Stock/Options Glossary

There are many more words and terms in a stock/options glossary or dictionary; these are the ones I feel are important for beginners. I will be adding more terms as the blog progresses.

All or None (AON) – A stipulation attached to a buy or sell order to instruct the broker to fill the order completely or not at all. If you have AON in effect and you place an order to buy (or sell) 500 shares of stock, your order will be filled when 500 shares of stock are available. There will be no partial orders filled.

Ask – The price at which a seller is offering to sell a stock or option.

Assignment – The notice that obligates the seller of an option to sell the underlying security (in the case of a Call) or purchase the underlying security (in the case of a Put) at the specified Strike Price.

At-the-Money (ATM) – When the stock price is the same as the option Strike price. Example: If you are looking to buy or sell an option and the price is $10, you would be looking at the option’s $10 Strike Price.

At-the-Market – An order to buy or sell stock at the prevailing market bid or ask price at the time the order is processed. An at-the-market order is generally executed within minutes (if not immediately) of being received and can be placed anytime during market hours.

Bearish – When an investor believes that a particular security or market is heading downward. Bears attempt to profit from a decline in prices. Bearish refers to a pessimistic outlook about the state of a given market.

Bid – The price at which a buyer is willing to buy an option or stock. 

Bullish – When an investor believes that a particular security or market is heading upward. Bullish refers to an optimistic outlook about the state of a given market.

Buy-Write – A trading strategy that consists of buying a stock and selling a Call Option on that stock, at the same time, on the same order. The result is a Covered Call while only paying one commission.

Call Option (Call) – A Call Option is a contract between the Call buyer and the Call seller. A Call Option gives it’s owner the right to buy a specified amount of stock from the Call seller at a specified price until a specified date. The Call seller has the obligation to sell his stock. The specified price is called the Strike Price and the specified date is the Expiration Date. The Call owner can exercise he right to buy the stock on or before the Expiration Date.

Called Out or Called Away – The seller of a Call or Put has been assigned (see assignment). The option writer’s account has been adjusted, the underlying security has been automatically sold (in the case of a Call) or purchased (in the case of a Put) at the contract Strike Price.

CBOE – Chicago Board Options Exchange

Contract – The word contract has 2 meanings in the stock/options industry.

#1 – The Agreement between buyer and seller of an option. This contract identifies the amount of stock involved, name of stock, expiration date, the price of the option and if it’s a Call Option or Put Option.

#2 – Identifies the amount of stock in an options transaction. An options contract is 100 shares of stock. All stock options are traded in 100 shares increments. If you buy or sell an option on 100 shares of stock, thats “1 contract.” If you buy or sell an option on 500 shares of stock, thats “5 contracts.” 1000 shares of stock is “10 contracts” and so on….

Cover – Not to be confused with “Covered” (see Covered Call). To buy back as a closing transaction an option that was initially written.

Covered – A written option is considered to be covered if the writer also has an opposing market position on a share-for share basis in the underlying security. That is, a short Call is covered if the underlying stock is owned, and a short Put is covered (for margin purposes) if the underlying stock is also short in the account. In addition, a short Call is covered if the account is also long another Call on the same security, with a Striking Price equal to or less than the Striking Price of the short Call. A short Put is covered if there is also a long Put in the account with a Striking Price equal to or greater than the Striking Price of the short Put.

Covered Call – An options strategy whereby an investor holds a long position (owns stock) and writes (sells) Call Options on that stock in an attempt to generate additional income from the stock. This income paid by the options buyer is called the Premium.

Covered Put – An options strategy where a trader sells a Put Option and simultaneously is short an equal number of shares of the underlying stock.

Early Exercise (assignment) – The exercise or assignment of an option contract before its expiration date.

Equity Options – Options on shares of an individual common stock.

Exercise – To exercise an option is to make use of the “right” available in the option contract. The holder of a Call Option has the right, but not the obligation, to buy the underlying stock at a specified price on or before a specified date in the future. The holder of a Put Option has the right to sell the underlying.

Expiration Date – The date on which an option contact become void (expires). Traditionally all contracts expired on the Saturday after the 3rd Friday of the contract month. Today many stocks have weekly options. In these cases the expiration day is the Saturday after the Friday of the contract week. The stock market is not open on Saturday. They call it the “Saturday after” because there are so options contracts bought and sold, it takes the computers into Saturday to settle all the options contracts that actually expire at the market close on the Friday.

Falling Knife – A falling knife is a colloquial term for a rapid drop in the price or value of a security. The term is commonly used in phrases like, “don’t try to catch a falling knife,” which can be translated to mean, “wait for the price to bottom out before buying it.” A falling knife can quickly rebound – in what’s known as a whipsaw—or the security may lose all of its value, as in the case of a bankruptcy.

