HERE IS A LIST OF TERMS EVERY TRADER MUST BE AWARE OF
Known ahead of time.
ABANDONED BABY PATTERN
A rare candlestick pattern in which an upside gap doji star (where the shadows do not touch) is followed by a downside gap black candlestick where the shadows also do not touch; considered a major top reversal signal.
Elliott wave terminology for a three-wave countertrend price movement. Wave A is the first price wave against the trend of the market. Wave B is a corrective wave to Wave A. Wave C is the final price move to complete the countertrend price move. Elliott wave followers study A and C waves for price ratios based on numbers from the Fibonacci series.
An addition to a trader’s original market position. The first of three distinct phases in a major trend in which investors are buying.
Refers to actual physical commodities, as distinguished from futures.
Block-structured programming language developed under the guidance of the U.S. Department of Defense to provide a medium for writing real-time, concurrent applications, for facilitating program verification.
Smoothing and/or forecasting prices with continuously updated weighting of past prices.
ADVANCED DECLINE LINE
Each day’s number of declining issues is subtracted from the number of advancing issues. The net difference is added to a running sum if the difference is positive or subtracted from the running sum if the difference is negative.
The loss attributable to price movement against the position in any one trade.
An acronym for “automated knowledge acquisition.” Refers to the use of programs to create knowledge needed by other programs (usually expert systems).
Premium that an investment portfolio earns above a given point of reference; a measure of stock performance independent of the market.
AMERICAN DEPOSITORY RECEIPTS (ADRs)
Certificates that are issued by a bank of US origin and traded in the U.S. as domestic shares. The certificates represent the foreign securities that the bank holds in that security’s country of origin.
Accounting method in which an asset’s cost is spread out.
ANALYSIS OF VARIANCE
(Anova) The partitioning of total sum of squares into the sum of squares explained by the model and the remaining sum of squares unexplained.
Candlestick formation. An exceptional exhaustion pattern (meaning “gap filling”) composed of five candles. The anaume occurs when the gap is filled in after a market price has changed directions. This pattern coupled with the other patterns indicate a strong potential for a bullish reversal and price advance.
Behavioral finance. The tendency to evaluate current decisions in the context of past events.
Generally a metallurgical process, in artificial intelligence a process in which a neural net work searches for a set of weights to minimize errors; the search constantly shrinks as the weights find better values, analogous to the rearrangement of the molecules in a heated metal bar as the bar cools.
Translating the figures for a given year into an annual rate.
Two forecasts whose errors are negatively correlated.
The simultaneous purchase and sale of two different, but closely related, securities to take advantage of a disparity in their prices.
ARMAX (AutoRegressive Moving Average eXogenous variables model)
The combination of fundamental variables outside the particular market that correlates with the independent variable added with the ARMA modeling of the remaining residuals.
Also known as TRading INdex (TRIN):
An advance/decline stock market indicator. A reading of less than 1.0 indicates bullish demand, while greater than 1.0 is bearish. The index is often smoothed with a simple moving average.
The field of computer science dedicated to producing programs that attempt to mimic the processes of the human brain.
Any earthly cycle, such as a market cycle, that has been scientifically related to the physics of the planetary system.
The fractional part of reduced energy or lost power due to smoothing or filtering.
The correlation between the values of a time series and previous values of the same time series.
Using previous data to predict future data.
The out, or back, contract month, as opposed to the current contract month; the expiration month farther in the future than the current, or spot, month.
A feedforward multilayered neural network that is a commonly used neural network paradigm.
A strategy is tested or optimized on historical data and then the strategy is applied to new data to see if the results are consistent.
BALANCED MUTUAL FUND
A mutual fund that seeks a return that is a combination of capital appreciation and current income, generally by building a portfolio of bonds, preferred stocks and common stocks.
An oscillator that accentuates only the frequencies in an intermediate range and rejects high and low frequencies. Implemented by first applying a low pass filter to the data and then a high pass filter to the resulting data (e.g., two SMA crossover system).
BANK INVESTMENT CONTACTS (BICs)
A negotiated-term deposit issued by a commercial bank. See Guaranteed Investment Contracts (GICs).
Used to plot price movements using vertical bars indicating price ranges.
The difference between spot (cash) prices and the futures contract price.
The measure of yields on bonds and notes; one basis point equals 0.01% of yield.
Large transactions made up of a number of different stocks.
BAYES DECISION RULE
A rule that states the strategy chosen from those available is that for which the expected value of payoff is the greatest.
A securities market characterized thus based on declining prices.
A regression of the estimated coefficient that belongs to a particular variable.
The difference between the expected value of an estimator and the actual value to be estimated.
BID AND ASK
Highest price and lowest price that an investor will pay for a tradable.
In which observations are displayed as having two distinct peaks.
A proprietary, computerized trading system whose rules are not disclosed or readily accessible.
Large transactions of a particular stock sold as a unit.
A steep and rapid increase in price followed by a steep and rapid drop in price.
A long-term debt security with a stated interest rate and fixed due dates, issued by a corporation or a government, when interest and principal must be paid. There are many variations.
Describes a variable that may have one of only two possible values: true or false. After George Boole, English logician, credited with the invention of “Boolean logic.”
Literally “bald” or “monk” in Japanese; in candlestick terminology refers to a situation during which a trading cycle opens or closes on a high or low, indicating a victory for the bulls or the bears.
A trading range market or a price region that is non-trending.
