TheoTrade Glossary of Terms
Glossary of Terms
AD : $ADSPD is the adv/decline for the S&P 500 and we use it as an indicator to determine overall breadth of the market. AD needs to support the trade that you are in. If short you want AD to come in — Long and you want a rising AD.
Ask Price: The price which a buyer must pay for an option or a stock.
Assign: To designate an option writer for fulfillment of his or her obligation to sell a stock (call option writer) or buy stock (put option writer). The writer receives an assignment notice from his brokerage firm.
At the Money: A term that describes an option with an exercise price that is equal or close to the current market price of the underlying stock.
Average Down: To buy more of a security at a lower price, thereby reducing the holder’s average cost
Bear Market: A long-term market downtrend lasting months to years.
Bearish: Describes the opinion or outlook that expects a decline in price, either in the general market or in an underlying stock, or both.
Bear Spread: An option strategy that makes its maximum profit when the underlying stock declines below a certain point and has its maximum risk if the stock rises far enough in price. The strategy can be implemented in either puts or calls. In either case, an option with a higher strike price is bought and one with a lower strike price is sold.
Belief System: The vision of the subconscious mind of what you should be doing and are worthy of.
Beta: A measure of how a stock’s movement corresponds to the movement of the entire market.
Between-the-Price Spread: When one buys a stock or option between the bid and the ask price.
Bid and Ask: The bid is the highest price anyone can sell a particular stock or option for at a given time. The ask is the highest price anyone is willing to pay for a particular stock or option at a given time. Typically, the buyer pays the ask and the seller receives the bid.
Bid Price: The price at which a seller can sell an option or a stock.
Break-Even Point: The stock price (or prices) at which a particular strategy neither makes nor loses money.
Bull Market: A long-term market uptrend lasting months to years.
Bull Spread: An option strategy that makes its maximum profit when the underlying security rises above a certain point, and has its maximum risk if the security falls far enough in price. The strategy can be implemented with either puts or calls. In either case, an option with a lower strike price is bought and one with a higher strike price is sold.
Bullish: The opinion or outlook in which one expects a rise in price, either by the general market, an individual security, or both.
Butterfly Spread: a neutral option strategy combining bull and bear spreads. Butterfly spreads use four option contracts with the same expiration but three different strike prices to create a range of prices the strategy can profit from. The trader sells two option contracts at the middle strike price and buys one option contract at a lower strike price and one option contract at a higher strike price. Both puts and calls can be used for a butterfly spread.
Calendar Spread: A calendar spread is an options or futures spread established by simultaneously entering a long and short position on the same underlying asset but with different delivery months. Sometimes referred to as an interdelivery, intramarket, time or horizontal spread.
Call: An option that gives the holder the right to buy the underlying security at a specified price for a certain period of time.
Candlestick Chart: (also called Japanese candlestick chart) is a style of financial chart used to describe price movements of a security, derivative, or currency. Each “candlestick” typically shows one day; so for example a one-month chart may show the 20 trading days as 20 “candlesticks”.
Closing Transaction: A trade that reduces an investor’s position. Closing “buy” transactions reduce short positions and closing “sell” transactions reduce long positions.
Collateral: In respect to option writing, the loan value of marginable securities, generally used to secure a loan to purchase securities.
Combination: Any strategy involving the purchase or sale of both put and call options on the same security that is not a straddle.
Cover: To buy back, as a closing transaction, an option that was initially written.
Covered: A written option is “covered” if the writer also has an opposing market position in an underlying stock/security on a share-for-share basis. A short call is covered if the underlying security is owned (a buy-write), and a short put is covered (for margin purposes) if the underlying stock is also short in the account.
Covered Call Write: A strategy in which one sells call options, while simultaneously purchasing an equivalent number of shares of the underlying security.
Covered Put Write: A strategy in which one sells put options and is short an equivalent number of shares of the underlying security.
Credit: Money received in an account. A credit transaction is one in which the net sale proceeds are larger than the net buy proceeds (cost), thereby bringing money into the account.
Credit Spread: The yield spread is also called the credit spread. The yield spread shows the difference between the quoted rates of return between two different investment vehicles. These vehicles usually differ regarding credit quality. Some analysts refer to the credit or yield spread as the “yield spread of X over Y”. This is usually the yearly percentage return on investment of one financial instrument minus the annual percentage return on investment of another.
