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<Back to homepage <Back to main glossary >To Options page >To Futures page Glossary of options and futures related terms
American-Style Option: An option contract that may be exercised at any time between the date of purchase and the expiration date. Most exchange-traded options in the United States are American-style.
Arbitrage: The simultaneous purchase and sale of identical or equivalent financial instruments or commodity futures in order to benefit from a discrepancy in their price relationship.
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. Back Months The futures or options on futures months being traded that are furthest from expiration. Bear One who believes prices will move lower.
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.
Bear Market: A market in which prices are declining.
Bid: The price that the market participants are willing to pay
Bull: One who expects prices to rise.
Bull Market: A market in which prices are rising.
Buy On Close: To buy at the end of a trading session at a price within the closing range.
Buy On Opening: To buy at the beginning of a trading session at a price within the opening range.
Class Of Options: Option contracts of the same type (call or put) and Style (American, European or Capped) that cover the same underlying security.
Close, The: The period at the end of the trading session. Sometimes used to refer to the Closing Range (or Range). The high and low prices, or bids and offers, recorded during the period designated as the official close
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
Commission (or Round Turn): The one-time fee charged by a broker to a customer when a futures or options on futures position is liquidated either by offset or delivery.
Contract: Unit of trading for a financial or commodity future. Also, actual bilateral agreement between the parties (buyer and seller) of a futures or options on futures transaction as defined by an exchange.
Contract Month: The month in which futures contracts may be satisfied by making or accepting delivery.
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.
Day Order: An order that is placed for execution during only one trading session. If the order cannot be executed that day, it is automatically cancelled.
Day Trading: Establishing and liquidating the same position or positions within one day's trading. The day is ended with no established position in the market.
Deferred: Another term for "back months." Delivery The tender and receipt of an actual commodity or financial instrument, or cash in settlement of a futures contract.
Derivative Security: A financial security whose value is determined in part from the value and characteristics of another security. The other security is referred to as the underlying security.
Equity Options: Options on shares of an individual common stock.
European-Style Options: An option contract that may be exercised only during a specified period of time just prior to its expiration.
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 settlement amount: The difference between the exercise price of the option and the exercise settlement value of the index on the day an exercise notice is tendered, multiplied by the index multiplier.
Expiration Date: Date on which an option and the right to exercise it, cease to exist.
Expiration Time: The time of day by which all exercise notices must be received on the expiration date.
Floor Broker: An exchange member who is paid a fee for executing orders for Clearing Members or their customers. A Floor Broker executing orders must be licensed by the exchange he is working on.
Floor Trader: An exchange member who generally trades only for his/her own account or for an account controlled by him/her. Also referred to as a "local."
Futures: A term used to designate all contracts covering the purchase and sale of financial instruments or physical commodities for future delivery on a commodity futures exchange.
Futures Commission Merchant: A firm or person engaged in soliciting or accepting and handling orders for the purchase or sale of futures contracts, subject to the rules of a futures exchange and, who, in connection with solicitation or acceptance of orders, accepts any money or securities to margin any resulting trades or contracts. The FCM must be licensed by the CFTC.
Hedge: A conservative strategy used to limit investment loss by effecting a transaction which offsets an existing position.
Holder: The party who purchased an option.
Initial Performance Bond: The funds required when a futures position (or a short options position) is opened. Sometimes referred to as Initial Margin.
In-the-money: A call option is in-the-money if the strike price is less than the market price of the underlying security. A put option is in-the-money if the strike price is greater than the market price of the underlying security.
Intrinsic Value: The amount by which an option is in-the-money.
Leaps: Long-term Equity Anticipation Securities are long-term stock or index options. LEAPS are available in two types, calls and puts. They have expiration dates up to three years in the future.
Limit Order: An order given to a broker by a customer that specifies a price; the order can be executed only if the market reaches or betters that price.
Liquidation: Any transaction that offsets or closes out a long or short futures or options position.
Long Hedge (futures): The purchase of a futures contract in anticipation of an actual purchase in the cash market. Used by processors or exporters as protection against and advance in the cash price
Long Position: An investors position where the number of contracts bought exceeds the number of contracts sold. He is a net holder.
