Option Glossary – Updated June 07, 2017
When there is a stock split or stock dividend, the exchanges adjust the strike prices to reflect the change. Usually, if the split is 2 for 1, the strike price is cut in half and the number of contracts in the subscribers’ is doubled with the number of shares per contract remaining at 100. However, for some other splits, the number of shares per contract and the strike price are both changed. For example, when there is a 3-for-2 split, the exchanges can change the strike prices (e.g. from $60 to $40) and the number of shares per contract (from 100 to 150). Sometimes, when there is a spin-off, the option will be exercisable into a composite of more than one stock (and sometimes some cash).
Returns to an asset that are not explained by Beta or the market, using the equation Stock = Alpha + Beta times the Market. Portfolios that are market-neutral tend to have low Betas and (if profitable) significant Alphas.
An American-style option is exercisable at any time until expiration. All U.S. exchange traded equity options are American-style. Options that are exercisable only at expiration are know as “European-Style.” Some index options, including the SPX (S&P 500) and the NDX (NASDAQ 100) are “European-Style.”
This is the price at which the market is willing to sell the option. The ask price (also known as the “offer” price) is always higher than the bid price, which is the price at which the market maker will buy the option.
Notice to an option writer that the option has been exercised. See “Automatic Exercise.”
This means at the prevailing bid (if a seller or a writer) or offer (if a buyer) price.
The striking price of an option equals the market price of the underlying stock or index price.
All exchange-traded options held by retail investors are automatically exercised at expiration if they are so much as $0.01 in-the-money.
A ratio spread created by buying a greater number of calls (puts) with the higher (lower) strike and selling a lesser number of calls (puts) with a lower (higher) strike. Backspreads often bring in a net credit of premium and for limited periods can offer attractive gains with only moderate loss on time premium. See “Option Spreads III – Backspreads.” Ot07827.Pdf in our Reports Archive.
A basic bear spread is a combination of buying a higher strike put (or call, but not both in the same spread) and writing a lower strike put (or call). See “Option Spreads I – Basic Bull and Bear Spreads,” Ot070823.Pdf.
The measure of a security’s so-called “market risk” or the degree to which the stock (portfolio, index) moves with the market. Beta = Covariance (Investment, Market)/Variance (Market). A stock with a Beta of 1.5 tends to rise (fall) 1.5% if the market rises (falls) 1.0%. Conversely, a stock with a Beta of 0.5 is expected to rise or fall only 0.5% if the market moves 1.0%. Beta comes from longer-term regression analysis and is not a reliable short-term predictor of stock price movements.
This is the price at which the market maker would be willing to buy the option.
Otherwise known as the Cox-Ross-Rubinstein model, the Binomial Model calculates the value of an American-Style option, which can be exercised anytime over the life of the option.
Named for Fischer Black and Myron Scholes, who developed it in 1973. Today, most models are variations of the Black Scholes model. Note The Black Scholes model assumes that options are ‘European-Style” – i.e. they be only be exercised at expiration.
This is a combination of one synthetic long stock position (long call, short put at same strike and expiration) and one synthetic short stock position (long put, short call at a different strike price but the same expiration). These four-legged positions are profitable when there are differences in the time premiums of calls and puts at the same strike prices. Because of transaction costs, market makers are usually the only ones who can make money from these otherwise riskless arbitrage opportunities.
This is the stock price (or prices in the case of some spreads) at which the option position will neither make nor lose money. For example, the break-even price on a long call is the strike price plus the premium.
In options, we really talk about two types of broker. One is the securities firm (or person at the securities firm) through which (or whom) investors place their trades and maintain their accounts. The other is the floor broker. This is the person on the Exchange floor who acts to execute customer orders. These days, most customer orders are executed electronically without the aid of floor brokers.
A basic bull spread is a combination of buying a lower strike call (or put, but not both in the same spread) and writing a higher strike call (or put). See “Option Spreads I – Basic Bull and Bear Spreads,” Ot070823.Pdf in our Reports Archive.
A combination of one out-of-the-money call (or put), two at-the-money calls (or puts) and one in-the-money call (or put) or with a combination of calls and puts. A Butterfly spread can earn you time premium with only limited risk.