Cycle: The expiration dates applicable to various classes of options. There are three cycles: 1) January, April, July and October; 2) February, May, August and November; and 3) March, June, September and December.
Day Order: A trading order that lasts only for one day. If the order is not filled by the end of the day, it is cancelled. Typically, unless otherwise specified, all orders are considered day orders.
Debit: An expense, or money paid out from an account. A debit transaction is one in which the net cost is greater than the net sale proceeds.
Debit Spread: An option spread strategy in which the premiums paid for the long leg(s) of the spread is more than the premiums received from the short leg(s), resulting in funds being debited from the option trader’s account when the position is entered. In other words, it’s two options with different market prices that an investor trades on the same underlying security. The higher priced option is purchased and the lower premium option is sold – both at the same time.
Delta: The amount by which an option’s price will change for a one-point change in the price of the underlying security. Call options have positive deltas, while put options have negative deltas. The delta is an instantaneous measure of the option’s price change, so that the delta will be altered for even fractional changes by the underlying security.
Delta Neutral: A portfolio strategy consisting of multiple positions with offsetting positive and negative deltas so that the overall delta of the assets in questions totals zero. A delta-neutral portfolio balances the response to market movements for a certain range to bring the net change of the position to zero.
Delta Spread: A ratio spread that is established as a neutral position by utilizing the deltas of the options involved. The neutral ratio is determined by dividing the delta of the purchased option by the delta of the written (sold) option.
Directional Bias: Is actually a type of ‘Directional Trading’ where trading strategies are based on the investor’s assessment of the broad market or a specific security’s direction. Directional trading can mean a basic strategy of going long if the market or security is perceived as heading higher, or taking short positions if the direction is downward. A trader can develop an internal bias towards one direction or the other.
Discount: An option is traded at a discount when it is traded for less than its intrinsic value. A future is trading at a discount if it is trading at a price less than the cash price of its underlying index or commodity.
Dow Jones Industrial Average (DJIA): The most widely used indicator of market activity, composed of an average of 30 large issues within the industrial sector of the economy.
Downside Protection: Generally used in connection with covered call writing, but always used by RATs when buying puts while long stock to prevent disaster. When used in buy-write, it is the call premium that gives you a limited cushion on the downside. The cushion is equal to the call premium.
Duration: a measure of the sensitivity of the price — the value of principal — of a fixed-income investment to a change in interest rates. Duration is expressed as a number of years. Bond prices are said to have an inverse relationship with interest rates. Therefore, rising interest rates indicate bond prices are likely to fall, while declining interest rates indicate bond prices are likely to rise.
Energy: As referenced to a price chart, the potential of a chart to continue trending in a singular direction.
Equity Option: An option that has common stock as its underlying security.
ETF’s (Exchange Traded Funds): a marketable security that tracks an index, a commodity, bonds, or a basket of assets like an index fund. Unlike mutual funds, an ETF trades like a common stock on a stock exchange. ETFs experience price changes throughout the day as they are bought and sold. ETFs typically have higher daily liquidity and lower fees than mutual fund shares, making them an attractive alternative for individual investors.
Ex-Dividend: The process whereby a stock’s price is reduced when a dividend is paid. The ex-dividend date (ex-date) is the date on which the price reduction takes place. Investors who own stock at the close of business on the business day prior to the ex-date will receive the dividend. Those who are short stock must pay the dividend.
Exercise: To invoke the right granted under the terms of a listed option contract. Call holders exercise to buy the underlying securities, while put holders exercise to sell the underlying securities.
Exhaustion: As measured by the Fractal Energy study, when the linearity of a trending move has reached an extreme point and is showing a strong probability of pulling into range-bound or consolidation price action.
Float: The number of shares outstanding of a particular common stock.
Floor Broker: A broker on the exchange floor who executes the orders of public customers or other traders who do not have physical access to the trading floor.
Fractal: The inherent nature of objects in nature as well as price charts that larger things/larger timeframe moves are built up from smaller things/smaller timeframe moves. Larger things are built on many identical smaller things.
Fundamental Analysis: A method of analyzing the prospects of a security by observing accepted accounting measures, such as earnings, sales, assets, etc.
Futures: A futures exchange or futures market is a central financial exchange where people can trade standardized futures contracts; that is, a contract to buy specific quantities of a commodity or financial instrument at a specified price with delivery set at a specified time in the future.
GTC: Good Till Canceled. An order to buy or sell will remain open until fulfilled. Most brokerage houses limit the GTC to 60 or 90 days.
