The Advance-Decline line is a technical indicator that shows the difference between the number of stocks advancing against the number of stocks declining. It’s typically applied to a broad market index like the S&P 500, Dow Jones Industrial Average, or Nasdaq.
In option trading, arbitrage occurs when an option is bought, immediately exercised, and the underlying security is sold for a profit.
The lowest price option sellers are currently willing to accept.
The receipt of an exercise notice by an option seller that obligates them to sell (in the case of a call) or purchase (in the case of a put) the underlying security at the specified strike price. Options assignments are how option buyers exercise their rights to a position in a security.
At the money
When the price of the underlying security is identical to the strike price. Same for both puts and calls. For example, if X stock is trading at $75, then the X 75 call option is at the money and so is the XYZ 75 put option.
The act of buying more shares of a stock as its price falls in order to lower the cost basis for the trade.The result of this second purchase is a decrease in the average price at which the investor purchased the stock.
Used to describe the opinion or outlook that a sector or specific stock will decline in price. Opposite of Bullish.
The highest price option buyers are currently willing to pay.
A point on a chart plotted two standard deviations away from an asset’s moving average line. It’s often used in technical analysis to determine overbought and oversold market levels. The bands are also subject to market volatility – during periods of low volatility the bands contract, while during periods of high volatility the bands widen.
Used to describe the opinion or outlook that a sector or specific stock will rise in price. Opposite of Bearish.
Bullish Percent Index
A gauge that fluctuates between 0% and 100% to measure overbought and oversold conditions. It measures the percentage of stocks in a sector that are trading in a bullish technical formation. It favors bulls when above 50%, and bears below 50%. BPI is considered overbought when above 70% and oversold when below 30%.
Buy to open
The act of buying a call, or put, to initiate a position.
Buy to close
The act of buying a call, or put, to close a position.
An option contract that gives the holder the right, but not the obligation, to buy the underlying security at a specified price for a certain, fixed period of time. A call buyer profits when the underlying asset increases in price.
A calendar spread is a trading tool that is used by oil producers to lock in high prices. When prices provide enough incentive, they will sell these spreads.
These charts show us where the stock opened and where it closed for each period (the ends of the “candle”), and the high and low of each period (the ends of each “wick”). A red candle means the asset traded lower on the period, a green candle means it traded higher.
CBOE Volatility Index (VIX)
An index showing the market’s expectation of volatility over the next 30 days, often referred to as “the investor fear gauge.” Investors look at VIX values as a way to measure market risk, fear and stress before making investment decisions.
The price that is recorded for a security on market close, 4:00 p.m. ET for the NYSE.
Commitments of Traders (COT) Report
A weekly report, published on Fridays at 3:30 p.m. ET, that shows the holdings of futures traders in various markets as of the previous Tuesday. It can be used as a contrary indicator. So, when futures traders hold a high amount of long or short positions in a particular asset, it can be a signal to take the opposite bet on that asset. For example: If the COT report shows a record high number of short positions on the S&P 500 futures, that may be a signal to take a long position on the index.
Commodity Channel Index (CCI)
A momentum indicator that is often used to determine when an investment is reaching oversold or overbought conditions. In general, it measures the current price relative to an average price over a given period of time. It lets traders determine if they want to enter or exit a trade, refrain from taking a trade, or add to an existing position.
Essentially how much is paid for a stock or option. Cost bases are static figures, and are used to determine the amount gained or lost in a position. One can lower or raise their cost basis on a position by buying more shares or option contracts below or above their initial cost basis.
A covered option is when an investor sells an option that is covered by a long or short position in the underlying security. Using this strategy ensures some downside protection while also generating income from the premium collected. For example, buying a stock and then selling a covered call on the shares creates income on what is generally considered a bullish position. Selling short a stock and then selling a covered put on the shares creates income on a generally bearish trade.
An uncovered (or “naked”) option is when an investor buys or sells an option that is not covered by a long or short position on the stock. Investors receive the option premium upfront, and are obligated to buy (in the case of selling uncovered puts) or sell (in the case of uncovered calls) the underlying security.
A mathematical estimate of how much the option price will change for every $1 move in the underlying stock. Can be positive or negative, being between 0 and 1 for a call option and negative 1 to 0 for a put potion.
