Options Trading Glossary

Description: Options Glossary, Make a Market, Margin,Margin Account,Margin Call

Make a Market

A market maker stands ready to buy or sell a particular security for his/her own account to keep the market liquid.

Margin

A deposit contributed by a customer as a percentage of the current market value of the securities held in a margin account is thus the margin amount. This amount changes as the price of the investment changes. basicaly, margin is a buying a security by borrowing funds from a brokerage house.

Margin Account

A customer account in which a brokerage firm lends the customer part of the purchase price of a trade.

Margin Call

A call from a broker signaling the need for a trader to deposit additional money into a margin account to maintain a trade.

Margin Requirement

The minimum equity required to support an investment position, the maximum percentage of the investment that can be loaned by the brokerage firm - is set by the Federal Reserve Board. To buy on margin refers to borrowing part of the purchase price of a security from a brokerage firm.

Margin Requirement (for options)

The amount an uncovered (naked) option writer is required to deposit and maintain to cover a position. The margin requirement is calculated daily.

Mark-To-Market

An accounting process by which the price of securities held in account are valued each day to reflect the last sale price or market quote if the last sale is outside of the market quote. The result of this process is that the equity in an account is updated daily to properly reflect current security prices. Market-to-market is the daily adjustment of margin accounts to reflect profits and losses. In this way, losses are never allowed to accumulate.

Marked to Market

At the end of each business day the open positions carried in an account held at a brokerage firm are credited or debited funds based on the settlement price of the open positions that day.

Market

A specific asset, security or commodity that is traded at an exchange.

Market Basket

A portfolio of common stocks whose performance is intended to simulate the performance of a specific index.

Market Maker

An independent trader or trading firm that is prepared to buy and sell shares or contracts in a designated market. Market makers must make a 2-sided market (bid and ask) in order to facilitate trading.

Market Not Held Order

Also a market order, but the investor is allowing the floor broker who is executing the order to use his own discretion as to the exact timing of the execution. If the floor broker expects a decline in price and he is holding a "market not held buy order", he (she) may wait to buy, figuring that a better price will soon be available. There is no guarantee that a "market not held order" will be filled.

Market on Close

An order specification that requires the broker to get the best price available on the close of trading, usually during the last five minutes of trading.

Market Order

An order to buy or sell securities at the current market. The order will be filled as long as there is a market for the security. A market order is to be executed immediately at the best available price, and is the only order that guarantees execution.

Market Price

The most recent price at which a security transaction took place.

Market quote

A quotation of the current best bid / ask prices for an option or stock in the marketplace (an exchange trading floor). This information is usually obtained by the investor from someone at a brokerage firm. However, for listed options and stocks, these quotes are widely disseminated and available through various commercial quotation services.

Market Value

The price at which investors buy or sell a share of common stock or a bond at a given time. Market value is determined by the interaction between buyers and sellers.

Market-If-Touched (M.I.T.)

A price order that automatically becomes a market order if the price is reached.

Market-Maker

An exchange member whose function is to aid in the making of a market, by making bids and offers for his account in the absence of public buy or sell orders. Several market-makers are normally assigned to a particular security. The market-maker system encompasses the market-makers, floor brokers, and order book officials.

Market-Maker System, (competing)

A method of supplying liquidity in options markets by having market makers in competition with one another. An alternative to a specialist system. They are similarly charged with making fair and orderly markets in a given class of options.

Market-not-held order

A type of market order which allows the investor to give discretion to the floor broker regarding the price and/or time at which a trade is executed.

Market-on-Close Order (MOC)

A type of option order which requires that an order be executed at or near the close of trading on the day the order is entered. A MOC order, which can be considered a type of day order, cannot be used as part of a GTC order.

Married Put and Stock

The simultaneous purchase of stock and the corresponding number of put options. This is a limited risk strategy during the life of the puts because the stock can be sold at the strike price of the puts.

Married Put Strategy

The simultaneous purchase of stock and put options representing an equivalent number of shares when the position is designated at that time as a hedge. This is a limited risk strategy during the life of the puts because the stock can always be sold for at least the strike price of the purchased puts.

Max Loss

The maximum amount of losses possible from the option trade.

Max Profit

The maximum amount of net profit possible from the option trade.

Mid-Cap Stocks

Usually solidly established medium growth firms with less than 100 billion in assets. They provide better growth potential than blue-chip stocks, but do not offer as wide a variety of investment attributes.

Model

A mathematical formula used to calculate the theoretical value of an option. This is a mathematical formula designed to price an option as a function of certain variables - generally stock price, striking price, volatility, time to expiration, dividends to be paid, and the current risk-free interest rate. The Black-Scholes model is one of the more widely used models.

Momentum

When a market continues in the same direction for a certain time frame, the market is said to have momentum.

Momentum Indicator

A technical indicator utilizing price and volume statistics for predicting the strength or weakness of a current market.

Momentum Trading

Investing with (or against) the momentum of the market in hopes of profiting from it.

Moving Averages

The moving average is probably the best known, and most versatile, technical indicator. A mathematical procedure in which the sum of a value plus a selected number of previous values are divided by the total number of values. Used to smooth or eliminate t he fluctuations in data and to assist in determining when to buy and sell.

Multiple-Listed/Traded option

Any option contract that is listed and traded on more than one national options exchange.

Mutual Fund

An open end investment company that pools investors' money to invest in a variety of stocks, bonds, or other securities.

Naked Option

An option written (sold) without an underlying hedge position.

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