When a tradable exits a trading range by trading at price levels that leaves a price area where no trading occurs on a bar chart. Typically, these gaps appear at the completion of important chart formations.
The point when the market price moves out of the trend channel.
A firm that handles transactions for its customers and also purchases securities for its own account, selling them to customers.
Orders physically held by the floor broker in the trading pit.
A securities market characterized thus on rising prices.
BUY AND HOLD
The acquisition of a tradable for the long term rather than quick turnover.
Widely used systems development language, also block-structured, but with more facilities to control the machine at the level of the hardware.
A contract that gives the buyer of the option the right but not the obligation to take delivery of the underlying security at a specific price within a certain time.
Takes the average rate of return for the last 36 months and divides it by the maximum drawdown for the same period. It is usually calculated on a monthly basis. A negative value for the Calmar ratio means that the system or trader had a negative performance over the last three years.
A charting method, originally from Japan, in which the high and low are plotted as a single line and are referred to as shadows. The price range between the open and the close is plotted as a narrow rectangle and is referred to as the body. If the close is above the open, the body is white. If the close is below the open, the body is black.
Losses resulting from selling at a loss.
CENTRAL LIMIT THEOREM
From statistics, the theorem that the distribution of sample means taken from a large population approaches a normal, Gaussian, curve.
An oscillator created by subtracting a 10-day EMA from a three-day EMA of the accumulation /distribution line.
In charting, a price channel contains prices throughout a trend. There are three basic ways to draw channels: parallel, rounded and channels that connect lows (bear trend) or highs (bull trend).
Describes the behavior of nonlinear systems. A subset of nonlinear dynamics analysis, chaos theory is a branch of mathematics focusing on irregular and complex behavior that has an underlying order. In the stock market, chaos theory seeks to forecast the future path of stock prices, including sudden changes that occur during periods of intense market activity.
A display or picture of a security that plots price and/or volume (the number of shares sold). The chart is the foundation of technical analysis, and over the years, many different types of charts have been developed.
CHRISTMAS TREE SPREAD
The simultaneous purchase and writing of options with either a different strike price or expi ration date or combination of the two.
In artificial intelligence, these systems perform a type of machine learning that generates rules from examples.
A smaller version of a retail mutual fund, it is offered as a subaccount in a variable annuity. The daily price of a clone fund is different among variable annuities that carry it because each clone fund starts on a different date and with a base price of $10.
A mutual fund that does not sell unlimited shares; one with a specific number of outstanding shares.
Positions that have been either liquidated or offset.
Locating the presence of groups of vectors that are similar in some fashion.
The Chicago Mercantile Exchange.
A constant used to multiply another quantity or series; as in 3 xand ax, 3 and a are coefficients ofx.
In Gann theory, a projected reversal point.
The weighted average of two or more forecasts.
COMPARATIVE RELATIVE STRENGTH
Compares the price movement of a stock with that of its competitors, industry group or the entire market. This is distinct from J. Welles Wilder’s Relative Strength Index, which compares current price movement to previous price movement of the same instrument.
A device of some kind that compares two inputs.
The payment, through interest, based on the sum of the original principal amount and its accrued interest.
Indication that at least two indices, in the case of Dow theory the industrials and the transportation, corroborate a market trend or a turning point.
CONGESTION AREA OR PATTERN
A series of trading days in which there is no visible progress in price.
Also known as a congestion period. A pause that allows participants in a market to reevaluate the market and sets the stage for the next price move.
A chart in which the price scale for the data for the end of a given contract and the data for the beginning of the next contract are merged in order to ease the transition of one contract to the next.
An agreement as in options in which rights are exchanged by law. Correlation Coefficient-When two random variables X and Y tend to vary together. The measurement is given by the ratio of the covariance of X and Y to the square root of the product of the variance of X and the variance of Y.
When futures prices and spot prices come together at the futures expiration.
Traders buy and sell two different securities (or synthetic securities), forcing equivalent prices for equivalent securities.
Also Coppock Guide. A long-term price momentum indicator: a 10-month weighted moving aver age of the sum of the 14-month rate of change and the 11-month rate of change for the Djia.
Any price reaction within the market leading to an adjustment by as much as one-third to two-thirds of the previous gain.
A numerical and graphical display of the test statistics of an autocorrelation diagnostic routine.
The cost of a given share or group of stock shares.
A price bar showing movement opposite to the direction of the prior time period; a retracement.
Multiplies the deviation of each variable from its mean, adds those products and then divides by the number of observations.
Purchasing back a contract sold earlier.
Writing a call against a long position in the underlying stock. By receiving a premium, the writer intends to realize additional return on the underlying common stock or gain some element of protection (limited to the amount of the premium less transaction costs) from a decline in the value of that underlying stock.
The spread between crude oil and its products: heating oil and unleaded gasoline plays a major role in the trading process.
The difference in value of two options, where the value of the one sold exceeds the value of the one purchased.
The extent to which the revenue streams of individual traders within a single enterprise tend to exhibit similar patterns over time.
CUP AND HANDLE
An accumulation pattern observed on bar charts. The pattern lasts from seven to 65 weeks; the cup is in the shape of a “U” and the handle is usually more than one or two weeks in duration. The handle is a slight downward drift with low trading volume from the right-hand side of the formation.
The current assets of a company divided by its current liabilities. Balance-sheet strength indication.
The continuous image of the unit interval.
Developing complicated rules that map known conditions.
A point where higher frequency cycles will not pass through a filter (e.g., a 10-day SMA will eliminate cycles of 20 days or less).
