A
All or nothing (AON) – This refers to an option order that needs to fill in its entirety or not at all. Also refers to some trades that will either make a trade a lot of money or leave them with nothing. See YOLO.
Ask price – The price of an option at which the liquidity provider is willing to sell.
Assignment – The notice that obligates an option seller to sell (in the case of a call) or purchase (in the case of a put) the underlying shares at the specified strike price.
At the Market – A price on the bid or or taking the offer of a security, ie. place a limit order at the market means an execution at current prices
At-the-money (ATM) – An option is considered ATM when the underlying stock price is at or very close to the option strike price.
Away from the Market – A price for a security that is below the bid or above the offer and is not executable right away
B
Back-month – The later-dated, longer-term expiration option series (vs. front-month).
Backspread – Net long option contract positions that generally have positive gamma and negative theta, and benefit from a bigger move in the underlying security.
Backwardation – The condition in a spread where the front-month value is higher than the back-month value.
Backtest – A re-test of a breakout move above/below a key support/resistance level that either confirms or rejects the initial breakout…
Bank Leverage Ratios – balance sheet ratios that force banks to either hold more capital against risky assets or to ensure they have enough short-term liquidity in times of stressed financial conditions.. Three major ratios that were created post the great financial crisis are the Supplementary Leverage Ratio (SLR), the Liquidity Coverage Ratio (LCR) and the Net Stable Funding Ratio (NSFR)…
Barrier to Entry – meaning a particular company has a moat of protection built around their business that restricts competition from gaining market share on them.
B/D – Acronym for Broker/Dealer.
Bearish – A trader is considered bearish if he or she believes the underlying security will decrease in price.
Bear call spread – Short delta trade where the short call is near the money and the long call is out of the money. The trade is generally opened for credit, where the dollar risk is greater than the potential reward.
Bear put spread – Short delta trade where the long put is near the money and the short put is out of the money. The trade is generally opened for a debit, where the dollar risked is less than the potential gain.
Bid/ask spread – The difference in the latest quoted bid and ask prices for a particular option contract.
Bid price – The option price in which the liquidity provider is willing to purchase.
Big Board – A nickname for the New York Stock Exchange (NYSE).
Big-cap – These are large market capitalization stocks with a value typically more than $100 billion. Most of these stocks are in the Dow, S&P 500, and NASDAQ 100 stock indexes.
Black-Scholes – The first option-pricing model that factors in the underlying price, the option’s strike price, the amount of time left until the option expires, the current level of interest rates, dividends, and forward volatility (implied volatility) of the underlying security to generate an option’s theoretical value.
Blue chip – Big-cap, dividend-paying stocks that are thought as investable quality with reliable earnings streams. Often members of the Dow Jones Industrial Average.
Breakeven – The level at which the underlying needs to be in order to recoup the initial investment.
Broken-wing butterfly – A butterfly with each wing at a different strike width from the center or body of the fly. The risk is generally more than the debit or credit to enter the trade, but is limited to the distance of the farthest strike leg from the center strike.
Brokerage – A broker/dealer (B/D) that is the FINRA-regulated custodian agent for investor activity in primary, secondary, and over-the-counter (OTC) markets. They perform transactions, give investing advice, and back office regulatory duties.
Bullish – A trader is considered bullish if he or she believes the underlying security will increase in price.
Bull call spread – A debit spread with a bullish delta where the long call option is more in the money than the short call option. The potential risk is limited to the initial debit spent, and potential reward is also limited.
Bull put spread – A credit spread with a bullish delta where the short put option is more in the money than the long put option. The potential risk is limited to the distance between the spread strikes, less the credit received. Potential reward is also limited.
Butterfly body – the “inner” part of the butterfly that is surrounded by each leg of the trade
Butterfly wings – the ‘outer” part of the butterfly that surrounds the body of the butterfly. Also knowns as “legs”
Butterfly spread – A call or put spread trade where the trader is long 1 option, short 2 options, and long 1 option. The short options are equidistant and between each long option leg. The trade is generally opened for a net debit.
Buy-to-open (BTO) – A transaction where the trader purchases a contract to initiate a trade. Traders can BTO calls, puts, stock, or any investable security.
Buy Write – The bread-and-butter trade that is the most common for retail traders. It consists of buying stock and selling out-of-the-money calls, usually on a ratio of 100 shares per every 1 call sold. The synthetic equivalent of this trade is the short put.