Good till Cancel (GTC) – A resignation applied to an order, meaning the order remains in effect until it is either filled or canceled, even if it extends into another trading day.

Grasshopper – This term is exclusive to “Main Street beats Wall Street.” For a little fun I will refer to a beginning trader as Grasshopper.

Hedge – A conservative strategy used to limit investment loss. The use of one position to offset another, such as options used to protect stock positions.

Implied Volatility – A measurement of volatility of a underlying stock, it is determined by using option prices currently existing in the market at the time rather than using historical data on the price change of the underlying stock.

In-the-Money (ITM) – For a Call Option, when the option’s Strike Price is below the market price of the underlying stock. If the stock price is at $20 and the Call Option’s Strike Price is $18, that option is In-the-Money by $2. For a Put Option, when the option’s Strike Price is above the market price of the underlying stock. If the stock price is at $20 and the Strike Price is $22, that option is In-the-Money by $2.

Intrinsic Value – This is the value between a Strike Price and the Stock Price in an “In-the-Money” Call or Put. If the stock price is $20 and you buy or sell a Call with the Strike Price of $15, there is $5 of Intrinsic Value. In the case of a Put, if the stock price is $20 and you buy or sell a Put with the Strike Price of $25, there is $5 of Intrinsic Value.

LEAPS – Long Term Equity Anticipation Security or LEAPS is a trademarked term for long-term Stock Options. LEAPS, like all options, are available in two types – Calls and Puts – but with one important distinction. Other options expire in a matter of weeks or months; LEAPS can take one to two years.

Limit Order – An order placed to buy or sell a set number of shares of stock at a specified price or better. Because the limit order is not a “market order”, it may not be executed if the price set by the investor cannot be met during the period of time in which the order is left open. Limit orders also allow an investor to limit the length of time an order can be outstanding before being canceled.

Long Position – The buying of, and owning a stock or stock options with the expectation that the asset will rise in value.

Margin – Borrowing money from your broker that is used to purchase stock. This practice is referred to as “buying on margin.”

Market Capitalization – The market capitalization of a publicly traded company is calculated using a simple formula: market cap equals number of shares outstanding multiplied by current share price. This number tells us what the stock market believes the company is worth on any given day.

Market Order – An order to buy or sell stock at the prevailing market bid or ask price at the time the order is processed. An at-the-market order is generally executed within minutes (if not immediately) of being received and can be placed anytime during market hours.

Money-in-the-Mattress – This term is exclusive to “Main Street beats Wall Street.” For a little fun I refer to making a profit at the end of a trade as Money-in-the-Mattress.

Murphy’s Law – What can go wrong will go wrong.

Naked Option (Uncovered) – A type of options contract that is not backed by an offsetting position (stock) that would help mitigate risk. “Trading naked”, as it’s called, poses significant risk. Generally, naked options are suitable only for experienced, knowledgeable investors who understand the risk and can afford substantial losses.

Open Interest – The number of outstanding option contracts in the exchange market.

Opportunity Lost – Opportunity Lost is the profit you don’t realize when you put a limit on the upside gain of the underlying stock when you sell a Covered Call.

Option (Stock Option) – A complex financial instrument that represents a contract sold by one party (the writer) to another (the buyer). The contract offers the buyer the right (not the obligation) to buy (in the case of a Call) or sell (in the case of a Put) a specified amount of stock at a specified price (strike price) on or before a specified date (the expiration date). An option contract (in the case of a Call) gives the seller the obligation (not the right) to deliver the stock if the option buyer exercises his right to buy the stock. An option contract (in the case of a Put)  gives the seller the obligation to buy stock if the option buyer exercises his right to sell his stock.

Out-of-the-Money (OTM) – For a Call Option, when the options Strike Price is above the market value of the underlying stock. If the stock price is $20 and the Call Option’s Strike Price is $22, that option is Out-of-the-Money by $2.For a Put option, when the option’s Strike Price is below the market value of the underlying stock. If the stock is $20 and the Strike Price is $18, that Put option is Out-of-the-Money by $2.

Outright Option – An Outright Option is an options trading strategy in which the trader buys or sells options contracts that are unhedged. An options trader will buy or sell call or put options without the simultaneously placing of a second offsetting contract. A stand alone trade.

Position – A Position is a trade an investor/trader currently holds open.

Premium – The income received by an investor/trader who sells or “writes” an option contract to a buyer. The Premium is the value of a specific Option. The value of an Option is the sum of it’s intrinsic value and it’s time value, which is the Premium.

