Category: Glossary
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A-B
ADJUSTMENT: The process by which the holder of a spread buys or sells stock or options in order to re-establish neutrality in his/her position. AMERICAN-STYLE OPTION: An option that can be exercised at any time on or before the expiration date. ARBITRAGE: The process in which traders simultaneously buy and sell similar securities for a […]
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C-D
CALL OPTION: A call option is a financial derivative contract that provides the holder with the right, but not the obligation, to purchase a specific underlying asset at a predetermined price on or before a predetermined date. It gives the holder exposure to potential profits from an increase in the underlying asset’s price without actually […]
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E-F
EDGE: The difference between market price and theoretical value-i.e. the long term advantage or disadvantage to the holder of an option position which has been calculated by using an option valuation model. ENFICIENT MARKET HYPOTHESIS: The EMH view of the markets believes that information is priced instantaneously into stock prices as soon as it is […]
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G-H
GAMMA: The sensitivity of an options’ delta over a one point change in the underlying. Als known as the delta of the delta. GREEKS: A set of factor sensitivities frequently used for measuring the exposures of derivative portfolios. HAIRCUT: On cquity option exchanges, money deposited by a trader with the clearing house to ensure the […]
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I-J
IMPLIED VOLATILITY: The volatility which must be attributed to an underlying price in order to make the theoretical values of an option or a spread equal to its current market price. IN THE MONEY: An option is in the money when it has intrinsic value. A call is in the money when the market price […]
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K-L
KURTOSIS: A measure of how "fat" a probability distribution’s tails are, measured relative to a normal distribution having the same standard deviation. LEAPS: An acronym for Long-term Equity AnticiPation Securities. LEAPS are put or call options with expiration dates set as far as two years into the future. Like standard options, each LEAPS contract represents […]
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M-N
MARGIN: Collateral deposited by a trader with the clearing house to ensure the integrity of his trades. MARGIN CALL: A call from the clearinghouse to a clearing member (variation margin call), or from a broker to a customer (maintenance margin call), to add funds to their margin account to cover an adverse price movement. The […]
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O-P
OPTION VALUATION MODEL: This model that assesses option prices incorporates six factors into its pricing assumptions: the underlying security price, the strike price, time to expiration, interest rates, volatility of the underlying and any dividends to be paid. The model develops theoretical valuations for individual options and provides information necessary to determine proper ratios in […]
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Q-R
REVALUATION: A change in the relationship between the price of an option (or a spread) and its’ theoretical value. In other words, a change in the ‘edge’ of the position. REVERSE CONVERSION: More commonly called a reversal, it is a neutral spread consisting of short actual underlying and long synthetic underlying. RHO: The sensitivity of […]
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S-T
SCALPER: A floor trader on an exchange who hopes to profit by continually buying at the bid price and selling at the offer price in a specific market. Scalpers usually try to close out all positions at the end of each trading day. SENSITIVITY: Exposure to a risk factor. SERIES: All option contracts of the […]