The Strange Lingo of Options

One intimidating factor about the options market is its language. The exotic and specialized terminology used by option traders often create the impression that the market is too high-level and advanced for the average investors who live on Main Street. The truth is that by mastering a few terms, you can overcome the language barrier. The best way to learn any language is to situate yourself in an environment where the language is spoken. If I want to learn to speak Spanish, I’ll hang around people who speak Spanish. Not that learning the lingo of option traders is equal to learning a foreign language, but there are many common words and terms used in uncommon ways. There are terms that will make you ask, “Why do they call it that?” For example, when it comes to options, there are two kinds: “Call Options” and “Put Options.” You can sell a “Call Option” and you can buy a “Call Option.” You can sell a “Put Option” and you can buy a “Put Option.” And there are many, many more common words and terms used in strange ways: long, short, covered call, naked call, time value, intrinsic value, etc, etc, etc.. Intimidating? Yes, but do not succumb to the language of “Wall Street.” The name of the website is “Main Street beats Wall Street” NOT “Main Street succumbs to Wall Street.” So, to start learning the lingo, start talking to people who are involved in options. Maybe get into this venture with a friend. Someone to talk and study with. Buy some books for reference. A great way to learn about a term is to just google it. Watch the financial shows. I like “Options Action” on CNBC. One thing about “Options Action,” when they are explaining a trade they talk really fast, so it’s a little confusing for a beginner. This can be intimidating! Why do they do this? I don’t know, but don’t give in, they’re Wall Street people. Maybe they want to sound smarter than you. This lingo is not only used while trading options. It’s also used by stock brokers and financial advisers. Many people on these financial shows like “Options Action” are not only on TV, they also make money giving advice and they have many clients who pay them to manage money. There is a theory that the use of jargon and acronyms in situations like this is not an accident. Speaking in a language that outsiders can’t understand keeps the power in the hands of the industry insiders. It makes your brokers and financial advisor and others in the know sound smart and therefore to some extent justifies the fees they charge you. Maybe that is a little cynical, but even so, investors should understand the decisions made regarding their money, and in order to do so must understand some of the terms used in assessing things like corporate earnings and the implications of earnings reports for stock prices. There is too much money to be made as you will see in my post, so keep pushing your education. Remember, knowledge is power! You can start looking at some terms in my “Stock/Options Glossary” in the Educational section, but the best place to learn is reading all the pages in the Educational section, which you’re in now.