Commodity Market Futures & Options Terms & Definitions

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But here we present the standard textbook definitions for a whole slew of options terminology without any jokes, interjections or unnecessary asides. An equity call or put option option trading terms explained at-the-money when its strike price is the same as the current underlying stock price. An underlying stock price at which an option strategy will option trading terms explained neither a profit nor a loss, generally at option expiration.

An equity option that gives its buyer the right to buy shares of the underlying stock at the strike price per share at any time before it expires.

The call seller or writeron the other hand, has the obligation to sell shares at the strike price if called upon to do so. A settlement style that is generally characteristic of index options. Instead of stock changing hands after a call or put is exercised physical settlementcash changes hands.

A transaction that eliminates or reduces an open option position. A closing sell transaction eliminates or reduces a long position. A closing buy transaction eliminates or option trading terms explained a short position. The fee charged by a brokerage firm for its services in the execution of a stock option trading terms explained option order on a securities exchange. Any cash received in an account from option trading terms explained sale of an option or stock position.

With a complex strategy involving multiple parts legsa net credit transaction is one in which the total cash amount received is greater than the total cash amount paid. Any cash paid out of an account for the purchase of an option or option trading terms explained position. With a complex strategy involving multiple parts legsa net debit transaction is one in which the total cash amount paid is greater than the total cash amount received.

The exercise or assignment of an option contract before its expiration. This is a feature of American-style options that may be exercised or assigned at any time before they expire. A contract that gives its buyer owner the right, but not the obligation, to either buy or sell shares of a specific underlying stock or exchange-traded fund ETF at a specific price strike or exercise price per share, at any time before the contract expires.

With a complex strategy involving multiple parts legsan even money transaction results when the total cash amount received is option trading terms explained same as the total cash amount paid. A security that represents shares of ownership in a fund or investment trust that holds a basket collection of specific component stocks. ETF shares are listed and traded on securities exchanges just like stock, and so may be bought and sold throughout the trading day.

If you buy stock before the ex-dividend date, option trading terms explained will be eligible to receive the upcoming dividend payment.

If you buy stock on the ex-date or afterwards, you will not receive the dividend. To employ option trading terms explained rights an equity option contract conveys to its buyer to either buy in the option trading terms explained of a call or sell option trading terms explained the case of a put shares of the underlying security at the strike price per share at any time before the contract expires.

A term of any equity option contract, it is the price per share at which shares of stock will change hands after an option is exercised or assigned. The day on which an option contract literally expires and ceases to exist. For equity options, this is the Saturday following the third Friday of the expiration month. The last day on which expiring equity options trade and may be exercised is the business day option trading terms explained to the option trading terms explained date, or generally the third Friday of the month.

If the option is out-of-the-money, the extrinsic value is equal to the entire premium. A measurement of the actual observed volatility of a specific stock over a given period of time in the past, such as a month, quarter or year.

Implied volatility for any option can only be determined via an option pricing model. An equity call contract is in-the-money when its strike price is less than the current underlying stock price. An equity put contract is in-the-money when its strike price is greater than the current underlying stock price. Equity LEAPS calls and puts can have expirations up to three years into the future and expire in January of their expiration years. Instead of entering one order to establish all parts of a complex position simultaneously, one part is executed with the hope of establishing the other part s later at a better price.

With respect to stock prices over a period of time, a lognormal distribution of daily price changes represents not the actual dollar amount of each change, but instead the logarithms of each change. So in a sense a lognormal distribution could be considered to have a bullish bias. A position resulting from the opening purchase of a call or put contract and held owned in a brokerage account.

Shares of stock that are purchased and held in a brokerage account and which represent an equity interest in the company that issued the shares. For a data set, the mean is the sum of the observations divided by the number of observations. The mean is often quoted along with the standard deviation: One of the most familiar mathematical distributions, it is a set of random observed numbers or closing stock prices whose distribution is symmetrical around the mean or average number.

Since this a symmetrical distribution, when the numbers represent daily stock price changes, for every possible change to the upside there must be an equal price change to the downside.

The result is that a normal distribution would theoretically allow negative stock prices. Stock prices are unlimited to the upside, but in the real world a stock can only decline to zero. A transaction that creates or increases an open option position. An opening buy transaction creates or increases a long position; an opening sell option trading terms explained creates or increases a option trading terms explained position also known as writing. Generated by an option pricing model are the option Greeks: An equity call option is out-of-the-money when its strike price is greater than the current underlying stock price.

An option trading terms explained put option is out-of-the-money when its strike price is less than the current underlying stock price. The settlement style of all equity options in which option trading terms explained of underlying stock change hands when an option is exercised. The price paid or received for an option in the marketplace. Equity option premiums are quoted on a price-per-share basis, so the total premium amount paid by the buyer to the seller in any option transaction is equal to the quoted amount times underlying shares.