A variation where a point of observation returns to its origin.
A day order is an order that is “good for the day” and is automatically cancelled if it cannot be executed the day it was placed. Compare to good-til-cancelled (GTC) orders.
A stock or option position that is purchased and sold on the same day.
Buying and selling the same stock or option position in one day’s trading session, thus ending the day with no position.
A firm or individual engaged in the business of buying or selling securities for its own account. Thinkorswim is not a dealer.
DEBIT BALANCE (DR):
In a client’s margin account, that portion of the value of stocks that is covered by credit extended by the broker to the margin client. In other words, the amount of money a client owes the brokerage firm. (FINRA)
Any option spread where you pay money for the spread. The debit occurs when the amount of premium paid for the option purchased exceeds the premium received for the option sold.
The stack of stock or option orders that are to be filled by a broker on the floor of an exchange.
The date a company announces the payment date, record date and amount of an upcoming dividend.
Refers to “back month” options or futures.
Exchange officials can postpone the start of trading on a stock beyond the normal opening of a day’s trading session. Reasons for the delay might be an influx of large buy or sell orders, an imbalance of buyers and sellers, or pending important corporate news that requires time to be disseminated.
Stock or option price quotes that are delayed by the exchanges 15 or 20 minutes from real-time.
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.
An approximation of the change in the price of an option relative to a change in the price of the underlying stock when all other factors are held constant. For example, if a call has a price of $1.5 and a delta of .33, if the underlying stock moves up $1, the option price would be $1.83 ($1.5 + (.33 x $1.00)). Generated by a mathematical model, delta depends on the stock price, strike price, volatility, interest rates, dividends, and time to expiration. Delta also changes as the underlying stock fluctuates. See gamma.
A security whose value is derived from the value and characteristics of another security, called the underlying security. Calls and puts are derivative securities on underlying stocks.
DESIGNATED ORDER TURNAROUND (DOT):
NYSE’s automated order entry system.
The rate that the Federal Reserve Bank charges on short term loans it makes to other banks and financial institutions.
An account in which the client has given the registered representative authority to enter transactions at the rep’s discretion. thinkorswim does not offer this type of account.
A payment made by a company to its existing shareholders. Dividends are usually cash payments made on a quarterly basis. Dividends can also be in the form of additional shares of stock or property.
Indicates how many times per year (quarterly, semi-annually) a particular stock pays a dividend.
The annual percentage of return that received from dividend payments on stock. The yield is based on the amount of the dividend divided by the price of the stock and of course fluctuates with the stock price.
DON’T KNOW (DK) NOTICE:
A term used when brokers or traders compare confirmations on a transaction. If one party receives a confirmation on a trade that it does not recognize, that party would send the other party a D.K. notice.
A term used to describe a trade made at a price lower than the preceding trade. A short sale may not be executed on a down or minus tick.(FINRA)
Successive downward price movements in a security over time.
When the same stock or option is listed on two or more different exchanges. For example, IBM options are traded on the CBOE, PHLX and AMEX.
SRO regulations require a duplicate confirmation (of a client’s confirmations) be sent to an employing broker-dealer, if the client is an employee of another broker dealer. Also, this duplicate confirmation may be sent to a client’s attorney if the request is put in writing. (FINRA)
A feature of American-style options that allows the buyer to exercise a call or put at any time prior to its expiration date.
Equity can have several meanings, including 1) stock, as it represents ownership in a corporation, or 2) in a margin account, equity represents a client’s ownership in his account; it is the amount the trader would keep after all his positions have been closed and all margin loans paid off.
See Stock options.
An option contract that can only be exercised upon its expiration date. Compare to American-style options.
The value of cash or securities held in a margin account that exceeds the federal requirement. (FINRA)
An association of persons (members) who participate in buying and selling securities. It also refers to the physical location where the buying and selling takes place.
Securities that have met certain requirements and have been admitted for full trading privileges on an exchange such as the NYSE or AMEX. These securities will have a three letter designation (IBM) rather than a four letter designation (MSFT) for over-the-counter securities.
Describes a stock whose buyer does not receive the most recently declared dividend. Dividends are payable only to shareholders recorded on the books of the company as of a specific date of record (the “record date”). If you buy the stock any time after the record date for a particular dividend, you won’t receive that dividend.
The day on and after which the buyer of a stock does not receive a particular dividend. This date is sometimes referred to simply as the “ex-date,” and can apply to other situations beyond cash dividends, such as stock splits and stock dividends. On the ex-dividend date, the opening price for the stock will have been reduced by the amount of the dividend, but may open at any price due to market forces.
The actual completion of an order to buy or sell stock or options.
If the buyer of a stock option wants to buy (in the case of a call) or sell (in the case of a put) the underlying stock at the strike price or, in the case of a cash-settled option, to receive the index price and the strike price settlement amount, the option must be exercised. To exercise an option, a person who is long an option must give his broker instructions to exercise a particular option (or if the option is .01 in-the-money at expiration it will be automatically exercised for a client) Someone with short option positions must be aware of the possibility of being assigned if his short options in-the-money, and he must make sure he has adequate buying power available in his account to cover any such potential assignment.
The expiration cycle has to do with the dates on which options on a particular underlying security expire. A stock option, other than LEAPS, will be in one of three cycles, the January cycle (with options listed in January, April, July or October), the February cycle (with options listed in the February, May, August or November) or the March cycle (with options listed in March, June, September or December). At any given time, an option will have contracts with four expiration dates outstanding.