C
Calendar spread – An option spread where the trader buys an option in one expiration series, and sells another option in another expiration series at the same strike price. A long calendar spread is when the trader buys to open the back-month options and sells to open the front-month options. A short calendar spread is when the trader buys to open the front-month and sells to open the back-month options.
Call option – A contract that gives the buyer the right — not the obligation — to buy an underlying security for a length of time (before expiration) at a given price (the strike). Usually the contract size is for 100 shares of the underlying.
Candlestick – A type of chart with an open, low, high, and close marker each day (or week/month) that looks like a candle.
Cash-secured puts – A sell-to-open short put where all the margin necessary is in the account to buy the stock at the strike price.
CBOE – The Chicago Board Options Exchange.
Class – The group of options and products that belong to a symbol — i.e. – AAPL, SPY, VIX.
Collar – This is a short call, long put strategy, where the put strike is below the current underlying price, and the call strike is above the underlying price. Mostly these are done against stock, or as a form of options insurance, on a 1:1:100 call/put/share ratio.
Commodity – A physical asset deliverable from a futures contract regulated by the CTFC. Commodities examples include gold, crude oil, and frozen concentrated orange juice.
Contango – When the back-month futures are higher than the spot and near-month futures. Often used when referencing volatility assets.
Correlation – The mathematical relationship where two securities move together in the same direction.
Covered call – A short call position, typically taken to insure or hedge long stock. This is also known as a short synthetic put.
Credit – The amount of money credited to an account when a trader sells to open an option or initiates a credit spread.
Credit spread – A call or a put vertical spread where the short contract is closer to the money and the long contract is more out of the money, resulting in a net credit (where we receive dollars to put the trade on). The max gain is the credit received and the max loss is the difference between the strike prices less the credit.
Curve trading – This is an arbitrage trade where a trader buys a contract on one part of the curve and sells another contract on the other part of the curve. Example curves: Treasury yields, VIX futures, crude oil futures term, SPX volatility, etc. Trades using a curve can be futures trades, skew trades, calendar trades, volatility trades, etc.
D
Daily options – Options with a 1-day expiration date. These could be binary or ordinary options, for example.
Day trade – Any securities trade where the trader enters and exits on the same day.
Debit spread – Buying one option closer to the money and selling one option out of the money, resulting in a net debit. The trade can be bullish (calls) or bearish (puts), and the net risk is usually just the price paid to open the spread.
Delta – An option “Greek” that shows the anticipated change in the option price for a $1 move in the underlying. Also thought of as a hedge ratio for the option, or the percentage chance the option will finish in the money if the volatility stays constant.
Deviation (Standard) – Expected move from the mean 68.2% for a given data set.
Diagonal spread – Calendar spread where the expiration dates are different and the strikes are different. Diagonal spreads can be long the ITM back-month and short the OTM front-month, or vice versa.
Dividend – The amount of money a company pays to holders of the stock. Usually paid quarterly.
Dividend Play – An option trade, usually selling a put, to capture the dividend when the short put is assigned. The idea is to sell the put, take delivery of the stock and collect the dividend on the Ex-d date.
Dollar Cost Averaging – this is an investment strategy that works well when you have a long-term outlook on a stock or asset class… You would commit to averaging your cost basis by making purchases based on a set time frame i.e. weekly monthly etc. or could plan to add as prices go down based on a % decline…
Double-top – A technical chart pattern where a stock makes a high, retraces for a period of time, and makes another high in the same area.
Dow Jones Industrial Average (INDU) – A closely watched index of 30 blue-chip, American stocks, including Apple (AAPL), IBM (IBM), Johnson & Johnson (JNJ), Pfizer (PFE), and Walmart (WMT).
E
Earnings – A company’s quarterly (usually) financial report, which can often act as a volatility catalyst for the underlying stock.
Exchange-traded fund (ETF) – A financial instrument that holds other financial assets like stocks, bonds and gold.
Exchange-traded note (ETN) – An exchange-traded, unsecured financial instrument that tracks other indexes or products.
Ex-D – This is the ex-dividend date where the trader must own a stock to collect the dividend prior to the open on the first business day. For example: Ex D is Friday the 12th, traders must own the stock by the close of business on the 11th. If Ex D is Monday the 15th, trader must own the stock on close of business Friday the 12th.