These are informational indexes published by the Chicago Board Options Exchange that track the performance of hypothetical buy-write strategies on some of the major stock indexes. The CBOE S&P 500 Buy Write Index (BXM) tracks the total return of buying the S&P 500 index and writing the near-term slightly out-of-the-money call. The SPX call is held until expiration and cash settled, at which time a new one-month, slightly out-of-the-money call is written. There is also the CBOE S&P 500 2% Out-of-the-Money Index Buy Write Index (BXY), which write calls on the S&P 500 at strikes that are at least 2% out-of-the-money. Other buy write indexes are the CBOE Dow Jones Industrial Buy Write Index (BXD) and the CBOE Russell 2000 Buy Write Index (BXR) and the CBOE NASDAQ 100 Buy Write Index (BXN). In Graph 1 on page 3, we compare the performance of the BXM with that of the dividend adjusted S&P 500 index.
These are also called “Horizontal Spreads.” A calendar spread consists of buying a longer-term call (put) and selling a shorter-term call (put) with the same strike (usually at-the-money). These spreads tend to make money if the stock stands still, but they can incur losses if the stock moves sharply in either direction. See “Calendar Spreads,” Ot061023.Pdf in our Reports Archive.
A call option gives you the right but not the obligation to buy the stock at a particular strike price over a specified time period (American-Style) or on a specified date (European-Style).
A stock split, stock dividend, merger, or spin-off that affects the number, and sometimes, the composition of shares of stock owned by an investor. See “Adjusted Strike Price.”
Options where the ultimate settlement is cash based on the price of an underlying instrument or a basket of underlying instruments. Index options are always cash settlement options.
This a combination of a put write and enough cash to cover the strike price less the premium. A cash covered put is a “synthetic” or “equivalent position” to a covered call at the same strike price. That is both positions require approximately the same amount of capital to establish and offer approximately the same dollar risks and rewards. See “Writing Cash-Covered Puts – Doing the Math,” Ot071217.Pdf in our Reports Archive.
All listed option contracts on the same type (i.e. calls or puts) on the same underlying security (e.g., all listed IBM call options).
This is the transaction that offsets your existing long or short option position. Usually, you should specify whether you are entering into an opening or closing transaction.
Usually a hedge of an underlying stock position consisting of buying a lower-strike put and selling a higher strike call. Depending on the strike prices, collars entail a debit or a credit of premium. Alternatively, they have no net cost if the call and put premiums are equal. See “Stocks Hedged with Collars,” Ot090709.Pdf in our Reports Archive.
These are orders which specify only doing a particular transaction when the stock price (or some other price) reaches a particular level.
This is a combination buying (or owning) the stock and writing a call on this stock. Covered calls can offer varying degrees of income, protection and profit potential. See our report “Covered Calls - Doing the Math,” Ot071126.Pdf in our Reports Archive.
These are bull or bear spreads that give you a net credit of premium. Bull put spreads and bear call spreads are both credit spreads since the option written has a higher premium than the one purchased. See “Option Spreads I – Basic Bull and Bear Spreads,” Ot070823.Pdf.
Customer Portfolio Margin (CPM)
This is a new margining system developed by the Options Clearing Corporation that uses risk-based calculations to determine margin. In most cases, CPM affords the investor much more efficient use of his or her capital than does the standard “Regulation T” margining system (see “News on the Margin Front,” Ot071105.Pdf).
A combination of stock and options or just options in which the deltas offset each other. If the investor is long (short) time premium on a daily basis, delta neutral combinations can have positive (negative) Curvature or Gamma with a daily loss (gain) in premium.
Also known as Change-Per-Point. Delta is the expected dollar change in an option price for a given dollar change in the stock price. Delta is largely derived from the probability that the option will end up in-the-money. See “Meet the Greeks,” Ot080728 in our Reports Archive.
A contract or security the price of which is dependent on some other security or commodity. A listed equity option is one type of derivative. A futures contract is another.
Usually, this is a one-to-one spread with different strike prices and expirations, in which the option purchased expires later than the option sold. A diagonal bull spread consists of being long a longer-term lower-strike call (put) and being short a shorter-term call (put). A diagonal bear spread consists of a long longer-term higher strike call (put) and short a shorter-term lower strike call (put). See “The One-to-One Diagonal Spread,” Ot070820.Pdf in or Reports Archive.
A payment to shareholders by the company. When all other things are equal, the higher the dividend is, the lower will be the call premium and the higher will be the put premium (See Ex-dividend date).
It used to be that options traded with strike price intervals that were no narrower than $2.50. That has changed, however. At present, a large number of ETFs, including the ones on the major stock market indexes (the Dow, the S&P 500 and the NASDAQ 100) trade in $1 strike intervals. There are also a large number of equities that trade in $1 strike intervals. We list these stocks in Figure 1 on page 4. Notice that none of these equities currently has a common price above $50 and that many of them trade at prices way below where they were a year ago.