EXTRINSIC VALUE (TIME VALUE):
The difference between the entire price of an option and its intrinsic value. For example, if a call option with a strike price of $50 has a price of $2.75, with the stock price at $52, the extrinsic value is $.75. The price of an out-of-the-money (OTM) option is made up entirely of extrinsic value.
The exchange declares trading in stocks or options to be in a “fast market” when transactions in the pit occur in such volume and with such rapidity that price reporters are behind in entering quotes. During this time, executing brokers are not held to any fills if a price is traded through on a limit order.
FED FUNDS (FEDERAL FUNDS):
The money a bank borrows from another to meet its overnight reserve requirements.
FED FUNDS RATE:
Set by the Federal Reserve Board, the Fed Funds Rate is the rate banks charge each other on overnight loans held the Federal Reserve Bank.
FEDERAL RESERVE BOARD (FRB):
A seven-member board of governors of the Federal Reserve System, appointed by the U.S. President and confirmed by the Senate, that is responsible for monetary policy within the United States. It controls the supply of money and credit to try to control inflation and create a stable, growing economy.
An option and stock position consisting of long stock, long an out-of-the-money put and short an out-of-the-money call, which emulates a bull spread. Alternatively, a reverse fence can be long stock, long in-the-money put and short in-the-money call which emulates a bear spread. All the options have the same expiration date.
The result of executing an order.
FILL OR KILL (FOK):
A type of order that is canceled unless it is executed completely within a designated time period, generally as soon as it is announced by the floor broker to the traders in the pit. Compare to all-or-none (AON).
Used to describe an account that has no open positions in stocks or options. Flat can also be regarding a position with little or no delta or gamma.
Number of shares of stock of a corporation that available for public trading.
Physical location of an exchange where the buying and selling of stocks or options takes place.
A member of an exchange who executes orders on the exchange floor for clearing members or their clients.
A member of an exchange who trades only for his own or proprietary account. On the CBOE, they are known as “market makers”.
FREE CREDIT BALANCE:
The amount of cash in a clients account. Broker-Dealers are required to notify clients of their free credit balances at least quarterly, however, Thinkorswim clients may access this information at any time.
An account which requiring cash in advance for a buy order to be executed or securities in hand before a sell order is executed. In most cases Thinkorswim clients whose accounts are frozen will be restricted to closing transactions only. (FINRA)
Factors that are used to analyze a company and its potential for success, such as earnings, revenues, cash flow, debt level, financial ratios, etc.
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.
A forward contract for the future delivery of a financial instrument (ex. Treasury bond) or physical commodities (corn), traded on a futures exchange (ex. CBOT, CME).
An approximation of the change in the delta of an option relative to a change in the price of the underlying stock when all other factors are held constant. Gamma is accurate for small changes in the price of the underlying stock, but is expressed in terms of a change in delta for a 1 point move in the stock. For example, if a call has a delta of .49 and a gamma of .03, if the stock moves down 1 point, the call delta would be .46 (.49 + (.03 x -$1.00)). Generated by a mathematical model, delta depends on the stock price, strike price, volatility, interest rates, dividends, and time to expiration.
A type of limit order that is active until it is filled or canceled. As opposed to a day order, a GTC order can remain active for an indefinite number of trading sessions.
Regarding options, it’s a colloquial term for the analytic measurements such as delta, gamma, theta, vega and rho, etc.
The whole-dollar part of the bid or offer price. For example, if the bid and offer prices for an option are 3 1/8 bid, offer 3/1/2, the handle is 3.
A position in stock or options that is established to offset the risk of another position in stock or options. You can use Thinkorswim’s analytics to hedge the Greeks of your position.
In reference to the O,H,L,C, “H” represents the high price of the session.
The annualized standard deviation of percent changes in the price of a stock over a specific period. Compare to implied volatility.
Someone who has bought an option or owns a security.
The act of pledging of securities as collateral, as might be done in a margin account.
IMMEDIATE OR CANCEL (IOC):
A type of order that must be filled immediately or be canceled. IOC orders allow partial fills, with the balance of the order canceled.
An estimate of the volatility of the underlying stock that is derived from the market value of an option. Implied volatility is the volatility number that, if plugged into a theoretical pricing model along with all the other inputs, would yield a theoretical value of an option equal to the market price of the same option. Compare to historical volatility.
A proxy for the overall stock market or segments of the stock market. An index is typically made up of a group of stocks that are selected to represent all stocks in the stock market or market segment (such as technology stocks or big capitalization stocks). The performance of the index gives an idea of how individual stocks might be performing. The S&P 500 (Standard & Poor’s 500) and Dow Jones Industrial Average are two well-known indices.
An option that has a stock index as the underlying security. The value of an index option is based on the value of the index. Typically, index options are cash settled options.
INITIAL MARGIN REQUIREMENT:
The amount of equity a client must deposit when making a new purchase in a margin account. For retail clients the SEC’s Regulation T requirement for equity securities currently stands at 50% of the purchase price. In addition, the FINRA and NYSE initial margin requirement is a deposit of $2,000 but not more than 100% of the purchase price. Purchases of options must be paid for in full while the sale of naked options is subject to house requirements prescribed by Thinkorswim. Also, the amount of money required to be in an account with a brokerage firm to carry a new position into the next trading day.
Organizations such as mutual funds, pension funds, endowment funds, and insurance companies that typically have very large sums of money to invest.