Exercise – The process by which an option holder invokes the terms of the option contract. To exercise, call holders will buy the underlying shares at the strike price, while put holders will sell the underlying stock at the strike price.
Expiration – The date in which the options contract expires. Standard options typically expire at the market close on Fridays, but settle on Saturdays. Weekly contracts typically expire and settle the same day.
Extrinsic value – The value of an option when you subtract its intrinsic value (if it has any). Made up mostly of time value and IV, and decreases as expiration approaches, assuming the stock price remains constant.
F
FAANG – A stock market nickname for a popular quintet of big-cap stocks: Facebook (FB), Amazon (AMZN), Apple (AAPL), Netflix (NFLX), and Google (GOOG).
Fed – The Federal Reserve, or the Fed, determines the federal funds rate and will step in or step back to aid the economy, as needed.
Fibonacci – Italian mathematician Leonardo Fibonacci, whose famed sequence of numbers is often seen on stock charts. Most notably, many traders use Fibonacci retracement levels to determine potential support or resistance levels on a chart.
Flag pattern – A continuation price pattern in the shape of a parallelogram that goes against the prevailing trend. Used by some traders as buy (bull flags) or sell (bear flags) signals.
Flash crash – An algo-driven market move that is usually computer generated, causing the stock market to halt trading after it trips the circuit breakers.
Forced liquidation – When an account cannot meet a margin requirement, post enough capital to fulfill obligations or deliver a security on time, the clearing agent/prime broker can sell or buy to close securities at market prices at their discretion.
Forward volatility – The interpolated volatility (or implied volatility) of a stock or option, reflected in the option’s price. Also the effective volatility of a back month option in a time spread governed by this formula SQRT((T2*V2^2-T1*V1^2)/(T2-T1)
Front-month – The option expiration nearest to today’s trade date.
FOMO – An acronym for “Fear Of Missing Out.”
Futures – A financial instrument that prices a commodity or index further out in time. Futures delivery can be in the physical commodity or cash.
G
Gamma – The rate of change of an option’s delta for every $1 move in the underlying.
Good-til-canceled (GTC) order – An order to open or close that is active during market hours, and can be cancelled during or after market hours. Generally in place until expiration.
Greeks – Order derivatives of the option model that inform how an option will change in value with respect to a change in inputs. The first-order greeks are delta, gamma, theta, vega, and rho, respectively.
H
Head-and-shoulders pattern – A predictive chart formation that usually indicates a reversal in the trend during which the market makes a shift from bullish to bearish, or vice-versa.
Hedge fund – An unregistered investment vehicle for high net-worth individuals.
Hedging – Protecting an investment with a separate investment (usually on the other side of the bullish/bearish coin) to act as “insurance” and limit losses in the event the primary trade doesn’t work out.
Historic volatility (HV) – Actual movement of an underlying asset over a previous period of time. Generally referred to as HV or realized volatility, and is often given in intervals like 10-day, 20-day, or 30-day historical volatility.
I
Implied volatility (IV) – The interpolated volatility (or forward volatility) of a stock or option, reflected in the option’s price.
Inflation trade – This is in reference to an economic environment that has accelerating growth and inflation… An investor should consider being long stocks in the energy, Industrials and materials sectors as well as commodities… That would be a portfolio built for an inflation trade…
In-the-money (ITM) – Only options with intrinsic value can be ITM. A call is ITM when the stock price is higher than the strike price, and a put is ITM when the stock price is lower than the strike price.
Indicator – A tool used to take the temperature of a security and predict future movements.
Index – The cash value of a group of securities, like the Dow or S&P 500. It is usually quoted as a price but trades via futures and settled to cash.
Intrinsic value – The difference between an in-the-money option’s strike price and the current underlying share price.
Iron butterfly – A long strangle and short straddle in an option class. For instance, the trader could sell to open the XYZ April 50 call and put, and buy to open the April 40 and 50 calls. The ratio is 1:1:1.
Iron condor – This is similar to an iron butterfly, but the short strikes are out of the money, generally around the 5-25 delta range. For instance, the trader could sell the April 35 put and April 55 call, and buy the April 30 put and April 60 call.
J
Juice – The option trading floor slang for option premium, decay, theta, or other terms describing the extrinsic value of options.