Horizontal Spread: A.K.A. calendar or time spreads is an option spread strategy employing two options, calls with calls or puts with puts, of the same stock, same strike price, but different expiration dates.
In/Out Spread: (TheoTrade exclusive): A vertical debit spread in which one leg is one strike in-the-money and the other leg is one strike out-of-the-money.
In the Money: A term describing any option that has intrinsic value. A call option is “in the money” if the price of the underlying security is higher than the strike price of the call. A put option is “in the money” if the price of the security is below the strike price.
Incremental Return Concept: A strategy of covered call writing in which the investor is striving to earn an additional return from option writing against a stock position which he has targeted to sell, possibly at substantially higher prices.
Index Option: An option that has a stock index as its underlying security.
Intrinsic Value: The value of an option if it were to expire immediately with the underlying security at its current price; the amount by which an option is “in the money”. For call options, this is the stock price less the strike price. Intrinsic value can never have a negative value. An option has either has a positive intrinsic value or zero intrinsic value.
Implied Volatility: The estimated volatility of a security’s price. In general, implied volatility increases when the market is bearish, when investors believe that the asset’s price will decline over time, and decreases when the market is bullish, when investors believe that the price will rise over time. This is due to the common belief that bearish markets are riskier than bullish markets. Implied volatility is a way of estimating the future fluctuations of a security’s worth based on certain predictive factors.
Iron Condor: An option trading strategy utilizing two vertical spreads – a put spread and a call spread with the same expiration and four different strikes. A long iron condor is essentially selling both sides of the underlying instrument by simultaneously shorting the same number of calls and puts, then covering each position with the purchase of further out of the money call(s) and put(s) respectively. The converse produces a short iron condor.
LEAPS™: Long-term Equity AnticiPation Securities. A term used to describe options with expiration dates longer than nine months.
Leg: A risk-oriented method of establishing a two-sided position. Rather than entering into a simultaneous transaction, the trader first executes one side of the position, hoping to execute the other side at a later time and at a better price. The risk materializes from the fact that a better price may never be available and a worse price may eventually be all that is available.
Leverage: In investments, the attainment of a greater percentage of profit and risk potential. A call holder has leverage with respect to a stock holder, and the former will have a greater percentage of profits and losses than the latter, for the same movement in the underlying stock.
Limit Order: An order to buy or sell securities at a specified price (the limit) or better (i.e., more favorable to the investor).
Limit Down: The maximum amount by which the price of a commodity futures contract may decline in one trading day. Limit down also refers to the maximum decline permitted in individual stocks on certain exchanges before trading curbs kick in.
Margin: To buy a security by borrowing funds from a brokerage house. The margin requirement, the maximum percentage of the investment that can be loaned by the brokerage firm, is set by the Federal Reserve Board.
Margin Call: A demand by a broker that an investor deposit further cash or securities to cover possible losses.
Market Neutral: a type of investment strategy undertaken by an investor that seeks to profit from both increasing and decreasing prices in one or more markets, while attempting to completely avoid some specific form of market risk. Market-neutral strategies are often attained by taking matching long and short positions in different stocks to increase the return from making good stock selections and decreasing the return from broad market movements.
Market Maker: An exchange member whose function is to aid in the making of a market by making bids and offers for his account in the absence of public buy or sell orders. Several market makers are generally assigned to a particular security. The market maker system encompasses the market makers, floor brokers, and order book officials.
Market Order: When someone places a market order to sell or buy a security, they are agreeing to accept the current market price. The order will be filled as long as there is a market for the security.
Married Put: When an investor owns a stock and a put on the same company. If he owns 1,000 shares of a stock and ten puts he has a married put position.
Non-Equity Option: An option whose underlying security is not common stock, e.g., index options.
Offering: Taking profits on longs or Entering to get SHORT
Open Interest: The net total of outstanding open contracts in a particular option series. An opening transaction increases the open interest, while a closing transaction reduces the open interest.
Open Order and Filled Order: An order is open when it is still pending. It is filled when it is executed.
Open, Low, High, Close: The open is the initial price paid for a stock on a day of trading. The low is the lowest price paid for a stock during the day, the high is the highest price paid for a stock during the day, and the close is the last price paid for a stock on a particular day.
Opening Transaction: A trade that adds to the net position of an investor. An opening buy transaction adds more long securities to the account. An opening sell transaction adds more short securities.