In Value Line Options, it is the price of the option based on our Adjusted Volatility Forecast. ( See “ Understanding Our Volatility Forecasts,” Ot080211.Pdf.)
A European style option is exercisable only at expiration. Most index options, with the exception of the S&P 100 (OEX), are European-style.
Exchange Traded Fund (ETF)
These are basically stocks, which are based on specific and known weighting of regular corporate equities. Like regular stocks, their prices are updated during normal trading hours. Options trade on more than 40 ETFs and we rank these options in the Value Line Daily Options Survey.
The cut-off date on which a stockholder will be entitled to a particular dividend. Usually the stock price will drop by the amount of the dividend right after the ex-dividend date.
Purchase or sale of the underlying stock at the strike price by the holder of a put or call.
Exercise Price
See Strike Price
Exotic Options
Options with payoffs that are different from conventional calls and puts, requiring different modeling. “Lookback” options allow the investor to lock in the best price seen over a particular period. “Compound” options give the holder the right to buy the option. “Down and Out” calls cease to exist of the stock goes below a certain price. “Up-and-Away” puts cease to exist if the stock goes above a certain price.
The date after the options last trading day. In the case of listed stock options, this is the third Saturday of the month. The option buyer should check carefully the time of day by which he must notify his broker to exercise or sell an option. Note if an option closes even slightly in-the-money at expiration, it will be automatically exercised.
The option value derived from a forecast of future volatility. Our estimated premiums are fair value because we base them on our adjusted forecast of future volatility. See “Understanding Our Volatility Forecasts,” Ot080211.Pdf.
Fixed Return Options (FROs)
A fixed return option is a “binary” option (i.e. only two possible outcomes) that pays $100 if the option ends up in-the-money or pays nothing at expiration. There are “Finish High FROs” and “Finish Low FROs,” which are comparable to calls and puts. FROs are available on a variety of common stocks and ETFs, including Apple Inc., Google and the S&P 500 index ETF.
These are large-sized exchange-traded OCC insured options. With a flex option, the customer can specify the option terms (size, strike and expiration).
Options on futures contracts, subject to regulation by the Commodity Futures Trading Commission (CFTC).
The rate at which an option’s delta is likely to change given a small change in the stock. All other things being the same, options that are short-term and at-the-money are likely to have the highest gamma. See “Meet the Greeks,” Ot080728 in our Reports Archive.
Stands for generalized auto regressive conditional heteroscedasticity , the type of regression analysis that The Value Line Daily Options Survey uses in its volatility forecasts. Robert F. Engle won the 2003 Nobel Price in economics for his work in developing GARCH in the 1980s. See “Understanding Our Volatility Forecasts,” Ot080211.Pdf.
A type of order, which as its name implies, stays in place until the investor notifies the broker to cancel. (Most orders are for one day only, unless otherwise specified.)
To reduce the risk of loss from an investment position by making offsetting transactions that will reduce one or more types of risk.
Historical Volatility
See Volatility (Historical)
Horizontal Spread
See Calendar Spread
Incentive Stock Options
Also called employee stock options, these are long-term (typically 5 years or more) call options offered by firms to important employees to increase their compensation. These options are not exchange-traded.
This is when the brokerage firm actually takes the other side of the customer’s trade. Officially, this is only allowed when no better offer (or bid) has been shown. However, because it keeps order flow away from the competition, it can dampen liquidity and cause spreads to widen.
An option that has some value if exercised is “in-the-money.” A call is in-the-money if the stock price is higher than the strike price. A put is in-the-money if the stock price is below the strike price.
An option’s intrinsic value is what the option is worth if exercised. Only options that are “in-the-money” have intrinsic value.
This stands for individual retirement account. There are two different types of IRAs, Traditional IRAs, which allows pretax annual contributions, and Roth IRAs, in which the contributions are after tax but allow the eventual withdrawals to be tax exempt. For both types of IRAs, brokers generally allow covered calls, cash-covered put writing and protective put buying. Some brokers also allow naked call and put buying and limited risk option spreads in IRAs. (See “Using Options in Your IRA,” Ot090323.Pdf.)
This is a leverage measure. It is percentage change in the option price divided by the percentage change in the underlying security price. An option with a Lambda of 3.0 is likely to change by 3.0% if the stock moves 1.0%.
Stands for Longer-Term Anticipation Security. LEAPS are standardized options with a maturity of between 10 months and 3 years. LEAPS currently trade on more than 750 underlying stocks.