L
Leaning – A trading term to indicate a directional bias, up or down, but the trade direction is hedged to some degree where the position can get back to a flat direction on an adverse move. A security or option “can be leaned upon,” where the trader uses the option or security to “get out” of another position.
LEAPS – Long-Term Equity AnticiPation Securities, or LEAPS, are options that expire in January and can go several years out.
Left Tail – This refers to volatility skew below the at the money strikes referencing what the market will pay for put out of the money implied volatility relative to the at the money implied volatility.
Leverage – Essentially getting more bang for your buck. For instance, buying one call option that controls 100 shares of the underlying, for less than it would cost to buy 100 shares outright.
Limit order – A buy or sell order at a set price or better. On the buy side, an order will only be executed at or below the limit price; on the sell side, an order will only be executed at or above the limit price.
Long trade – Owning or buying a security or option and expecting the value of that security to increase.
Long Squeeze – A market action that tries to get long holders to liquidate their positions by heavy, leveraged selling of the underlying securities by other market participants.
LP – Liquidity Provider, also known as a market maker.
M
Market capitalization – The number of shares outstanding x the price of the stock.
Market maker – An exchange member obligated to provide liquidity to options markets. Also known as an LP, or liquidity provider.
Market order – A buy or sell order executed at the best price possible when the order hits an exchange. There is no limit price on this order and the results can vary.
Married Put – A married put is one long put for every long 100 shares of stock owned. The put serves as an effective stop for the shares dropping in price too much.
Melt-up – A market up-trend that is not driven by investors buying based on fundamental values of stock. It is driven by central bank money printing intended to inflate financial asset prices, including stocks and bonds.
Meme stocks – Typically stocks that are popular among Reddit and Robinhood users, called that because millennial traders often make memes about stocks they’re trading.
Mid-cap – Stocks with a $100 million to $1 billion market capitalization.
MOMO – A Wall Street nickname for “momentum” or “momentum stocks.”
Moving average – This is a moving indicator that smooths out prices over a period of time. A 50-day moving average would cover the average underlying price over the last 50 trading days. Moving averages can be simple (SMA) or exponential (EMA).
Mutual fund – Registered investment vehicle regulated by the SEC with daily settled prices.
N
Nasdaq – The over-the-counter exchange for trading securities. Nasdaq-listed stocks usually have 4-letter symbols like AAPL or MSFT.
Nasdaq-100 (NDX) – Top 100 market-cap stocks on the Nasdaq exchange.
Near the money – An option is considered near the money if the underlying share price is close to the option strike price.
NYSE – The New York Stock Exchange, also called the “Big Board.”
O
Open interest – The number of outstanding contracts in a derivative security, or the number of put or call contracts open at a particular strike. A contract is open until the initial buyer or seller closes it.
Order flow – The actual option contracts bought or sold by the investing public in a particular class of securities.
OPEX – Option expiration. This would be weekly or Fridays or any day that options expire.
Option – A call or put contract that controls 100 shares of the underlying security or index.
Opening trade – For options, when a buyer or seller initiates a trade and creates open interest.
Opening rotation – The first price of an option trade once the exchange opens the contract for trading.
Other side of the market – A trading floor term referring to the “call side” of the market as one side and the “put side” as the other side of the market.
Out-of-the-money (OTM) – A call option is OTM when the underlying stock price is below the strike price, while a put option is OTM when the underlying stock price is above the strike price.
Overbought – A condition where too many buyers want the same security at the same time — often seen after a big, fast rally. Usually when a technical signal, like the RSI, gets to an upper extreme.
Oversold – A condition where too many sellers want to dump the same security at the same time — often seen after a big, fast sell-off. Usually when a technical signal, like the RSI, gets to a lower extreme.
Over-the-Counter (OTC) Markets – refers to the process of how securities are traded for companies not listed on a formal exchange. OTC securities are traded via broker, dealer networks as opposed to on a centralized exchange.
P&L – Profit & Loss.
Paper – A trader’s term for retail order flow. This is everyone not a market maker.
Pennant – The continuation price pattern is similar to a flag, except that it is more horizontal and resembles a small triangle when composed.
Penny stock – Usually considered to be a stock under $5.