A distribution of a percentage of a company’s earnings, determined by a company’s board of directors, generally as a percentage of the stock’s current share price. Dividends can be issued in cash, shares, or other property, and are most commonly issued on a quarterly basis.
The value of an asset minus the total liabilities (debt) of the asset in question. .Equity is the value that would be returned to a company’s shareholders if all of the assets were liquidated and all of the company’s debts were paid off.
A cut-off date by which an investor must hold shares in a security in order to receive the security’s dividend distribution. Because trades generally take two trading days to settle, the ex-date is accepted as being two trading days before the record date, when an investor must be recorded as a company shareholder to receive a dividend.
Exchange-traded fund (ETF)
A security that tracks an index, commodity, bond, or basket of individual assets. ETFs can be bought and sold like common stock on a stock exchange. ETFs can track stocks in a single industry, such as energy, or an entire index of equities like the S&P 500.
You can either sell your option, or exercise your right to buy (call) or sell (put) the underlying security at the strike price. Readers of the Delta Report will rarely exercise an option—we usually recommend selling them prior to expiration.
Exponential moving average (EMA)
A technical chart indicator that is a type of moving average but is weighted more towards recent data. Because of this, the EMA reacts to price changes in a security more quickly than a simple MA.
The termination date for the option contract. Standard option contracts officially expire on the third Friday of each month.
A contract that obligates the buyer to purchase an underlying asset (commodities, equity index, treasuries, or FX), and the seller to sell at a predetermined future price and date. These products are usually very liquid and widely followed, allowing investors to speculate on the direction of the underlying asset (and physical or commercial operators of the underlying asset) to hedge their risk (farmers, oil producers, etc.)
The GDX/Gold ratio measures the difference between the value of the VanEck Vectors Gold Miners ETF (GDX) and the price of gold. A rising GDX/Gold ratio chart indicates that gold stocks are outperforming the metal – a bullish sign for the sector. The opposite happens when the GDX/Gold ratio is falling and gold stocks are underperforming the metal – a bearish sign for the sector.
Used to describe a security’s price action during trading hours. For example, an “intraday high” is the highest point a security trades at during the session, but not necessarily the highest point it closed at.
A relationship between two variables in which they move in opposite directions. A common inverse (or negative) correlation is the relationship of the broad stock market to gold. As stocks decline, gold tends to rise as investors store their money in more “safe haven” assets.
In the money
Calls are “in the money” if the price of the underlying instrument is HIGHER than the strike price. Puts are “in the money” if the price of the underlying instrument is LOWER than the strike price. (A put with a $20 strike price is “in the money” with the stock at $19.)
The amount by which an option is “in the money.” For example, a call option with a $20 strike price would be $3 in the money if the underlying stock was at $23 per share. The intrinsic value of this option is $3.
A term used to refer to the amount of debt a company carries against its equity (assets). It also refers to an investment strategy in which capital is borrowed in order to increase the potential return of a particular investment.
The amount an uncovered option seller is required to deposit and maintain in order to cover a position. The margin requirement is calculated daily.
An indicator used in technical analysis to determine the balance between stocks that are advancing and declining. It is calculated by subtracting the 39-day exponential moving average (EMA) of stock advances, less declines, from the 19-day EMA of stock advances, less declines. The result is a momentum indicator that works similarly to the MACD.
McClellan Oscillator = (19-day EMA of advances – declines) – (39-day EMA of advances – declines)
Moving Average (MA)
A trend-following indicator used in technical analysis to smooth out price action by filtering out large spikes and drops in a stock’s price to create a constantly updated average price. The two types of moving averages are the simple MA and the exponential moving average (EMA).
Moving Average Convergence Divergence (MACD)
A momentum indicator that shows the relationship between two distinct moving averages of a security’s price. The MACD is calculated by subtracting the 26-day exponential moving average (EMA) from the 12-day EMA. It triggers technical signals when it crosses above (to buy) or below (to sell) its signal line.
An agreement between two parties to execute a transaction of a security at a preset price and by a certain date. The two types of options contracts are called Put and Call options. For stock options, a single contract covers 100 shares of the underlying stock.