One of several components of an option combination or spread.
To buy or sell a predetermined number of shares at (or better than) a specified price. Limit orders guarantee a price, if executed, but not execution.
Listed Option
An option traded on a national securities exchange.
Long/Short Hedge
This strategy consists of simultaneously buying and selling uncovered calls (or puts) on different stocks. The success of this hedge depends on Value Line’s ability to find underpriced and overpriced options.
The minimum equity required by law to support an investment position. For uncovered or “naked” option writes, the margin is the premium taken in, plus the greater of (1) 20% of the underlying stock value, less the amount the option is out-of-the-money, or (2) 10% of the underlying stock value. For credit spreads, (i.e., bull put spreads and bear call spreads), the margin is the difference between the two strike prices times the number of the underlying shares. (See also “Portfolio Margin.”)
In the event that a writer has written uncovered options, he or she will be required to put up more margin if the stock moves against him. The term is also used to describe the latest evaluation of option positions.
A member of an options exchange, who trades on the floor with his or her own capital. Market makers are required to make a two-sided price (bid and offer) on all incoming orders. Market makers enjoy certain trading advantages, such as being able to buy options at the bid price and sell them at the offer price. They also enjoy very favorable margin rules. See “Meet the Market Maker,” Op990215.Pdf.
The combination of owning the stock and a put on this stock. With a married put, your losses are covered but your potential gains (if the stock rises) are unlimited. See “Hedging Stocks with Married Puts,” Ot010702.Pdf.
The tendency for certain variables to return to their long-term mean. Both Historical Volatility and Implied Volatility tend to be mean reverting phenomena. The option price predicted by an econometric model or similar technique used to estimate typical stock price-option price relationships. Normal price is a prediction of what an option price will likely be as opposed to its Fair Value.
National Best Bid or Offer (NBBO)
The SEC requires brokers show customers the best available bid price when they sell securities and the best available ask price when they buy them. The prices we collect for the Value Line Daily Options Survey are the NBBO prices selected from all the Exchanges.
One Cancels Other (OCO)
You use this when you enter multiple orders but only want the first one to meet the price limit to be executed. The execution of one order automatically cancels a second or alternate order.
The number of contracts, long or short, outstanding on a particular option series that have not been offset by a closing transaction. Note
since each option has both a buyer and a writer, open interest refers to both long and short positions.
This is a trade that creates a new position or adds to an existing one. The new position can consist of either short or long options on a stock. Usually, when entering a trade, you specify whether it is an opening or closing transaction.
Refers to all the options on a particular stock or index, e.g. all the options on IBM.
Option Clearing Corporation (OCC)
The guarantor of listed security option contracts. The OCC is owned jointly by each of the options exchanges that trade listed security option contracts in the United States. See www.optionsclearing.com .
In conventional options, the actual contract is in bearer form and sets forth the provisions of the contract. The buyer’s evidence of ownership is his confirmation slip from the executing broker.
Option Series
A particular listed option - e.g., the IBM January 100 call.
Option Type
Refers to whether an option is a put or a call.
Optionable Stock
A stock on which listed options are traded.
Options Exchange
One of the exchanges, regulated by the SEC, which are authorized to trade listed stock options. These include the Chicago Board Options Exchange, The Boston Options Exchange, the NYSE and the International Securities Exchange
A term referring to an option that has no intrinsic value because the current stock price is below the striking price of a call or above the striking price of a put. For example, a put struck at $100 when the stock is selling at $105 is said to be $5 out-of-the-money. See At the Money, In-the-Money.
Payment for Order Flow (PFOF)
Payment for order flow (PFOF) is when the market maker pays the broker for the order (officially, when no better prices are shown). This practice tends to discourage orders being presented to other market makers, thus making the market less competitive.
For options on most stocks, the narrowest price interval is $0.05. A small (and hopefully growing) number of stocks have their prices listed in $0.01 intervals. Obviously, the existence of these penny price intervals is favorable to the average investor. Among the stocks with penny price intervals are Apple Inc., Bank of America and Research in Motion. The major stock index ETFs, including the SPY (S&P 500), the DIA (Dow Jones Industrials) and the QQQQ (NASDAQ 100), also have their premiums quoted in penny price intervals.
This the tendency for stock prices to gravitate to the nearest strike price at expiration. Pin risk occurs because market makers need to square up their positions on expiration day.