Money paid when borrowing money or money earned when lending money.
Any positive value resulting from the stock price minus the strike price (for calls) or strike price minus the stock price (for puts). Only in-the-money options have intrinsic value, and intrinsic value can never be zero or less. For example, if a call option with a strike price of $50 has a price of $2.75, with the stock price at $52, the intrinsic value is $2.00. If a put option with a strike price of $15 has a price of $1.50, with the stock price at $14, the intrinsic value is $1.00. Compare to extrinsic value.
Someone who purchases a stock with the intent of holding it for a some amount of time and profiting from the transaction. Compare to day trading.
IRON BUTTERFLY SPREAD:
An option spread composed of calls and puts, with long options and short options at three different strikes. The options are all on the same stock and of the same expiration, with the quantity of long options and the quantity of short options netting to zero. The strikes are equidistant from each other. An iron butterfly can be seen as a straddle at the middle strike and a strangle at the outer strikes. For example, a long 50/60/70 iron butterfly is long 1*50 put, short 1*60 call, short 1*60 put, and long 1*70 call. It’s important to understand that you buy an iron butterfly for a credit, that is, you take money in when you buy it.
IRON CONDOR SPREAD:
An option spread composed of calls and puts, with long options and short options at four different strikes. The options are all on the same stock and of the same expiration, with the quantity of long options and the quantity of short options netting to zero. Generally, the strikes are equidistant from each other, but if the strikes are not equidistant, the spread is called an iron pterodactyl. An iron condor can be seen as a strangle at the middle strike and a strangle at the outer strikes. For example, a long 50/55/60/65 iron condor is long 1*50 put, short 1*55 put, short 1*60 call, and long 1*65 call. It’s important to understand that you buy an iron condor for a credit, that is, you take money in when you buy it.
As a verb, when a company offers shares of stock to the public; as a noun, the stock that has been offered by the company.
(1) An entity that offers or proposes to offer its securities for sale. (2) The creator of an option; the issuer of a listed option is the OCC.
An account that has two or more owners who possess some form of control over the account and these individuals may transact business in the account. See also joint tenants.
JOINT TENANTS (JT):
A type of account with two owners. There are two types of joint tenant accounts: 1) Joint Tenants With Rights of Survivorship – in the event of the death of one party, the survivor receives total ownership of the account and 2) Joint Tenants in Common – in the event of the death of one party, the survivor receives a fractional interest of the account, the remaining fractional interest goes to the deceased party’s estate.
JUNK BOND (HIGH-YIELD BOND):
A bond with a credit rating of BB or lower, carrying higher risk of default than investment grade bonds.
Qualified retirement plan designed for employees of unincorporated businesses or persons who are self-employed, either full-time or part-time.
KNOW YOUR CLIENT:
The industry ruleTemplate that requires that each member organization exercise due diligence to learn the more essential facts about every client.
The price of the last transaction of a stock or option for a trading session.
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.
An acronym for Long-term Equity AnticiPation Securities. LEAPS are call or put options with expiration dates set as far as two years into the future. They function exactly like other, shorter-term exchange-traded options.
A term describing one option of a spread position. When someone “legs” into a call vertical, for example, he might do the long call trade first and does the short call trade later, hoping for a favorable price movement so the short side can be executed at a better price. Legging is a higher-risk method of establishing a spread position, and Thinkorswim STRONGLY suggests that if you decide to leg into a spread, you should, for margin and risk purposes, do the long trades FIRST.
The ability to control of a larger amount of money or assets with a smaller amount of money or assets, typically done by borrowing money or using options. If prices move favorably for a leveraged position, the profits can be larger than on an unleveraged position. However, 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. Buying stock on margin is using leverage. A long option position is leveraged because it “controls” a large number of shares with less money than it would take to maintain a position with the same number of shares.
Relating to futures markets, a limit move is an increase or decrease of a futures price by the maximum amount allowed by the exchange for any one trading session. Price limits are established by the exchanges, and approved by the Commodity Futures Trading Commission (CFTC). Limit moves vary depending on the futures contract.
LIMIT (PRICE) ORDER:
An order that has a limit on either price or time of execution, or both. Compare to a market order that requires the order be filled at the most favorable price as soon as possible. Limit orders to buy are usually placed below the current ask price. Limit orders to sell are usually placed above the current bid price. It is wise to use limit orders when trading spreads. In markets with low liquidity or in fast markets, some traders use limits to ensure getting filled by putting in a limit order to buy at or above the ask price or a limit order to sell at or below the bid price.
A transaction or transactions that offsets or closes out a stock or options position.
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.
The stock of a corporation that is traded on a securities exchange.
LOAN CONSENT AGREEMENT:
The agreement between a brokerage firm and its margin client permitting the brokerage firm to lend the margined securities to other brokers; this contract is part of the margin agreement.
The maximum amount of money that can be borrowed in a margin account at a brokerage firm using eligible securities as collateral.
A term for a trader at the CBOT or CME who trades for his own account. They compete with each other to provide the best bid and ask prices for futures. Locals are basically the same type of traders that market makers are at the CBOE.
Refers to a futures market that has moved its daily maximum amount and, if the move is up, no one is willing to sell. Conversely, if the move is down, no one is willing to buy. Hence, the market is “locked” at the limit price with no trading.
As a noun, it refers to people who have bought stock or options. As an adjective, it refers to a position of long stock or options. Compare to short.
The strategy of buying puts as protection against the decline in the value of long securities.