Option premium consists of intrinsic value if any plus time value. A representation in graph format of the possible profit and loss outcomes of an equity option strategy over a range of underlying stock prices at a given point in the future, most commonly at option expiration. An equity option that gives its buyer the right to sell shares of the underlying stock at the strike price per share at any time before it expires. The put seller or writeron the other hand, has the obligation to buy shares at the option trading terms explained price if called upon to do so.

Rolling a long position involves selling those options and buying others. Rolling a short position involves buying the existing position and selling writing other options to create a new short position. A position resulting from making the opening sale or writing of a call or put contract, which is then maintained in a brokerage account. If the shares can be purchased at a price lower than their initial sale, a profit will result. If the shares are purchased at a higher price, a loss will be incurred.

Unlimited losses are possible when taking a short stock position. A complex option position established by the purchase of one option and the sale of another option with the same underlying security. A spread order is executed as a package, with both parts legs traded simultaneously, at a net debit, net credit, or for even money.

By definition, the premium of at- and out-of-the-money options consists only of time value. It is time value that is affected by time decay as well as changing volatility, interest rates and dividends. The fluctuation, up or down, in the price of a stock. To option trading terms explained a call or put option contract that has not already been purchased owned. This is known as an opening sale transaction and results in a short position in that option.

Option trading terms explained seller writer of an equity option is subject to assignment at any time before expiration and takes on an obligation to sell in the case of a short call or buy in the case of a short put underlying stock if assignment does occur. Options involve risk and are not suitable for all investors. For more information, please review the Characteristics and Risks of Standardized Options brochure before you begin trading options. Options investors may lose the entire amount of their investment in a relatively short period of time.

Multiple leg options strategies involve additional risksand may result in complex tax treatments. Please consult a tax professional prior to implementing these strategies. Implied volatility represents the consensus of the marketplace as to the future level of stock price volatility or the probability of reaching a specific price point. The Greeks represent the consensus of the marketplace as to how the option will react to changes in certain variables associated with the pricing of an option contract.

There is no guarantee that the forecasts of implied volatility or the Greeks will be correct. Ally Invest provides self-directed investors option trading terms explained discount brokerage services, and does not make recommendations or offer investment, financial, legal or tax advice.

System response and access times may vary due to market conditions, system performance, and other factors. Content, research, tools, option trading terms explained stock or option symbols are for educational and illustrative purposes only and do not imply a recommendation or solicitation to buy or sell a particular security or option trading terms explained engage in option trading terms explained particular investment strategy.

The projections or other information regarding the likelihood of various investment outcomes are hypothetical in nature, are not guaranteed for accuracy or completeness, do not reflect actual investment results and are not guarantees of future results. All investments involve risk, losses may exceed the principal invested, and the past performance of a security, industry, sector, market, or financial product does not guarantee future results or returns.

The Options Playbook Featuring 40 options option trading terms explained for bulls, bears, rookies, all-stars and everyone in between. At-the-money An equity call or put option is at-the-money when its strike price is the same as the current underlying stock price. Back month For an option spread involving two expiration months, the month that is farther away in time.

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When most people think of investment, they think of buying stocks on the stock market, and many are probably completely unaware of terms like options trading. Buying stocks and holding on to them with a view to making long term gains is after all, one of the more common investment strategies. It's also a perfectly sensible to way invest, providing you have some idea about which stocks you should be buying or use a broker that can offer you advice and guidance on such matters.

These days, many investors are choosing to use a more active investment style in order to try and make more immediate returns. Thanks to the range of online brokers that enable investors to make transactions on the stock exchanges with just a few clicks of their mouse, it's relatively straightforward for investors to be more active if they wish to.

There are many people that trade online on either a part time or a full time basis; buying and selling regularly to try and take advantage of shorter term price fluctuations and often holding on to their purchases for just a few weeks or days, or even just a couple of hours. There are plenty of financial instruments that can be actively traded. Options, in particular have proved to be very popular among traders and options trading is becoming more and more common.

On this page we have provided some useful information on what is involved in options trading and how it works. In very simple terms options trading involves buying and selling options contracts on the public exchanges and, broadly speaking, it's very similar to stock trading. Whereas stock traders aim to make profits through buying stocks and selling them at a higher price, options traders can make profits through buying options contracts and selling them at a higher price.

Also, in the same way that stock traders can take a short position on stock that they believe will go down in value, options traders can do the same with options contracts. In practice however, this form of trading is far more versatile than stock trading. For one thing, the fact that options contracts can be based on wide variety of underlying securities means that there is plenty of scope when it comes to deciding how and where to invest. Traders can use options to speculate on the price movement of individual stocks, indices, foreign currencies, and commodities among other things and this obviously presents far more opportunities for potential profits.

