Arbitrage refers to the act of purchasing and selling an asset to profit from a difference in price between two financial instruments. 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.
At the money
When the price of the underlying security is identical to the strike price. Same for both puts and calls.
The act of buying more shares of a stock as its price falls in order to lower the cost basis for the trade.
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. Developed by famous technical trader John Bollinger, it is 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.
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 to buy the underlying security at a specified price for a certain, fixed period of time.
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.”
The price that is recorded for a security on market close, 4:00 p.m. ET for the NYSE.
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.
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 less the total liabilities of the asset in question. Liabilities are generally debt or other financial obligations.
A 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, which is the 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.
You can either sell your option, or exercise your right to buy (in the case of a call) or sell (in the case of a 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 type of moving average that 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 Friday before the third Saturday of each month.
The GDX/Gold ratio measures the difference between the value of the VanEck Vectors Gold Miners ETF and the price of gold. Fundamentally, a rising GDX/Gold ratio chart indicates that gold stocks are outperforming the metal – a bullish sign for the sector. The opposite is true when the GDX/Gold ratio is falling and gold stocks are underperforming the metal – a bearish sign for the sector.
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 fording for $23 per share. In this case, the intrinsic value of the option is $3.
A term used to refer to the amount of debt a company carries against its equity. 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.
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. 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.
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.
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.)
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.
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.
Relative Strength Index (RSI)
A momentum oscillator designed by J. Welles Wilder to measure 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.
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.
A method of determining a specific entry point to an option position. The way that security prices trend in correlation with momentum indicators, company news, or other factors, help determine the structure and effectiveness of each setup.
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 the underlying instrument 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 to identify trends and project future price movements.
An indicator that is backward-looking, meaning that it is based on past prices.
The stock, stock index, or any other financial instrument that you have the right to buy and sell.
The amount of uncertainty or risk determined by the size of changes in a security’s value over time.
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.