In reference to the O,H,L,C, “L” represents the low price of the session.
An amount of cash or margin-eligible securities that must be maintained on deposit in a client’s account to maintain a particular position. If a client’s equity in his account drops to, or under, the maintenance margin level, the account may be frozen or liquidated until the client deposits more money or margin-eligible securities in the account to bring the equity above the maintenance margin level.
The amount of equity contributed by a client (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 client’s margin account.
An account that allows a client to borrow money from a brokerage firm against cash and margin-eligible securities held in the client’s margin account at that brokerage firm.
The amount a client has borrowed, using cash or margin-eligible securities as collateral, in his margin account.
A brokerage firm’s demand of a client for additional equity in order to bring margin deposits up to a required minimum level. If the client fails to deliver more equity in the account, the client’s positions may be liquidated.
Securities, such as stocks or bonds, that can be used as collateral in a margin account. Options are not margin-eligible securities.
The minimum equity required in an account to initiate or maintain a position in stock or options.
Mark is the mid point between the bid and the ask.
1) A quote, that is a bid and ask price for a stock or option, ex. the market on the XYZ Dec 75 calls is 2 ½ – 3, or 2) a term for all stocks as a whole, ex. the market is going up means stocks in general are rising, or 3) a place to trade.
The purchase of a put option and the underlying stock on the same day. Special tax rules may apply to this position.
The act of combining two or more corporations into one corporate entity. Options on stocks involved in mergers can be difficult to evaluate.
MINIMUM PRICE FLUCTUATION:
The smallest possible increment of price movement for a stock or option. It is often referred to as a “tick”.
Any one of the various option pricing models used to value options and calculate the “Greeks”. Models typically use six factors in their calculations: the underlying stock price, the strike price, the time until expiration, dividends, interest rates, and the volatility of the stock. Thinkorswim uses the Black-Scholes model for European-style options, and the Binomial model for American-style options.
MONEY MARKET FUND:
A special type of mutual fund that invests only in short-term, low-risk fixed-income securities, such as bankers’ acceptances, commercial paper, repurchase agreements and Treasury bills. The money market fund manager tries to maintain a share price of $1.00. Money market funds are not federally insured, even though the money market fund’s portfolio may consist of guaranteed securities.
When the same stock or option is listed on two or more different exchanges. For example, IBM options are traded on the CBOE, PHLX and AMEX.
Refers to the number, typically $100, used to calculate aggregate strike prices and premiums for options. The multiplier affects profit/loss calculations on options positions.
NAKED CALL OR PUT:
Refers to a short option position that doesn’t have an offsetting stock position. For example, a client 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.
The change in the price of a stock or option from the closing price of the previous day.
The difference between a client’s open long and open short positions in any one stock or option.
The role of a brokerage firm when client securities are held in street name.
Security that must be paid for in full. Call and put option contracts are examples of this type of security.
The purchase or sale of stock in less than the round lot increment of 100 shares.
OEX is the symbol for the Standard & Poor’s 100 cash Index. It is a capitalization-weighted index of 100 stocks from a broad range of industries. Cash-settled, American-style options on the OEX are traded at the CBOE.
Another name for the ask price. The price of a stock or option at which a seller is offering to sell.
ONE CANCELS OTHER (OCO):
Two orders submitted simultaneously by one client, where if one order is filled, the other is canceled immediately. A type of order which treats two or more option orders as a package, whereby the execution of any one of the orders causes all the orders to be reduced by the same amount. For example, the investor would enter an OCO order if he/she wished to buy 10 May 60 calls or 10 June 60 calls or any combination of the two which when summed equaled 10 contracts. An OCO order may be either a day order or a GTC order.
OPEN (O), THE:
The beginning of the trading session. In reference to the O,H,L,C, “O” represents the opening price of the session.
The value of all open positions in stock and options, less the margin requirements of those positions.
The 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 (PRICE) ORDER:
An order that is active until it is either executed or canceled.
A public auction, using verbal bids and offers, for stocks or options on the floor of an exchange.
A long or short position in stock or options.
The range of the first bid and offer prices made or the prices of the first transactions.
Process by which options are systematically priced after the opening of the underlying stock.
An opening purchase transaction adds long stock or options to a position, and an opening sale transaction adds short stock or options to a position.
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.
A list of all options on a particular stock.
OPTION PRICING MODEL:
Any one of the various models used to value options and calculate the “Greeks”. Models typically use six factors in their calculations: the underlying stock price, the strike price, the time until expiration, dividends, interest rates, and the volatility of the stock. Thinkorswim uses the Black-Scholes model for European-style options, and the Binomial model for American-style options.
OPTIONS CLEARING CORPORATION, THE (OCC):
The issuer and registered clearing facility of all options contracts traded on the AMEX, CBOE, PCX, and PHLX. It supervises the listing of options and guarantees performance on option contracts.
OPTIONS DISCLOSURE DOCUMENT:
This document is published by The Options Clearing Corporation (OCC) and must be distributed to all clients intending to open an option account with Thinkorswim. The document itself outlines the risks and rewards of investing in options. The document is also called the OCC Risk Disclosure Document.
An instruction to purchase or sell stock or options.
ORDER BOOK OFFICIAL (OBO):
Employees of the exchanges, OBOs manage clients’ limit orders on the floor of the exchange.
The orders to buy and sell stock or options that brokers send to market makers.