Options Clearing Corporation (OCC): The issuer of all listed options contracts that are trading on the national options exchanges.
Order Book Official: An exchange employee who handles public limit orders on exchanges, utilizing the market-maker system rather than the specialist system of executing orders.
Out of the Money: An option without intrinsic value. A call option is “out of the money” if the stock is below the strike price of the call, while a put option is “out of the money” if the stock price is above the strike price of the put.
Overbought: A situation in which the demand for a certain asset or security unjustifiably pushes the price of that asset or underlying asset to levels that are not justified by fundamentals. Overbought is often a term used in technical analysis to describe a situation in which the price of a security has risen to such a degree – usually on high volume – that an oscillator has reached its upper bounds.
Oversold: A condition in which the price of an underlying asset has fallen sharply to a level below where its true value resides. This condition is usually a result of market overreaction or panic selling and is generally considered short term in nature. When an asset has been oversold, the price is expected to rebound in an event referred to as a price bounce.
Over-the-Counter Option (OTC): An option traded off the exchange, as opposed to a listed option. The OTC option has a direct link between the buyer and seller (no secondary market and no standardization of striking prices or expiration dates).
Pairs Trading: Pairs trading is a market-neutral trading strategy that matches a long position with a short position in a pair of highly correlated instruments such as two stocks, exchange-traded funds (ETFs), currencies, commodities or options. The pairs trade or pair trading is a market neutral trading strategy enabling traders to profit from virtually any market conditions: uptrend, downtrend, or sideways movement. This strategy is categorized as a statistical arbitrage and convergence trading strategy.
Parity: An in-the-money option trading for its intrinsic value, e.g., an option trading at parity with the underlying stock. Also used as a point of reference. An option is said to be trading at a half point over parity or at a quarter point under parity. An option trading under parity is a discount option.
Position: As a noun, specific securities in an account (a covered call writing position might be long 1,000 XYZ and short 10 XYZ January 30 calls). As a verb, to facilitate; to buy or sell, generally a block of securities, thereby establishing a position.
Premium: For options, it is the total price of the option contract, the sum of the intrinsic value and the time value premium.
Price Action: Reading the bars and looking for patterns. Higher lows, Higher highs – Lower highs, Lower lows.
Protected Strategy: A position with limited risk. A protected short sale (short stock, long call) has limited risk, as does a protected straddle write (short straddle, long out-of-the-money combination).
Put: An option granting the owner the right to sell a security at a set price for a specific period of time.
Range Contraction: When the price of a stock moves from trending price action into a range-bound area, or “contracts” in price range.
Range Expansion: Referring to when the price of a stock moves out of a consolidation zone and trends strongly in one direction.
RAS (Reticular Activating System): Works for the Subconscious Mind to act as the “eyes and ears” to gather requested information that is aligned with the Belief System.
Rate of Return: The return (R) divided by the investment (I) determines the percentage rate of return on the investment, i.e., R ÷ I = %R or ROI
Resistance: A term in technical analysis indicating a price area higher than the current stock price, where an abundance of supply is thought to exist for the stock, so that the stock may have trouble rising through the price.
Risk Markers: Levels used to identify risk on the entry from a SPOT – The Marker represents the ENTIRE handle (42.00, 42.25, 42.5, 42.75
Roll Down: To close out options at one strike price and simultaneously open other options at a lower strike price.
Roll Forward: To close out options at the near-term expiration date and open options at a longer-term expiration date. Also called “roll out”. We like this strategy and it can be done more than one time in an expiration cycle.
Roll Up: To close out options at a lower striking price and open at a higher striking price.
Secondary Market: Any market in which securities can be readily bought and sold after their initial issuance. The national listed options exchanges provide a secondary market in stock options.
Securities: Stock, bonds and options.
Series: All option contracts on the same underlying stock having the same striking price, expiration date, and unit of trading.
Short Option Position: The position of an option writer that represents an obligation to meet the terms of the option if exercised.
Specialist/Market Maker: A person on the floor of an exchange, or on a trading desk if the stock is unlisted (NASDAQ), who is responsible for giving a price where they will buy or sell the stock or option he trades for his own account. Note: when a brokerage firm trades for its own account, in addition to having public customers, i.e., you, it is called proprietary trading.
