a corporation.
STOCK OPTIONS: A financial contract, giving an investor the right to buy (call) or sell (put) individual stocks at a specific price and date.
STOP LIMIT (PRICE) ORDER: A type of order placed with a broker that combines the characteristics of a stop order with the characteristics of a limit order. A stop limit order will initially places a stop limit order (either a buy or sell), which works like a Stop Market order with one major exception. Once the order is activated (by the currency trading at or through the stop price), it does not become a market order. Instead, it becomes a limit order with a specified limit price. Your order fill price will be either at your specified limit price or better.
STOP ORDER: An order type that is submitted, and once executed at a specific price (stop price) turns into a market order. A buy stop order has an expected execution at the existing offer price and a sell stop order should have an expected execution at the prevailing bid price.
STRADDLE: An options strategy that combines both calls and puts on the same security, in which the calls and puts have the same strike price and expiration date.
STRANGLE: An options strategy that involves both a put option and a call option with the same expiration dates and strike prices, of which have strike prices either above or below the market price of the underlying security.
STREET NAME: The term used for a security that is held in the name of a brokerage firm on behalf of a customer. This is usually performed to assist with later transactions.
STRIKE PRICE: The particular price of an option contract at which an investor who is purchasing a call option can buy the underlier or a put option buyer can sell the underlier.
SYMBOLS: A combination of letters used to identify a security. Symbols with up to three letters are used for stocks which are listed and trade on an exchange. Symbols with four letters are used for NASDAQ stocks. Symbols with five letters are used for NASDAQ stocks other than single issues of common stock. Symbols with five letters ending in X are used for mutual funds.
SYNTHETIC: This is a financial instrument that is created artificially by replicating another financial instrument as well as combining features of an assortment of other resources.
SYNTHETIC LONG CALL: An option trade created by buying the underlying asset; also know to have the typical return of a call option.
SYNTHETIC LONG PUT: This is an option's transaction that involves short selling a security and entering a long position on its call.
SYNTHETIC LONG STOCK: This is an option's trade involving the same stock, strike price and expiration date, composed of long calls and short puts.
SYNTHETIC SHORT CALL: This is an option's trade involving a position of short puts and short stock. The quantity of short puts equals the number of round lots of stock.
SYNTHETIC SHORT PUT: An option's trade that involves a position composed of short calls and long stock. The quantity of short calls equals the number of round lots of stock.
SYNTHETIC SHORT STOCK: This is an option's trade involving the same stock, strike price and expiration date, composed of short calls and long puts.
SYSTEMATIC RISK: This is the risk that is commonly involved in an entire class of assets or liabilities and can affect all companies in a stock market. This is also known as market risk.
TECHNICAL ANALYSIS: A strategy used to evaluate securities prices by relying on how the market data, such as charts of price, volume, and open interest, can help predict future (usually short-term) market trends.
TENDER OFFER: An offer that is made by an investor to a corporation to purchase all of the shareholders stock, usually at a price that is above the current market price.
THEORETICAL VALUE: When trading options, the hypothetical value of an option as calculated by the Black-Scholes Pricing Model.
THETA: A ratio involved in options trading, which compares the change in an option's price to the decrease in time to its expiration. This is also called 'Time Decay'.
TICK: This is the smallest achievable price movement (up or down) in the price of a security.
TICKER: This is the scrolling system which displays up to date or the latest security prices and/or volume. This is also known as "tape".
TIME AND SALES: This is a record that includes the time, price and volume of each transaction of every security.
TIME DECAY: See Theta.
TIME SPREAD: This is an options trading strategy that involves buying and selling of both put and call options that have the same strike price but different expiration dates.
TIME VALUE: This is the total premium of an option being greater than its basic value.
TRADING AUTHORIZATION: This is the written permission given by an investor to his/her brokerage firm that gives that specific firm power of attorney in making trades for them. This is also called Power of Attorney.
TRADING FLOOR: This is the floor on an exchange where trading of securities occurs.
TRADING HALT: This is the momentary deferral of trading in a particular security usually due to the anticipation of a news event or order discrepancy.
TRANSFER AGENT: An individual who works for a corporation or mutual fund, and helps with the up keeping of shareholder's records involving specific securities.
TREASURY STOCK: These are shares of a specific security that have been reacquired by a corporation to be retired, given to employees through a benefit program or resold to the public.
TREND: This is latest direction of movement for prices or rates.
TRUST: This is a legal affiliation in which an individual (the trustor) gives control of assets to a person or organization (the trustee) for the benefit of a specific recipient.
TYPE: This is the classification of an option contract as either a call or a put.
UNCOVERED CALL OR PUT: A call option written (uncovered call) or a put option purchased (uncovered put) without ownership of the underlying asset. An uncovered call or put is also called naked option.
UNDERLYING (STOCK OR SECURITY): Examples of underlying securities are stocks, bonds, futures and indices. In derivatives, the security that must be delivered when a derivative contract, such as a put or call option, is exercised. In equities, the common stock that must be delivered when a warrant is exercised, or when a convertible bond or convertible preferred share is converted to common stock.
UNSYSTEMATIC RISK: This is the risk of price change due to the unique circumstances of a specific security, as opposed to the overall market. This risk can be virtually eliminated when a portfolio is diversified.
UP-TICK: A stock market transaction (or sometimes, a quote) at a price higher than the preceding one for the same security. This is also called plus tick which is the opposite of downtick.
UPTREND: This is the continuing rising price movements in a security over time.
VEGA: This is the change in the price of an option that results from a 1% change in volatility.
VIX (VOLATILITY INDEX): This is the ticker symbol for the Chicago Board Options Exchange (CBOE) Volatility Index, which shows the market's expectation of 30-day volatility. It is constructed using the implied volatilities of a wide range of S&P 500 index options. The volatility is meant to be forward looking and is calculated from both calls and puts. The VIX is often referred to as the "investor fear gauge".There are three variations of volatility indexes: the VIX tracks the S&P 500, Nasdaq 100 and the Dow Jones Industrial Average.
VOLATILITY: This is the relative rate at which the price of a security moves up and down. Volatility is found by calculating the annualized standard deviation of daily change in price. If the price of a stock moves up and down rapidly over short time periods, it has high volatility. If the price almost never changes, it has low volatility.
VOLUME: The number of shares, bonds or contracts traded during a given period, for a security or an entire exchange, also known as trading volume.
WARRANT: A certificate, usually issued along with a bond or preferred stock, entitling the holder to buy a specific amount of securities at a specific price, usually above the current market price at the time of issuance, for an extended period, anywhere from a few years to forever. The main difference between warrants and call options is that warrants are issued and guaranteed by the company, whereas options are exchange instruments and are not issued by the company. Furthermore, the life of a warrant is often measured in years, while the life of a typical option is measured in months.
WRITE/WRITER: This is trader or brokerage that sells an option short.
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