ORDER ROUTING SYSTEM (ORS):
The system utilized by the Chicago Board Options Exchange (CBOE) to collect, store, route and execute orders for clients of the exchange. The ORS system automatically routes option market and limit orders to the various execution vehicles at the CBOE including the RAES system.
A situation that results when there is some error on a trade. Differences between the buyer and seller regarding option price, option strike price or expiration month, or underlying stock are some of the reasons an out-trade might occur. Other costly errors occur when there was a buy versus a buy or a sell versus a sell.
OVER-THE-COUNTER (OTC) MARKET:
A securities market made up of dealers who may or may not be members of a securities exchange. In the OTC market, there is no exchange floor, such as the NYSE or CBOE.
A term used to describe an in-the-money option when the option’s total premium is equal to its intrinsic value. Such an option moves 1 point for every 1 point move in the underlying stock, and is said to be “worth parity” or “trading for parity”.
A limit order that is only partially executed because the total specified number of shares of stock or options could not be bought or sold at the limit price.
Date on which the dividend on a stock is actually paid to shareholders of record. Compare to ex-dividend date and record date.
The risk to a trader who is short an option that, at expiration, the underlying stock price is equal to (or “pinned to”) the short option’s strike price. If this happens, he will not know whether he will be assigned on his short option. The risk is that the trader doesn’t know if he will have no stock position, a short stock position (if he was short a call), or a long stock position (if he was short a put) on the Monday following expiration and thus be subject to an adverse price move in the stock.
PLUS TICK or UP TICK:
A term used to describe a trade made at a price higher than the preceding trade.
PLUS TICK RULE:
SEC regulation governing the market price at which a short sale may be made. Meaning, no short sale may be executed at a price below the price of the last sale. See also down tick or minus tick.
The minimum change in the handle of a stock or option price. For stock or options in the U.S., a point means $1. If the price of an option goes from $2.00 to $7.00, it has risen 5 points.
Long or short stock or options in an account.
For a single trader, client, or firm, the maximum number of allowable open option contracts on the same underlying stock. The limits are established by the exchanges.
Establishing a position in stocks or options and holding it for an extended period of time. Compare to day trading.
A class of stock (as distinguished from common stock) with a claim on a company’s earnings before dividends may be made on the common stock. Preferred stock usually has priority over common stock if the company is liquidated.
The price of an option.
The lowest interest rate commercial banks charge their largest and most credit-worthy corporate clients.
A ratio of the trading volume of put options to call options. It is used to gauge investor sentiment.
A put option gives the buyer of the put the right, but not the obligation, to sell the underlying stock at the option’s strike price. The seller of the put is obligated to take delivery of (buy) the underlying stock at the option’s strike price to the buyer of the put when the buyer exercises his right.
The bid to buy and the offer to sell a particular stock or option at a given time. If you see a “quote” for an option on the screen “3 ½ – 3 7/8”, it means that the bid price is $3.50 and the ask price is $3.875. This means that at the time the quote was disseminated, $3.50 was the highest price any buyer wanted to pay, and $3.875 was the lowest price any seller would take.
A rise in the price of a stock or the market as a whole. Compare to reaction.
The high and low prices of a stock or option recorded during a specified time.
An option position composed of either all calls or all puts, with long options and short options at two different strike prices. The options are all on the same stock and usually of the same expiration, with more options sold than purchased. A ratio spread is the purchase of an option(s) and the sale of a greater number of the same type of options that are out-of-the-money with respect to the one(s) purchased. For example, a 50/60 call 1-by-2 ratio spread is long 1*50 call and short 2*60 calls.
A decline in price of a stock or the market as a whole following a rise. Compare to rally.
REALIZED GAINS OR LOSSES:
The profit or loss incurred in an account when a closing trade on a stock or option is made and matched with an open position in the same stock or option.
RECORD DATE (DATE OF RECORD):
The date by which someone must be registered as a shareholder of a company in order to receive a declared dividend. Compare to ex-dividend date and payment date.
REGISTERED OPTIONS PRINCIPAL:
An employee of a brokerage firm who has passed the FINRA Series 4 exam, which provides in-depth knowledge related to options. The registered options principal is an officer or partner in a brokerage firm who approves client accounts in writing.
An employee of a brokerage firm who has passed the FINRA Series 7 and Series 63 exam.
REGULATION T (REG T):
The regulation, established by the Federal Reserve Board, governing the amount of credit that brokers and dealers may give to clients to purchase securities. It determines the initial margin requirements and defines eligible, ineligible, and exempt securities.
The practice of pledging a client’s securities as collateral for a bank loan. A brokerage firm may rehypothecate up to 140% of the value of their clients’ securities to finance margin loans to clients.
An order that is not executed because it is invalid or unacceptable in some way.
A margin account in which the equity is less than the REG T initial requirement. A restricted account with Thinkorswim will be restricted to closing transactions only.
RETAIL AUTOMATIC EXECUTION SYSTEM (RAES):
The system utilized by the CBOE to execute option market and executable limit orders for retail clients received by the exchange’s ORS. Retail option orders executed via the RAES system are filled instantaneously at the prevailing market quote and are confirmed almost immediately to the originating firm.
REVERSAL (MARKET REVERSAL):
When a stock’s direction of price movement stops and heads in the opposite direction.
REVERSAL (REVERSE CONVERSION):
A position of short stock, long a call, and short a put (with the call and put having the same strike price, expiration date, and underlying stock). The long call and short put acts very much like long stock, thus acting as a hedge to the short stock. So, a reversal has a very small delta. A reversal is a way to exploit mispricings in carrying costs.