SPOTS: Levels used for entries on the NQ chart — The SPOT represents the ENTIRE handle (46.00, 46.25, 46.5, 46.75)
SPOTS Open: When price comes from a SPOT and breaches the marker above/below the handle it “opens” the coresponding SPOT for a test – eg. from 46 SPOT a 2min bar closes at 41.75 or better – the 33 SPOT opens.
Spread: The spread trade is also called the relative value trade. Spread trades are the act of purchasing one security and selling another related security as a unit. Usually, spread trades are done with options or futures contracts. These trades are executed to produce an overall net trade with a positive value called the spread. Spreads are priced as a unit or as pairs in future exchanges to ensure the simultaneous buying and selling of a security. Doing so eliminates execution risk where in one part of the pair executes but another part fails.
Spread Order: An order to simultaneously transact two or more option trades. Typically, one option would be bought while another would be sold.
Spread Strategy: Any option position having both long options and short options of the same type on the same underlying security.
Standard Deviation: A measure of the volatility of a stock. It is a statistical quantity measuring the magnitude of the daily price changes of a stock.
Static Return: The return on a particular position if the underlying stock were unchanged in price at the expiration of the options in the position.
Stock Option: The right to buy (a “call”) or sell (a “put”) a particular stock at a particular price (the “strike price”) on or before a particular date (the “expiration date”). Normally an option represents a 100-share lot (an “options contract”).
Stock Symbol: The symbol chosen by a company to represent their stock on the ticker.
Stop Limit Order: Similar to a stop order, the stop limit order becomes a limit order, rather than a market order, when the security trades at the price specified as the stop price.
Stop Order: An order placed away from the current market that becomes a market order if the security trades at the price specified by the stop order. Buy stop orders are placed above the market, while sell stop orders are placed below it. They are called stop orders because they attempt to stop your loss at a specified price.
Straddle: The purchase or sale of an equal number of puts and calls having the same terms (i.e., strike price and expiration date).
Strangle: The purchase or sale of an equal number of calls and puts with the calls being for a strike price above the stock price and the puts being for a strike price below the stock price, both with the same expiration date.
Strategy: A preconceived, logical plan of position selection and follow-up action.
Strike Price: The strike price is the price at which the option allows one to buy or sell the underlying stock.
Suitable: Describing a strategy or trading philosophy in which the trader is operating in accordance with his/her financial means and trading objectives.
Support: A price area lower than the current price of the stock, where demand is thought to exist. In many cases, a stock stops declining when it reaches a support area.
Swing Trading: Attempts to capture gains in a stock (or any financial instrument) within an overnight hold to several weeks. Swing traders use technical analysis to look for stocks with short-term price momentum. These traders may utilize fundamental or intrinsic value of stocks in addition to analyzing the price trends and patterns.
Synthetic Call: A strategy equivalent in risk to purchasing a call option whereby an investor buys stock and buys a put.
Synthetic Put: A strategy equivalent in risk to purchasing a put option whereby an investor sells stock short and buys a call.
Synthetic Stock: An option strategy that is equivalent to a position in the underlying stock. A long call and a short put are synthetic long stock. A long put and a short call are synthetic short stock.
Technical Analysis: A method of predicting future price movements based on observation of historical stock price movements.
Time Value Premium: The amount by which an option’s total premium exceeds its intrinsic value.
Trader: A speculative investor who frequently buys and sells.
Uncovered Option: A written option is considered to be “uncovered” if the trader does not have an offsetting option or stock position.
Underlying Security: The security which one has the right or obligation to buy or sell according to the terms of a listed option contract.
Undervalued: Describing a security that is trading at a lower price than it logically should (usually determined by the use of a mathematical model).
Variable-Ratio Write: An option strategy in which the investor owns 100 shares of the underlying security and writes two call options against it, each having a different striking price.
Vertical Spread: Any option spread strategy using two options, calls with calls and puts with puts, of the same stock, same series, same expiration dates, but different strike prices.
Volatility: The term used to describe a stock’s price fluctuation. A measure of the amount by which an underlying security is expected to fluctuate in a given period of time. Generally measured by the annual standard deviation of the daily price changes in the security. Also called VOL. Volatility is not equal to the beta of the stock. Stocks high in volatility are prone to more price fluctuations.
Volume: The number of shares or options of a particular stock trading within a particular time frame.
Weekly Options: or commonly called “Weeklys”, are options listed with approximately one week to expiration, different from traditional options that have a life of months or years before expiration
Write: To sell an option. The trader who sells is called the writer.