This is a more liberal margin system than “the Exchange Minimum” margins. Portfolio margins are calculated using sophisticated risk management tools. (See “News on the Margin Front,” Ot071105.Pdf in our Reports Archive. )
Exchange rules, mandated by the SEC, that restrict the size of option positions that can be taken by a single investor or a group of investors acting in concert.
The amount of money an option buyer pays for a conventional put or call or the quoted price of a listed option.
A put option gives you the right but not the obligation to sell the stock at a particular strike price over a specified time period (American-Style) or on a specified date (European-Style).
The relationship whereby the combination of a short call and a long put with the same expiration and strike prices fully offsets a long stock position. This relationship helps bring call and put time premiums in line with each other. (See “A Primer on Put/Call Parity and How to Use It, “Ot080804.Pdf.)
These ratios are usually calculated as the number of put contracts divided by the number of call contracts traded on a particular day (volume) or the ratio of put contracts outstanding divided by the number of call contracts outstanding (open interest). An unusually high put/call ratio is often thought of as a signal that the stock is oversold.
Top rank for Call buying (a bullish strategy), Put Buying (a bearish strategy), or covered call writing (a bullish strategy) or married put buying (a bullish strategy).
Top rank for Call writing (a bearish strategy), Put writing (a bullish strategy).
The purchase of near-the-money options and the sale of a greater number of farther out-of-the-money options, with all options having the same expiration date.
An investment strategy in which stock is purchased and call options are sold on a greater than one-for-one basis.
Registered Options Principal (ROP)
An employee of a brokerage firm who has passed a test on the exchange and SEC rules for handling customer option accounts.
Relative Volatility (Covered Call)
This is based on the expected percentage changes in the covered call given certain moves and on the volatility of the stock itself. Because changes in the stock and call written against it partly offset each other, a covered call on a stock will have a lower Relative Volatility than the stock itself.
Relative Volatility (Married Put)
A married put’s relative volatility is the risk of the combined position (long put plus stock) relative to the median risk stock in The Value Line Investment Survey.
Relative Volatility (Option)
An indicator of leverage and of the volatility (or breadth of dispersion) of the underlying stock price.
Relative Volatility (Stock)
The volatility relative to the average of the over 1,700 stocks in the Value Line Investment Survey.
In our service, we calculate the risk of stocks, options, covered calls and married puts to the median risk stock in The Value Line Investment Survey.
Securities and Exchange Commission (SEC)
The regulatory agency charged with regulation of securities and stock option markets in the United States.
All listed option contracts of the same class having the same exercise price and expiration date, e.g. all Cisco July $100 calls.
(named for William F. Sharpe) A statistic that indicates risk-adjusted performance. The basic formula is ((Return of Investment - risk free rate of return)/Standard Deviation) of the Investment. The Sharpe Ratio of an investment is generally shown relative to the Sharpe Ratio of the overall market.
The position of the writer or seller of a call or a put. A call writer must sell the stock at the strike price if the option is exercised. The writer of the put must buy the stock at the strike price if the option is exercised.
The sale of a security not previously owned by the seller in the expectation that it will be possible to repurchase that security at a lower price some time in the future. An equivalent short sale position can be constructed by simultaneously sale a call and buying a put with the same strike price and expiration date on the same stock.
These are futures contracts on equity shares. Single stock futures are usually traded in 100 share lots, just like options. Some brokers will allow you to write covered calls on long single stock futures positions. (See “Single Stock Futures,” in our Reports Archive.)
These are options that are exercisable into combinations of more than one stock plus often a fixed amount of cash. These composite strike prices usually result from corporate changes such as mergers or “spin-offs.” We screen out these special settlement options from our service. (See also “Adjusted Strike Price.”)
The purchase of one option and the sale of another option on the same security.
A measure of volatility (risk). It is the square root of the variance. Variance is the average difference between each variable and its mean.
A contingency order to buy or sell the stock when the price reaches a particular level. When the price specified in the stop order is reached, the stop order becomes a market order and is executed at the best possible price.
A combination option consisting of equal numbers of puts and calls, same stock, strike price and expiration. A long straddle consists of option purchases. A short straddle consists of option writes.
A combination of a short put and a short call or a long put and a long call on the same underlying security, usually with the same expiration date, but with different strike prices. See Straddle.
A combination option consisting of two calls and one put on the same stock.
The price at which the owner of the call (put) can purchase (sell) the stock. Also know as the “exercise price.”
A combination option consisting of two puts and one call on the same stock.