An action taken by a corporation in which the number of outstanding shares is reduced and the price per share increases. For example, if a trader were long 100 shares of stock of a company with a price of $80, and that company instituted a 1-for-4 reverse split, the trader would see his position become long 25 shares of stock with a price of $320. The value of the trader’s position does not change (unless the price of the stock subsequently changes) and his proportionate ownership in the company remains the same. Compare to stock split.
An instantaneous measurement of the price sensitivity of an option relative to a change in interest rates when all other factors are held constant. This is typically expressed in the amount of money per option, per one-percent (100 basis point) change in interest rates. Rho is dependent upon the stock price, strike price, volatility, interest rates, dividends, and time to expiration.
Calculations that use stock price and volume data to identify patterns helping to predict future stock movements. Some technical analysis tools include moving averages, oscillators, and trendlines.
An offer from one company to buy shares of stock of another company from that other company’s existing stockholders. Those stockholders are asked to “tender” (surrender) their shares for a specific price (represented by cash, shares in another company, or both), which is usually higher than the current market price of the stock.
An estimated price of a call or put derived from a mathematical model, such as the Black-Scholes or binomial models.
An approximation of the decrease in the price of an option over a period of time when all other factors are held constant. Theta is generally expressed on a daily basis. For example, if a call has a price of $3.00 and a theta of 0.10, one day later, with all else unchanged, the call would have a price of $2.90 ($3.00 – (.10 x 1)). Generated by a mathematical model, theta depends on the stock price, strike price, volatility, interest rates, dividends, and time to expiration.
The smallest possible price increment for a stock or option.
The telegraphic system which prints or displays last sale prices and volume of securities transactions on exchanges on a moving tape within a minute after each trade. Also known as the “tape”.
TIME AND SALES:
A record of the time, price and volume of each transaction of every stock and option.
Option price erosion over time. Another name for theta.
Another name for calendar spread.
Another name for extrinsic value.
Written permission from the owner of an account authorizing another person to enter trades on behalf of the owner. Also called Power of Attorney.
The part of an exchange where the stocks and options are actually bought and sold.
A temporary suspension of trading in a particular stock due anticipation of a major news announcement or an imbalance of buy and sell orders.
A particular location on the trading floor of an exchange designated for the trading of a specific stock or options on a specific stock or index.
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.
Shares of stock issued by a company but later bought back by the company. These shares may be held in the company’s treasury indefinitely, used for employee bonus plans, reissued to the public, or retired. Treasury stock is ineligible to vote or receive dividends.
Either an uptrend or a downtrend, successive price movements in the same direction in a security over time
A legal relationship in which a person or entity (the trustee) acts for the benefit of someone else.
The classification of an option as either a call or a put.
When the market is unchanged.
UNCOVERED CALL OR PUT:
Another term for naked call or put.
UNDERLYING (STOCK OR SECURITY):
The stock or other security that determines the value of a derivative security and that (with the exception of cash-settled options) would be purchased or sold if an option on that underlying stock or security was exercised. Examples of underlying securities are stocks, bonds, futures and indices.
The company-specific microeconomic factors that affect an individual stock. Theoretically, it’s the risk in a portfolio that can be reduced through diversification. Compare to systematic risk.
A term used to describe a trade made at a price higher than the preceding trade.
Successive upward price movements in a security over time.
An approximation of the change in the price of an option relative to a change in the volatility of the underlying stock when all other factors are held constant. This is typically expressed for a one-percent change in volatility. For example, if a call has a price of $2.00 and a vega of .65, if volatility rises 1%, the call would have a price of $2.65 ($2.00 + (.65 x 1.00)). Generated by a mathematical model, vega depends on the stock price, strike price, volatility, interest rates, dividends, and time to expiration.
An option position composed of either all calls or all puts, with long options and short options at two different strikes. The options are all on the same stock and of the same expiration, with the quantity of long options and the quantity of short options netting to zero. A long call vertical (bull spread) is created by buying a call and selling a call with a higher strike price. A short call vertical (bear spread) is created by selling a call and buying a call with a higher strike price. A long put vertical (bear spread) is created by buying a put and selling a put with a lower strike price. A short put vertical (bull spread) is created by selling a put and buying a put with a lower strike price. For example, a short 70/80 put vertical is long 1*70 put and short 1*80 put.
VIX (VOLATILITY INDEX):
Created by the CBOE, the VIX is an index of volatility calculated from the extrinsic value of out of the money SPX index options.
Generically, volatility is the size of the changes in the price of the underlying security. In practice, volatility is presented as either historical or implied.
Volatility skew, or just “skew”, arises when the implied volatilities of options in one month on one stock are not equal across the different strike prices. For example, there is skew in XYZ April options when the 80 strike has an implied volatility of 45%, the 90 strike has an implied volatility of 47%, and the 100 strike has an implied volatility of 50%. If the implied volatilities of options in one month on one stock ARE equal across the different strike prices, the skew is said to be “flat”. You should be aware of volatility skew because it can dramatically change the risk of your position when the price of the stock begins to move.
The total number of shares of stock or option contracts traded on a given day.
A security issued by a corporation that gives the holder the right to purchase securities at a specific price within a specified time limit (or sometimes with no time limit). Warrants are sometimes like call options, but the main differences are that warrants typically have much longer lives whereas options tend to expire relatively soon, and that warrants are issued by a company to raise money whereas options are created by the OCC.
An individual who sells an option short.