Prime brokers – The very large clearing firms that house hedge fund accounts, much like Charles Schwab or Fidelity house retail trading clients. These are the big guys like Goldman Sachs, Morgan Stanley, Nomura, Deutsche Bank, etc.
Premium – The amount in dollars of an option bought or sold. This could be for a spread or mult-ileg trade.
Protective put – A long put bought against stock or another financial instrument. The put in this case is a hedge against adverse market conditions.
Put fly – Shorthand for a put butterfly. The trader is long 1 put, short 2 puts, and long 1 put, with the distance between strikes being equal. Long put flies are taken for debit, and short put flies are taken for a credit.
Put option – A contract that gives the buyer the right (but not the obligation) to sell 100 shares of the underlying stock within a period of time (expiration) for a set price (the strike).
Put Write – Selling a put, usually cash secured, in lieu of buying stock. The idea is to use the put premium collected as a yield like a dividend.
Q
QQQ – The PowerShares QQQ ETF, which is based on the NASDAQ 100. This index holds most if not all of the Mega Cap tech stocks like GOOGL, AAPL, FB, NVDA, MSFT, INTC, AMZN etc. Most of the market capitalization in QQQ is in the top 10 stocks.
Quadruple witching – Expiration cycle that happens quarterly where multiple exchange products expire on the same day.
R
Ratio spread – Any spread where the contract count per strike is different. For instance, if a trader is long two options and short one option, or vice versa.
Realized volatility – The actual volatility of an underlying over a period of time (see Historical Volatility).
Relative strength – How an underlying is performing against itself, to get to an overbought or oversold condition.
Relative Strength Index (RSI) – An indicator where a reading above 70 suggests the underlying is overbought, and a reading below 30 suggests it’s oversold.
Resistance – A chart level that acts as a “speed bump” or ceiling for the underlying shares. The opposite of support.
Retail trader – The bulk of the trading public that does not professionally manage money.
Retracement – Prices often retrace, or pull back, before resuming the larger trend. Shares tend to retrace to key levels or by notable amounts, like a Fibonacci number.
Reverse Split – A consolidation that reduces the overall number of shares while proportionally increasing their value.
Right Tail – This refers to volatility skew above the at the money strikes referencing what the market will pay for call out of the money implied volatility relative to the at the money implied volatility.
Risk Arb – Short for Risk Arbitrage and it involves shorting one security and buying another to make money on the contraction of the spread between the two securities.
Robinhood – A no-commission trading platform for retail traders. Our own Mark Sebastian gathers data on retail traders (like those who trade on Robinhood) AND institutional investors to hit home runs in Robinhood Trader.
Rolling a position – A trader can roll an open position to reflect adjusted expectations for the underlying, whether that’s changing strike prices or option series. A roll is closing one term or strike and reopening another term or strike. Buy then sell or sell then buy.
Russell 2000 (RUT) – An index of the top 2,000 mid-market-capitalization stocks listed in the USA.
S
S&P 500 Index (SPX) – An index of 500 market-cap stocks chosen by Standard & Poor’s.
Sell-to-open (STO) – A transaction where the trader sells a contract, usually for a credit, as the initial trade.
Sharp B.E.T.S. – One of Mark Sebastian’s proprietary trading systems, based on: the Background of the stock; its Energy, or volatility; Timing — when the trade should be executed; and the perfect Strike.
Short position – A bearish position, or one opened by selling a contract to open.
Short seller – A trader that sells a security without owning it. The trade creates short interest and is normally bought back to close at a later date.
Short squeeze – The forced short covering of short sellers in a security. This is a mechanical market trade where owners of the underlying force borrowers to return the shares. This usually results in much higher share prices for the short sellers forced to cover at a loss.
Short straddle – Selling to open a call and a put on the same strike and term, to “pin” a stock price (bet on minimal volatility).
Short strangle – Selling to open a call and put on different strikes, but the same term, to “pin” a stock price. The short strangle profits if the shares stay between the sold strikes during the options’ lifetime.
Skew – The difference in volatility per strike for an option. Black Scholes wants 1 volatility for all strikes, but adjusts strike volatility to compensate for the assumptions in the Black Scholes model.
Small-cap – A stock with less than $100 million in market capitalization.
Spike – An immediate price change in a security where the relative move is much higher than the normal volatility
Split-strike butterfly – See: Broken-wing butterfly.
