Options Glossary For Income Investors

Option trading comes with a fair amount of specialized lingo. Before you start putting in orders to buy and sell, here are some terms you should know, with definitions provided by the Chicago Board Options Exchange. Ask Price: The price at which a seller is offering to sell an option or stock.

Assignment: The receipt of an exercise notice by an option writer (seller) that obligates him to sell (in the case of a call) or purchase (in the case of a put) the underlying security at the specified strike price. At-the-money: An option is “at-the-money” if the strike price of the option is equal to the market price of the underlying security. Automatic Exercise: A protection procedure whereby the Options Clearing Corporation attempts to protect the holder of an expiring in-the-money option by automatically exercising the option on behalf of the holder.

Bearish: An adjective describing an opinion or outlook that expects a decline in price, either by the general market or by an underlying stock or both. Bid Price: The price at which a buyer is willing to buy an option or stock. Call: An option contract that gives the holder the right to buy the underlying security at a specified price for a certain, fixed period of time.

Carrying Cost: The interest expense on a debit balance created by establishing a position. Cash-Based: Referring to an option or future that is settled in cash when exercised or assigned. No physical entity, either stock or commodity, is received or delivered.

Cash Settlement: The process by which the terms of an option contract are fulfilled through the payment or receipt in dollars of the amount by which the option is in-the-money as opposed to delivering or receiving the underlying stock. Closing Purchase: A transaction in which the purchaser’s intention is to reduce or eliminate a short position in a given series of options. Closing Sale: A transaction in which the seller’s intention is to reduce or eliminate a long position in a given series of options.

Closing Transaction: A trade that reduced an investor’s position. Closing buy transactions reduce short positions and closing sell transactions reduce long positions. Collateral: The loan value of marginable securities; generally used to finance the writing of uncovered options.

Contingent Order: An order that can be executed only if another event occurs; i. e. “sell October 45 call 7.

25 with stock 52 or lower. ” Cover: To buy back as a closing transaction an option that was initially written. With inflation running at 4.

0%, dividend stocks offer one of the best ways to beat inflation and generate a dependable income stream. Download Five Dividend Stocks To Beat Inflation, a special report from Forbes’ dividend expert, John Dobosz. Covered: A written option is considered to be covered if the writer also has an opposing market position on a share-for-share basis in the underlying security.

That is, a short call is covered if the underlying stock is owned, and a short put is covered (for margin purposes) if the underlying stock is also short in the account. In addition, a short call is covered if the account is also long another call on the same security, with a striking price equal to or less than the striking price of the short call. A short put is covered if there is also a long put in the account with a striking price equal to or greater than the striking price of the short put.

Covered Call: An option strategy in which a call option is written against long stock on a share-for-share basis. Covered Call Option Writing: A strategy in which one sells call options while simultaneously owning an equivalent position in the underlying security or strategy in which one sells put options and simultaneously is short an equivalent position in the underlying security. Covered Put Write: A strategy in which one sells put options and simultaneously is short an equal 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. See also Debit.

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. See also Credit.

Deliver: To take securities from an individual or firm and transfer them to another individual or firm. A call writer who is assigned must deliver stock to the call holder who exercised. A put holder who exercises must deliver stock to the put writer who is assigned.

Delivery: The process of satisfying an equity call assignment or an equity put exercise. In either case, stock is delivered. For futures, the process of transferring the physical commodity from the seller of the futures contract to the buyer.

Equivalent delivery refers to a situation in which delivery may be made in any of various, similar entities that are equivalent to each other (for example, Treasury bonds with differing coupon rates). Delta: The amount by which an option’s price will change for a one-point change in price by the underlying entity. Call options have positive deltas, while put options have negative deltas.

Technically, 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 entity. Derivative security: A financial security whose value is determined in part from the value and characteristics of another security, the underlying security. Downside Protection: Generally used in connection with covered call writing, this is the cushion against loss, in case of a price decline by the underlying security, which is afforded by the written call option.

Alternatively, it may be expressed in terms of the distance the stock could fall before the total position becomes a loss (an amount equal to the option premium), or it can be expressed as a percentage of the current stock price. Exercise: To implement the right under which the holder of an option is entitled to buy (in the case of a call) or sell (in the case of a put) the underlying security. Exercise price: The price at which the option holder may buy or sell the underlying security, as defined in the terms of his option contract.