Symbology (new)
At present, option ticker symbols consist of an underlying identifier code (which may or may not be the same as the common ticker) and an “alpha” date code and an “alpha” strike code. The options industry is moving to replace these option tickers with a much more intuitive system that will consist of the underlying common ticker, a letter indicating a call or a put, numbers for the expiration date and numbers for the strike price. These new symbols are scheduled to go into effect in May 2010.
A synthetic or “equivalent” position is a combination of options or options and stock that that has the same risk/reward characteristics of option only or stock only positions. Most of these work on the principle of put/call parity. (See “A Primer on Put/ Call Parity and How to Use It,” Ot080804.Pdf. in our Reports Archive.)
Most commonly, a combination of a long call and a short put (for a long stock position) or a short call and a long put (for a short stock) on the same stock with the same expiration date.
Tangible Value (Intrinsic Value)
The in-the-money portion of an option’s price.
Theoretical Value
Another name for “fair value.” Our “Estimated Normal Price” is an example of fair or theoretical value.
Also known as “Time Decay.” An option’s expected daily loss in premium if the stock remains unchanged, usually expressed in dollar terms. See “Understanding Time Decay,” Ot060306.Pdf in our Reports Archive.)
An option’s time value is that portion of an options premium that is not intrinsic value. Time premium is mainly a function of time to expiration, stock price, strike price and implied volatility.
Transaction Costs associated with a trade include the purchase or sale commission charged by the brokerage firm executing the trade and the spread between the bid and asked price.
The classification of an option as a put, a call, or a combination option.
An option writer who does not own the underlying stock. See Naked Option Writing
Vega
Expected dollar change in option price in response to a one-percentage-point change in implied volatility.
Regardless of whether puts or calls are used, the option purchased will have a higher striking price than the option sold. The number of contracts purchased will equal the number sold, and both options will expire on the same date. (See “Option Spreads I – Basic Bull and Bear Spreads,” Ot070813.Pdf.”)
Regardless of whether puts or calls are used, the option purchased will have a lower striking price than the option sold. The number of contracts purchased will equal the number sold, and both options will expire on the same date. (See “Option Spreads I – Basic Bull and Bear Spreads,” Ot070813.Pdf.”)
The CBOE’s index of the 30-day implied volatility of S&P 100 (OEX) options.
The CBOE’s index of the 30-day implied volatility of NASDAQ 100 (NDX) options
Volatility (Historical)
An option’s historical volatility is the standard deviation of log price changes over a particular time period, usually expressed as a per-annum rate. (See “Understanding Our Volatility Forecasts,” Ot080211.Pdf in our Reports Archive. )
Volatility (Implied)
An option’s implied volatility is the volatility that it would take to produce a particular premium level using a standard options model such as Black Scholes. (See “Understanding Our Volatility Forecasts,” Ot080211.Pdf in our Reports Archive.)
The volatility cone is the pattern exhibited by the fact that shorter-term volatility tends to trade over a much wider range than does longer-term volatility. Over the period from early 2005 through July 2008, for instance, 30-day historical volatility for the S&P 500 was in a range between 85.9% and 5.9%. Over the same period, one year volatility was in a range between 46.0% and 9.4%. Implied volatilities tend to follow similar patterns, with the shorter maturities fluctuating more than the longer ones.
In addition to the well know VIX index (30-day implied volatility of the S&P 500), the Chicago Board Options Exchange also lists the following major market volatility indexes, VXD (30-day implied volatility of the Dow Jones Industrials ETF), the VXN (30-day implied volatility of the NASDAQ 100 ETF) and the RVX (30-day implied volatility of the Russell 2000 ETF). All four volatility indexes have futures and listed option contracts. The CBOE publishes volatility indexes on the gold and oil prices and on the U.S. Dollar versus the Euro, but does not currently list options or futures on any of these latter indexes.
The tendency for the implied volatility of an option to be higher when struck further away from the stock price. The curved pattern thus charted resembles a “smile”. See “Understanding the Implied Volatility “Smile”,” Ot070625.Pdf in our Reports Archive.)
An option to purchase securities at a given price and time, or at a series of prices and times outlined in the warrant agreement. A warrant differs from a call option in that it is usually the obligation of the corporation itself. Ordinarily, a warrant’s exercise increases the number of outstanding shares, whereas a call is an option on shares already outstanding.
Writing (uncovered or “naked”)
An “uncovered” option writing position, requiring the posting of a margin. A call writer must sell the stock at the strike price if the option is exercised. A put writer must buy the stock at the strike price if the option is exercised. Naked option writing can produce attractive returns, but losses can be very large. For this reason, we urge investors to monitor their “naked” option positions very closely.