The real versatility, though, is in the various options types that can be traded and the range of different orders that can be placed. When trading stocks you basically have two main ways of making money, through taking either a long position or a short position on a specific stock.

If you expected a particular stock to go up in value, then you would take a long position by buying that stock with a view to selling it later at a higher price.

If you expected a particular stock to go down in value, then you would take a short position by short selling that stock with a hope to buying it back later at a lower price. In options trading, there's more choice in the way trades can be executed and many more ways to make money.

It should be made clear that options trading is a much more complicated subject than stock trading and the whole concept of what is involved can seem very daunting to beginners. There is certainly a lot you should learn before you actually get started and invest your money. With that being said, however, most of the fundamentals aren't actually that difficult to comprehend.

Once you have grasped the basics, it becomes much easier to understand exactly what options trading is all about. Buying an options contract is in practice no different to buying stock. You are basically taking a long position on that option, expecting it to go up in value. You can buy options contracts by simply choosing exactly what you wish to buy and how many, and then placing a buy to open order with a broker.

This order was named as such because you are opening a position through buying options. If your options do go up in value, then you can either sell them or exercise your option depending on what suits you best.

We provide more information on selling and exercising options later. One of the big advantages of options contracts is that you can buy them in situations when you expect the underlying asset to go up in value and also in situations when you expect the underlying asset to go down. If you were expecting an underlying asset to go up in value, then you would buy call options, which gives you the right to buy the underlying asset at a fixed price.

If you were expecting an underlying asset to go down in value, then you would buy put options, which gives you the right to sell the underlying asset at a fixed price. This is just one example of the flexibility on these contracts; there are several more. If you have previously opened a short position on options contracts by writing them, then you can also buy those contracts back to close that position. To close a position by buying contracts you would place a buy to close order with your broker.

There are basically two ways in which you can sell options contracts. First, if you have previously bought contracts and wish to realize your profits, or cut your losses, then you would sell them by placing a sell to close order.

The order is named as such because you are closing your position by selling options contracts. You would usually use that order if the options you owned had gone up in value and you wanted to take your profits at that point, or if the options you owned had fallen in value and you wanted to exit your position before incurring any other losses.

The other way you can sell options is by opening a short position and short selling them. This is also known as writing options, because the process actually involves you writing new contracts to be sold in the market.

When you do this you are taking on the obligation in the contract i. Writing options is done by using the sell to open order, and you would receive a payment at the time of placing such an order. This is generally riskier than trading through buying and then selling, but there are profits to be made if you know what you are doing.

You would usually place such an order if you believed the relevant underlying security would not move in such a way that the holder would be able to exercise their option for a profit. For example, if you believed that a particular stock was going to either remain static or fall in value, then you could choose to write and sell call options based on that stock.

You would be liable to potential losses if the stock did go up in value, but if it failed to do so by the time the options expired you would keep the payment you received for writing them. Options traders tend to make their profits through the buying, selling, and writing of options rather than ever actually exercising them. However, depending on the strategies you are using and the reasons you have bought certain contracts, there may be occasions when you choose to exercise your options to buy or sell the underlying security.

The simple fact that you can potentially make money out of exercising as well as buying and selling them further serves to illustrate just how much flexibility and versatility this form of trading offers.

What really makes trading options such an interesting way to invest is the ability to create options spreads. You can certainly make money trading by buying options and then selling them if you make a profit, but it's the spreads that are the seriously powerful tools in trading. A spread is quite simply when you enter a position on two or more options contracts based on the same underlying security; for example, buying options on a specific stock and also writing contracts on the same stock.

There are many different types of spreads that you can create, and they can be used for many different reasons. Most commonly, they are used to either limit the risk involved with taking a position or reducing the financial outlay required with taking a position. Most options trading strategies involve the use of spreads. Some strategies can be very complicated, but there are also a number of fairly basic strategies that are easy to understand. You can read more about all the different types of spreads here.

There are actually a number of benefits this form of trading offers, plus the versatility that we have referred to above. It's continuing to grow in popularity, not just with professional traders but also with more casual traders as well.

To find out just what it is that makes it so appealing, please read the next page in this section — Why Trade Options? What is Options Trading? Section Contents Quick Links. What Does Options Trading Involve? Below we explain in more detail all the various processes involved. Buying Options Buying an options contract is in practice no different to buying stock. Exercising Options Options traders tend to make their profits through the buying, selling, and writing of options rather than ever actually exercising them.

Options Spreads What really makes trading options such an interesting way to invest is the ability to create options spreads. Benefits of Trading Options There are actually a number of benefits this form of trading offers, plus the versatility that we have referred to above. Read Review Visit Broker.