Options Trading Glossary

Description: Options Glossary, Technical Analysis, Terms,Theoretical Option Pricing Model,Theoretical Value

Technical Analysis

A method of predicting future stock price movements based on observation of of historical market data such as (among others) the prices themselves, trading volume, open interest, the relation of advancing issues to declining issues, and short selling volume.

Terms

The collective name denoting the expiration date, striking price, and underlying stock of an option contract.

Theoretical Option Pricing Model

The first widely-used model for option pricing. This formula can be used to calculate a theoretical value for an option using current stock prices, expected dividends, the option's strike price, expected interest rates, time to expiration and expected stock volatility. While the Black-Scholes model does not perfectly describe real-world options markets, it is still often used in the valuation and trading of options.

Theoretical Value

The estimated value of an option, or a combination of options, as computed by a mathematical model to determine what an option is really wort.

Theta

The measurement of the time decay of a position - a measure of the rate of change in an option's theoretical value for a one-unit change in time to the option's expiration date.

Tick

The smallest unit price change allowed in trading a security. For listed stock, this is generally 1/8th of a point. For a listed option under $3 in price, this is generally 1/16th of a point. For a listed option over $3, this is generally 1/8th of a point.

Time Decay

The amount of time premium movement within a certain time frame on an option due to the passage of time in relation to the expiration of the option itself. Time decay is used to describe how the theoretical value of an option reduces with the passage of time. Time decay is especially quantified by Theta.

Time Premium

The additional value of an option due to the volatility of the market and the time remaining until expiration.

Time Spread

An option strategy which generally involves the purchase of a farther-term option (call or put) and the writing of an equal number of nearer-term options of the same type and strike price. Example: buying 1 XYZ May 60 call (far-term portion of the spread) and writing 1 XYZ March 60 call (near-term portion of the spread). Also known as calendar spread or horizontal spread.

Time Value

The portion of the option premium that is attributable to the amount of time remaining until the expiration of the option contract. The difference between the premium paid for an option and the intrinsic value (whatever value the option has in addition to its intrinsic value ). As an option approaches expiration, the time value erodes, eventually to zero.

Time Value Premium

The amount by which an option's total premium exceeds its intrinsic value.

Total Return Concept

A covered call writing strategy in which one views the potential profit of the strategy as the sum of capital gains, dividends, and option premium income, rather than viewing each one of the three separately.

Tracking Error

The amount of difference between the performance of a specific portfolio of stocks and a broad-based index with which they are being compared. 

Trader

(1) Any investor who makes frequent purchases and sales. (2) A member of an exchange who conducts his or her buying and selling on the trading floor of the exchange.

Trading Account

An account opened with a brokerage firm from which to place trades.

Trading Limit

The exchange-imposed maximum daily price change that a futures contract or futures option contract can undergo.

Trading pit

A specific location on the trading floor of an exchange designated for the trading of a specific option class or stock.

Transaction costs

All of the charges associated with executing a trade and maintaining a position. These include brokerage commissions, fees for exercise and/or assignment, exchange fees, SEC fees, and margin interest. In academic studies, the spread between bid and ask is taken into account as a transaction cost.

Treasury Bill (T-Bill)

These are short-term government securities with maturities of no more than one year.

Treasury Bill/Option Strategy

(90/10 strategy) a method of investment in which one places approximately 90% of his funds in risk-free, interest-bearing assets such as Treasury bills, and buys options with the remainder of his assets.

Treasury Bond (T-Bond)

A fixed-interest U.S. government debt security with a maturity of 10 years or more..

Treasury Note (T-Note)

A fixed-interest U.S. government debt security with a maturity of between one and ten years.

Triple Witching Day

The third Friday in March, June, September and December when U.S. options, index options and futures contracts all expire simultaneously often resulting in massive trades.

Type

The classification of an option contract as either a put or a call.

Type of options

The classification of an option contract as either a put or a call.

Uncovered call option writing

A short call option position in which the writer does not own an equivalent position in the underlying security represented by his option contracts.

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