Options Disclosure Document
A document issued by the Options Clearing Corporation (OCC) that is required reading for first-time option traders. Traders may need to periodically verify that they’ve read the document and understand the associated trading risks that are unique to options, depending on the policy of the brokerage firm in question.
Out of the money (OTM)
Calls are “out of the money” if the price of the underlying instrument is LOWER than the strike price. Puts are “out of the money” if the price of the underlying instrument is HIGHER than the strike price. (A crude-oil call with a strike price of $25 is “out of the money” if crude is at $20.)
Price-To-Earnings Ratio (Price/Earnings or P/E)
The ratio for valuing a company that measures its current share price relative to its per-share earnings (EPS). It’s used by investors and analysts to determine the relative value of a company’s shares in an apples-to-apples comparison. It can also compare a company against its own historical record or to compare aggregate markets against one another or over time.
Price-To-Sales Ratio (Price/Sales or P/S)
A ratio that utilizes a company’s market capitalization and revenue to determine whether the stock is valued properly. It’s calculated by taking a company’s market capitalization (the number of outstanding shares multiplied by the share price) and dividing it by the company’s total sales or revenue over the past 12 months. The lower the P/S ratio, the more attractive the investment.
An option contract which gives the owner the right, but not the obligation, to sell a specific amount of an underlying security at a specific price and time.
Used to gauge the overall mood of the market. A ratio that measures the number of put options traded relative to the number of call options. Under normal conditions, the CPC will trade below 1.00. That means traders are buying more call options than put options. When the CPC spikes sharply above 1.00, it means folks are buying more puts than calls. From a contrarian view, that’s potentially bullish. When the CPC drops sharply below 1.00, it indicates traders are buying more calls than puts – which is bearish from a contrarian standpoint.
The price of the option.
Real Interest Rate
The real interest rate factors inflation into the equation, to give investors a more accurate measure of their buying power, after they redeem their positions. It’s adjusted to remove the effects of inflation and gives the real rate of a bond or loan.
Relative Strength Index (RSI)
A popular momentum oscillator that measures the speed and change of price movements. Oscillating between 0 and 100, the RSI determines a security is overbought over 70 and oversold below 30. The data is generally measured over a period of 14 trading days.
The price level at which sellers are expected to enter the market. A concept, often paired with support, that the price of a security will tend to reverse at a certain price level. It represents a price point that an asset has had trouble exceeding in the time period being considered.
The gain or loss of a security over a set period of time, usually represented as a percentage.
Sell to open
The act of opening a short position in a covered, or uncovered, call or put option.
Sell to close
The act of closing a long position in a covered, or uncovered, call or put option.
The act of selling a security that is either borrowed or otherwise controlled, with the intent of purchasing shares as they decline in price in order to make a profit.
The price at which you can “exercise” your option. This price is based on the underlying instrument. Call-option buyers have the right to buy at the strike price. Put option buyers have the right to sell at the strike price.
The price level at which buyers are expected to enter the market.
A form of financial analysis which uses patterns formed by market data (by studying price and volume) to identify trends and project future price movements.
An indicator that is backward-looking, meaning that it is based on past prices. Some top indicators include Moving Averages, Bollinger Bands, MACD, and RSI)
The stock, commodity, stock index, or any other financial instrument that you have the right to buy and sell.
VIX Buy/Sell Signal
A signal that occurs when the CBOE Volatility Index closes outside, and then back inside, its Bollinger Bands. A broad stock market buy signal occurs when the VIX closes above its upper Bollinger Band, and then back below it. A broad stock market sell signal occurs when the VIX closes below its lower Bollinger Band, and then back above it.
The amount of uncertainty or risk determined by the size of changes in a security’s value over time.In most cases, the higher the volatility, the riskier the security. For example, when the stock market rises and falls more than 1% over a sustained period of time, it’s called a “volatile” market.
Volume Weight Average Price (VWAP)
A trading benchmark that gives the average price a security has traded at throughout a period, based on both volume and price. It provides insight into both the trend and value of a security.
Anatomy of an Option
The basic parts of an option symbol are: Stock Ticker + Expiration Year + Expiration Month + Expiration Day + Call/Put Indicator + Strike Price. You can see how this works below.