Price-Earnings Ratio – P/E Ratio – The price-earnings ratio (P/E ratio) is the ratio for valuing a company that measures its current share price relative to its per-share earnings. The price-earnings ratio is also sometimes known as the price multiple or the earnings multiple.

Put Option (Put) – An option contract gives the owner the right, but not the obligation, to sell a specified amount of stock (underlying security) at a specified price within a specified time. This is the opposite of a Call Option, which gives the holder the right, but not the obligation, to buy shares

Resistance – A term in technical analysis indicating a price area higher than the current stock price where an abundance of supply exists for the stock and therefore the stock may have trouble rising through  that price area.

Roll Down – Close out options at one Strike Price and simultaneously open other options at a lower Strike.

Roll Forward (out) – Close-out options at a near-term expiration date and open options at a longer-term expiration date.

Rolling – A follow-up action in which the strategist closes options currently in the position and opens other options with different terms, on the same underlying stock.

Roll Up – Close-out options at a lower Strike Price and open options at a higher Strike Price.

Shares Outstanding – refer to a company’s stock currently held by all its shareholders, including share blocks held by institutional investors and restricted shares owned by the company’s officers and insiders. … A company’s number of outstanding shares is not static and may fluctuate wildly over time.

Short Position – The selling of a stock or stock options with the expectation that the underlying stock will drop in value. When you short a stock you borrow the stock from your broker, it is sold and you buy it back at a later date with the hope that stock will drop in value. When you go long you buy the stock first and sell at a later date hopefully at a higher price. When you short a stock you do the opposite, you sell the borrowed stock first and buy it at a later date hopefully at a lower price.

Stop Order – There are 2 types of Stop Orders, a Buy Stop Order and a Sell Stop Order. A Buy Stop Order is when an order is placed to buy a stock and the price to buy is set above the current market value of the stock. If the stock price is at $20 and you place a Buy Stop Order at $22, once the stock hits $22, a market order is placed to buy the stock. A Sell Stop Order is when an order is placed to sell a stock and the price to sell is below the current market value of the stock. If the stock is at $20 and you place a Sell Stop Order at $18, once the stock goes down to $18 a market order is placed to sell the stock.

Strike Price – The price at which a specific derivative contract can be exercised. Strike prices is mostly used to describe stock and options, in which Strike Prices are fixed in the contract. For Call Options, the Strike Price is where the security can be bought (up to the expiration date), while for Put Options the price is the price at which shares can be sold.

Support – A term in technical analysis indicating a price area lower than the current price of the stock, where demand is thought to exist. Thus a stock would stop declining when it reached the support area.

Time Decay – The term used to describe how the theoretical value of an option “erodes” or reduces with the passage of time.

Time Value – The portion of an option’s premium (value) that is attributable to the time remaining until the expiration of the option. The value of an option is comprised of 2 components: It’s intrinsic value and it’s time value.

Trader – An individual who engages in the transfer of financial assets in any financial market, either for themselves, or on behalf of someone else. The main difference between a trader and an investor is the duration for which the person holds the asset. Investors tend to hold longer term where a trader tends to hold assets for shorter periods of time in order to capitalize on short-term trends.

Uncovered Call (Naked) – The “Uncovered Call” is defined as an option strategy where an option player sells (writes) call options without owning the underlying security (stock). Also referred to as “Naked Call” or “Short Call.”

Uncovered Option – See Naked Option.

Uncovered Put (Naked) – A Put Option is Uncovered or Naked when the seller does not have a corresponding short position in the underlying stock.

Underlying – In option trading, the security (stock) that must be delivered when a options contract, such as a Put or Call Option, is exercised.

Unusual options activity –  also known as UOA, occurs when there is an unusually large number of options traded for a given stock. It could be an indication that someone is making a large and aggressive bullish OR bearish bet on a particular stock.

Volatility –  A measure of fluctuation in the market price of the underlying security. Mathematically, volatility is the annualized standard deviation of returns.

Wash-Sale Rule -The wash–sale rule prohibits selling an investment for a loss and replacing it with the same or a “substantially identical” investment 30 days before or after the sale. If you do have a wash sale, the IRS will not allow you to write off the investment loss which could make your taxes for the year higher than you hoped.

Whipsawed – Whipsaw is a condition in which a security’s price heads in one direction, but is followed quickly by a movement in the opposite direction. There are two types of whipsaw patterns, with the first involving an upward movement in a share price, which is then followed by a drastic downward move, causing the share’s price to fall relative to its original position. The second type occurs when a share price drops in value for a short while, and then suddenly surges upward toward a positive gain, relative to the stock’s original position.

Write – To sell an option. The investor who sells is called the writer.

Writer – The investor/trader who sells an option and collects the premium payment from the buyer.