Options Trading Glossary

Description: Options Glossary, Each Way, Early Exercise,End of Day,EPS Rank

Each Way

The commission made by a broker for the purchase and sale sides of a trade.

Early Exercise

A feature of American-style options that allows the owner to exercise an option at any time prior to its expiration date.

End of Day

The close of the trading day when market prices settle.

EPS Rank

An Investor's Business Daily list of companies ranked from 0 to 100 by the strength of each company's earnings per share.

Equilibrium

A price level in a sideways market equal-distance from the resistance and support levels.

Equity

In a margin account, this is the difference between the securities owned and the margin loans owed. It is the amount the investor would keep after all positions have been closed and all margin loans paid off.

Equity Option

An option on shares of an individual common stock or exchange traded fund (ETF).

Equivalent strategy

A strategy which has the same risk-reward profile as another strategy. For example, a long May 60-65 call vertical spread is equivalent to a short May 60-65 put vertical spread.

Escrow Receipt

A receipt issued by a bank in order to verify that a customer (who has written a call) in fact owns the stock and therefore the call is considered covered.

Eurodollar

Dollars deposited in foreign banks, with the futures contract reflecting the rates offered between US banks and foreign banks.

European Exercise

A feature of an option that stipulates that the option may only be exercised at its expiration. Therefore, there can be no early assignment with this type of option.

European Option

An option that can only be exercised on the expiration date.

European-Style Options

An option contract that may be exercised only during a specified period of time just prior to its expiration.

Ex-date/Ex-dividend date

The day before which an investor must have purchased the stock in order to receive the dividend. On the ex-dividend date, the previous day's closing price is reduced by the amount of the dividend (rounded up to the nearest eighth) because purchasers of the stock on the ex-dividend date will not receive the dividend payment. This date is sometimes referred to simply as the 'ex-date,' and can apply to other situations; for example, splits and distributions. If you purchase a stock on the ex-date for a split or distribution you are not entitled to the split stock or that distribution. However, the opening price for the stock will have been reduced by an appropriate amount, as on the ex-dividend date. Weekly financial publications, such as Barron's, ofte

Ex-Dividend

The process whereby a stock's price is reduced when a dividend is paid. The ex-dividend date (ex-date) is the date on which the price reduction takes place. Investors who own stock on the ex-date will receive the dividend, and those who are short stock must pay out the dividend.

Exchange

An area where an asset, option, future, stock or derivative is bought and sold.

Exchange Rate

The price at which one country's currency can be converted into another country's currency.

Exchange Traded Funds (ETFs)

Exchange traded funds (ETFs) are index funds or trusts that are listed on an exchange and can be traded in a similar fashion as a single equity. The first ETF came about in 1993 with the AMEX's concept of a tradable basket of stocks - the Standard & Poor's Depositary Receipt (SPDR). Today, the number of ETFs that trade options continues to grow and diversify. Investors can buy or sell shares in the collective performance of an entire stock portfolio - or a bond portfolio as a single security. Exchange traded funds allow some of the more favorable features of stock trading, such as liquidity and ease of equity style features to more traditional index investing.

Execution

The process of completing an order to buy or sell securities.

Exercise

Implementing an option's right to buy or sell the underlying security. In the case of a call, the option owner buys the underlying stock. In the case of a put, the option owner sells the underlying stock.

Exercise by Exception Processing

A procedure used by The Options Clearing Corporation as an operational convenience for it's clearing members. Under these proceedings, a clearing member is deeming to have tendered exercise notices for options that are in-the-money by threshold amounts, unless specifically instructed not to do so. This procedure protects the owner from losing the intrinsic value of the option because of failure to exercise. Unless instructed not to do so, all expiring equity options that are held in customer accounts will be exercised if they are in the money by a specified amount.

Exercise Limit

The limit on the number of contracts which a holder can exercise in a fixed period of time. Set by the appropriate option exchange, it is designed to prevent an investor or group of investors from "cornering" the market in a stock.

Exercise Price

The price at which the owner of an option can purchase (call) or sell (put) the underlying stock. In other words, it is the price at which the call holder may exercise to buy the underlying security or the put holder may exercise to sell the underlying security. For listed options, the exercise price is the same as the Striking Price.

Exercise Settlement Amount

The difference between the exercise price of the option and the exercise settlement value of the index on the day an exercise notice is tendered, multiplied by the index multiplier.

Expected Profit

Expected Profit is the predicted profits minus the predicted losses expressed in total dollars.

Expected Return

A rather complex mathematical analysis involving statistical distribution of stock prices, it is the return which an investor might expect to make on an investment if he were to make exactly the same investment many times throughout history.

Expiration

The date and time after which an option may no longer be exercised.

Expiration Cycle

Today, equity options (except LEAPS) expire on a hybrid cycle which involves a total of four option series: the two nearest-term calendar months and the next two months from the traditional cycle to which that class of options has been assigned. For example, on January 1, a stock in the January cycle will be trading options expiring in these months: January, February, April, and July. After the January expiration, the months outstanding will be February, March, April and July.

Expiration Date

The day on which an option contract becomes void. The expiration date for listed stock options is the Saturday after the third Friday of the expiration month. Holders of options should indicate their desire to exercise, if they wish to do so, by this date.

Expiration Friday

The last business day prior to the option's expiration date during which purchases and sales of options can be made. For equity options, this is generally the third Friday of the expiration month. Note: If the third Friday of the month is an exchange holiday, the last trading day will be the Thursday immediately preceding the third Friday.

Expiration Month

The month during which the expiration date occurs.

Expiration Time

The time of day by which all exercise notices must be received on the expiration date. Technically, the expiration time is currently 5:00PM on the expiration date, but public holders of option contracts must indicate their desire to exercise no later than 5:30PM on the business day preceding the expiration date. The times are Eastern Time.

Explosive

An opportunity that can yield large profits with usually a limited risk in a short amount of time.

Extrinsic Value

The price of an option less its intrinsic value. An out-of-the money option's worth consists of nothing but extrinsic or time value.

Facilitation

The process of providing a market for a security. Normally, this refers to bids and offers made for large blocks of securities, such as those traded by institutions. Listed options may be used to offset part of the risk assumed by the trader who is facilitating the large block order.

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