Category: Learning
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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 […]
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U-V
UNDERLYING: The security upon which the value of an option depends. Underlying securities can include stock, futures and indexes. UNDERVALUED OPTION: An option trading at less than its theoretical value, as estim using an option valuation model. UNSYSTEMATIC RISK: The risk of an individual stock that is a function of that comp outlook for earnings, […]
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W-X
WASTING ASSET: An asset that has a limited life and tends to decrease in value over time(all other factors being held constant). Options are wasting assets. WRITER: The seller who initiates a short options position.
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VEGA
Option Vega is a measure of the sensitivity of the price of an option to changes in the implied volatility of the underlying asset. Vega values represent the change in an option’s price given a 1% move in implied volatility, all else equal. This is the option’s sensitivity to volatility. Simply put,it describes how the […]
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Rho
Understanding Rho: The Greek that Measures Interest Rate Sensitivity When delving into the world of options trading, it’s crucial to understand the various Greeks, each of which provides insight into different dimensions of risk and opportunity. One of the often overlooked but essential Greeks is Rho. This Greek measures an option’s sensitivity to changes in […]