Stock-replacement strategy – Usually employed after a large gain in the underlying stock, wherein the shares are sold and calls are purchased in their place.
Straddle – A long call and long put at the same strike in the same series. The long straddle profits if the underlying makes a big enough move in either direction from the strike.
Strangle – A long call and long put in the same series, but at different strikes. The long strangle profits if the underlying makes a big enough move above the call strike or below the put strike.
Stonk – Market slang for “stock,” popularized by a surge in pandemic retail traders in 2020.
Stop – This is a closing transaction in an open trade. Traders can stop gains or losses by executing a close once an option reverses direction from the winning direction to the losing direction. This helps to manage gains and keep losses small.
Strike price – The price at which a call or put holder has the right — but not the obligation — to buy or sell the underlying shares, respectively, before the contract expires.
Support – A level on the charts that acts as a floor for the underlying shares, whether that be a moving average, round number, former high or low, or otherwise.
Swell – An increase of momentum in a stock chart.
Swing trade – A trade lasting from a few days to a few weeks in duration.
Synthetic – The ability in options to turn a call into a put and vice versa. Also to turn options into stock equivalents and options debits into option credit on the other side of the market.
Synthetic Call – Using 1 put and 100 shares of stock to create a similar risk profile for calls. Long synthetic stock is long put, long stock and short a synthetic call is short put, short stock.
Synthetic Put – Using 1 call and 100 shares of stock to create a similar risk profile for puts. Long synthetic puts are short stock and long calls and short synthetic puts are long stock and short calls.
Synthetic Stock – Using 1 call and 1 put of the same strike to create a similar risk profile for stock. Long 1 call and short 1 put is long synthetic stock and short 1 call and long 1 put is short synthetic stock.
T
Term structure – The difference in volatility between two different expiration terms.
Theta – The “Greek” that measures the change in an option’s value for every day closer to expiration. Essentially measures time value.
Time decay – The amount of value an option loses as expiration approaches, assuming the volatility stays constant.
Time value – The proportion of an option’s value that is sensitive to time decay. The longer an option has until expiration, the more time value (read: the more expensive) it has.
U
Underlying – The stock, future, index, or bond that is the price for a derivative security.
Underwater – A trade that is losing money or an option that is trading for less than its intrinsic value.
UVXY – An ETN that tracks the ProShares Short Term Volatility index with a 30-day duration and 1.5x leverage. UVXY means to own the 30-day weighted performance of Cboe Volatility index (VIX) futures.
V
Vega – The Greek that shows the change in an option’s value for a 1-point move in volatility.
VIX – The Cboe Volatility Index, which seeks to measure short-term S&P 500 index option volatility. Also called Wall Street’s “fear index,” as a rising VIX often correlates to sinking stock prices. Nobody knows VIX or trades volatility better than Mark Sebastian.
VIX curve – The term structure for VIX futures.
VIX futures – Futures for the Cboe Volatility Index (VIX). They settle to cash on the Wednesday morning 30 days prior to expiration of the following month SPX contract.
Vol – Abbreviation for volatility, realized volatility, implied volatility or otherwise a euphemism describing market movement
Volatility – How much a stock, option, or another asset moves. Volatility is often “mean reverting,” which means it tends to move back toward the average after a big jump or drop-off.
Volatility crush – A fast drop in implied volatility, often seen after a known event like earnings, which can inflate IV.
Volume – The number of contracts or shares traded during market hours.
VXN – Essentially the VIX for the Nasdaq 100.
VXX – A ProShares ETN that owns the front 2 months VIX futures contracts to keep a constant 30-day duration.
W
Wedge – A technical chart pattern that has a narrower range than a pennant, often used as a buy or sell signal.
Weekend Effect – This is the Monday increase in VIX and other option volatility, purely a mechanical result of the liquidity provider rolling dates forward in the prior week to drive down option premiums, since there are only 5 trading days in a 7-day week. On Monday, the clock is reset.
Weekly options – Options that expire on a weekly or basis, usually at the close on Fridays.
Wheel Trade – An option trade meant to capture the dividend in a stock. The routine goes: sell a put, take delivery of shares and then sell a call at the money to call away the stock at least 1 day past ex-dividend.
Y
YOLO – An acronym for “You Only Live Once” — often refers to all-or-nothing trades for retail plungers.