It is the price at which the call holder may exercise to buy the underlying security or the put holder may exercise to sell the underlying security. Expiration date: The day on which an option contract becomes void. The options holder generally must indicate their desire to exercise, if they wish to do so, on or by the expiration date.

Gamma: The rate of change in an option’s delta for a one-unit change in the price of the underlying security. Good Until Canceled (GTC): A designation applied to some types of orders, meaning the order remains in effect until it is either filled or canceled. Implied Volatility: A measure of the volatility of the underlying stock, it is determined by using option prices currently existing in the market at the time rather than using historical data on the price changes of the underlying stock.

Limit Order: An order to buy or sell securities at a specified price (the limit). A limit order may also be placed “with discretion. ” In this case, the floor broker executing the order may use their discretion to buy or sell at a set amount beyond the limit if they feel it is necessary to fill the order.

Market Order: An order to buy or sell securities at the current market. The order will be filled as long as there is a market for the security. Opening Purchase: A transaction in which the purchaser’s intention is to create or increase a long position in a given series of options.

Opening Sale: A transaction in which the seller’s intention is to create or increase a short position in a given series of options. With inflation running at 4. 0%, dividend stocks offer one of the best ways to beat inflation and generate a dependable income stream.

Download Five Dividend Stocks To Beat Inflation, a special report from Forbes’ dividend expert, John Dobosz. 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. Open Interest: The number of outstanding options contracts in the exchange market or in a particular class or series. Out-of-the-money: A call option is out-of-the-money if the strike price is greater than the market price of the underlying security.

A put option is out-of-the-money if the strike price is less than the market price of the underlying security. Premium: The price of an options contract, determined in the competitive marketplace, which the buyer of the options pays to the options writer for the rights conveyed by the options contract. Profit Graph: A graphical representation of the potential outcomes of a strategy.

Dollars of profit or loss are graphed on the vertical axis and various stock prices are graphed on the horizontal axis. Results may be depicted at any point in time, although the graph usually depicts the results at expiration of the options involved in the strategy. Put: An option contract that gives the holder the right to sell the underlying security at a specified price for a certain fixed period of time.

Rho: The expected change in an option’s theoretical value for a 1% change in interest rates. Short Position: A position wherein a person’s interest in a particular series of options is as a net writer (i. e.

, the number of contracts sold exceeds the number of contracts bought). Standard Deviation: A measure of the volatility of a stock. It is a statistical quantity measuring the magnitude of the daily price changes of that stock.

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 on the stop. Stop Order: An order, placed away from the current market, which becomes a market order if the security trades at the price specified on the stop order. Buy stop orders are placed above the market while sell stop orders are placed below.

Strategy: With respect to option investments, a preconceived, logical plan of position selection and follow-up action. Strike Price: The stated price per share for which the underlying security may be purchased (in the case of a call) or sold (in the case of a put) by the option holder upon exercise of the option contract. Theta: A measure of the rate of change in an option’s theoretical value for a one-unit change in time to the option’s expiration date.

Time Decay: A term used to describe how the theoretical value of an option “erodes” or reduces with the passage of time. Time decay is especially quantified by Theta. Time Value: The portion of the option premium that is attributable to the amount of time remaining until the expiration of the option contract.

Time value is whatever value the option has in addition to its intrinsic value. Time Value Premium: The amount by which an option’s total premium exceeds its intrinsic value. Total Return Concept: A covered call writing strategy in which one views the potential profit of the strategy as the sum of capital gains, dividends, and option premium income, rather than viewing each one of the three separately.

Uncovered Call Writing: A short call option position in which the writer does not own an equivalent position in the underlying security represented by his option contracts. Uncovered Option: A written option is considered to be uncovered if the investor does not have an offsetting position in the underlying security. Uncovered Call Writing: A short call options position in which the writer does not own an equivalent position in the underlying security represented by his option contracts.

Underlying Security: The security subject to being purchased or sold upon exercise of the option contract. Vega: A measure of the rate of change in an option’s theoretical value for a one-unit change in the volatility assumption. Volatility: A measure of the fluctuation in the market price of the underlying security.

Mathematically, volatility is the annualized standard deviation of returns. Write: To sell an option. The investor who sells is called the writer.

YieldBoost: Yield generated on a position above and beyond the dividend yield. For covered calls, YieldBoost is calculated by dividing the premium by the value of the stock. With put selling, YieldBoost is the premium received divided by dollar value of stock you may be obligated to buy before expiration.

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