Maintenance Performance Bond(Previously Maintenance Margin): A sum, usually smaller than, but part of, the initial performance bond, which must be maintained on deposit in the customer's account at all times. If a customer's equity in any futures position drops to, or under, the maintenance performance bond level, a "performance bond call" is issued for the amount of money required to restore the customer's equity in the account to the initial margin level.
Margin Requirement For Options: The amount an uncovered (naked) option writer is required to deposit and maintain to cover a position. The margin requirement is calculated daily.
Mark-To-Market: The daily adjustment of margin accounts to reflect profits and losses.
Market Order: An order for immediate execution given to a broker to buy or sell at the best obtainable price.
Maximum Price Fluctuation (futures): The maximum amount the contract price can change, up or down, during one trading session, as stipulated by Exchange rules.
Minimum Price Fluctuation: Smallest increment of price movement possible in trading a given contract, more commonly referred to as a "tick."
Nearby: The nearest active trading month of a futures or options on futures contract. It is also referred to as "lead month."
Offer: The price at which an investor is willing to sell a futures or options contract. Offset buying if one has sold, or selling if one has bought, a futures or options on futures contract.
Open Interest: Total number of futures or options on futures contracts that have not yet been offset or fulfilled by delivery. An indicator of the depth or liquidity of a market (the ability to buy or sell at or near a given price) and of the use of a market for risk- and/or asset-management.
Open Order: An order to a broker that is good until it is cancelled or executed.
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.
Open interest: The number of outstanding option 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.
Out-Trades: A situation that results when there is some confusion or error on a trade. A difference in pricing, with both traders thinking they were buying, for example, is a reason why an out-trade may occur.
Performance Bond Call: Previously referred to as Margin Call. A demand for additional funds because of adverse price movement.
Premium (options): An options price has two components. They are the intrinsic value and time value. Premium is often referred to as time value. In the money call option - option strike 65. Underlying security is 67. Option price is 3. This is two points of intrinsic value and 1 point of premium. An out of the money call where the strike price is 65 and the underlying security is at 63 and the price of the option is 1-1/2. The premium would be 1-1/2. As there is no intrinsic value.
Premium (futures): The excess of one futures contract price over that of another, or over the cash market price. Or, The amount agreed upon between the purchaser and seller for the purchase or sale of a futures option. Remember that purchasers pay the premium and sellers (writers) receive the premium.
Put: An option contract that gives the holder the right to sell the underlying security at a specified price for a fixed period of time.
Rally Reaction: A decline in prices following an advance. The opposite of rally. An upward movement of prices following a decline; the opposite of a reaction.
Registered Representative: A person employed by, and soliciting business for, a commission house or a broker dealer. Many times referred to as a broker.
Round-Turn (futures): Procedure by which a long or short position is offset by an opposite transaction or by accepting or making delivery of the actual financial instrument or physical commodity.
Scalp: To trade for small gains. Scalping normally involves establishing and liquidating a position quickly, usually within the same day, hour or even just a few minutes.
Secondary Market: A market that provides for the purchase or sale of previously sold or bought options through closing transactions. Stock exchanges and the Over The Counter market are examples of the secondary market.
Series: All option contracts of the same class that also have the same unit of trade, expiration date and strike price.
Settlement Price (futures): A figure determined by the closing range that is used to calculate gains and losses in futures market accounts. Settlement prices are used to determine gains, losses, margin calls, and invoice prices for deliveries.
Short Hedge: The sale of a futures contract in anticipation of a later cash market sale. Used to eliminate or lessen the possible decline in value of ownership of an approximately equal amount of the cash financial instrument or physical commodity.
Short Position: An investors position where the number of contracts sold exceeds the number of contracts bought. The person is a net seller.
Stop Order (Stop): An order to buy or sell at the market when and if a specified price is reached.
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.
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. This is often referred to as premium.
Type: Describes either a put or call.
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 put writing: A short put option position in which the writer does not have a corresponding short position in the underlying security or has not deposited, in a cash account, cash or cash equivalents equal to the exercise value of the put.
Underlying security: The security subject to being purchased or sold upon exercise of the option contract.
Volatility: A measure of the fluctuation in the market price of the underlying security. Mathematically, volatility is the annualized standard deviation of returns. See the sections in 'Options' which describes implied and historical volatility.
Writer: The seller of an option contract. Top of page <Back to homepage <Back to main glossary >To Options page >To Futures page
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