Glossary

A

acquisition

when a company buys a majority of another company's public stock

american-style

options that can be exercised before their expiration date

arbitrage

buying and selling similar instruments to make a risk-free profit

ask/offer

the lowest available price to buy

assigned

being forced to fulfill the obligation of an option contract

at-the-money

an option with a strike price at or near the price of the underlying

automatic exercise

automatic performance of an option contract, due to the option expiring in-the-money

B

back month

an option expiration month later than the current month

backspread

a spread in which more options are purchased than sold

basis (futures-cash)

the difference between the price of futures and the cash price

basis point

an incremental change in interest rates of 0.01%

bearish

the outlook that the price of a stock or the market will drop

bear spread

a spread that profits from a drop in the price of the underlying security

b/a spread

the difference between the bid and ask price of a security

big boy iron condor

the strikes are widened close to 1 standard deviation out to take additional risk and can act as a potential substitute for selling strangles

big dawg butterfly

wider strikes to yield a higher probability of success during periods of high IV Rank

bond

the debt of a company to its lenders, to be repaid over time with interest

break-even point

the point at which a position generates neither a profit nor a loss

broken winged butterfly

a combination of a long call butterfly and a short OTM call vertical, or a long put butterfly and a short OTM put vertical, so one side is wider than the other. The short vertical finances the long butterfly, and increases the probability of profit of the strategy.

bullish

the outlook that the price of a stock or the market will rise

bull spread

a spread that profits from a rise in the price of the underlying security

butterfly spread

a 3-strike price spread that profits from the underlying expiring at a specific price

buying into weakness

when the stock market or a particular underlying is at or near its low, the tastytrade methodology is to "buy" into a long position (and inversely, close out of a short position).

buying power

the amount available for the purchase and short sale of securities. Includes cash and margin

buy-write

the simultaneous purchase of stock and sale of a covered call

C

calendar spread

an option trade that benefits from the passage of time, also called a time spread

call option

an option that gives the holder the right to buy stock at a specific price

call writer

a person who sells a call and receives a premium

carrying cost

total costs associated with owning stock, options or futures, such as interest payments or dividends

chicken iron condor

the short strikes are closer to the ATM strike to collect more premium (45-50% the width of the strikes); this increases potential profit and ROC

combo

a combination of options positions that replicates owning the underlying stock

contrarian

having a contrarian viewpoint means that you reject the opinion of the masses. This is where buying into strength, selling into weakness comes from - it is a contrarian way of thinking. Despite market trends, contrarians like to buy when the market is performing poorly and sell when the market is performing well.

cost basis

original price paid for a stock, plus any commissions or fees

covered call

a combination of a long stock position with a short call

credit spread

a spread trade that, when opened, results in a credit to your account

D

day order

an order that expires at the end of the regular market session

day trade

a trade that is opened and closed in the same trading session

debit spread

a spread trade that, when opened, results in money being debited from your account

delta

the expected change in price of an option for a $1 move in the underlying security

dividend yield

the total annual dividend divided by the price of the stock

E

equity

ownership in a company, expressed in shares of stock

ETF

an exchange-traded fund, a basket of stocks meant to track an index or sector

ex-div date

the date when all shareholders are guaranteed a dividend, and the stock's price is adjusted downward

expiration

the date at which an option stops trading, and all contracts are exercised or become worthless

extrinsic value

the value of an option beyond its intrinsic value, also known as time value

F

flat

this means that Tom/Tony do not have a position in an underlying they are discussing. Flat can also mean that the deltas in a particular underlying are nuetral

float

number of shares of a company available for public trading

G

gamma

the expected change in delta for a $1 move in the underlying security

greeks

analytic measurements of different types of risk

H

hedge

to own a position in an instrument that lessens the risk of a similar instrument

historical volatility

measure of the range of stock prices in the previous year, in percentage terms

holder

someone who has bought an option or owns a security

I

implied volatility

measure of the expected range of stock prices in the future, in percentage terms

IPO

Initial Public Offering, a company's first attempt to sell its stock in the marketplace

ITM

an option that could be exercised, and the stock position immediately closed, at a profit to the trader

Iron Condor

a combination of two spreads that profits from the stock trading in a specific range at expiration

J

Junk Bond

a bond with a low credit rating, indicating a higher risk of default by the borrower

L

layering up

adding more positions to an existing position, keeping the same directional assumption

LEAPS

options with an expiration month more than one year in the future

legging in

trading a spread by buying or selling each leg at different times

Leverage

the use of a small amount of money to control a large number of securities

limit order

an order to buy or sell at a specific price, or better

liquidity risk

the risk that a position can't be closed when desired

M

margin

the amount being borrowed to purchase securities

mark

the average of the bid and ask price

market order

an order to buy or sell immediately at the best available price

married put

a combination of a long stock position with a long put

merger

the act of combining two or more companies into one

N

naked call or put

a call or put that does not have an offsetting stock or option position

O

open interest

the number of outstanding option contracts of a certain issue

open position

a long or short position in stocks or options

OTM

an option that could not be exercised, and the stock position closed, at an immediate profit

Over the counter

a security that is not listed on a stock exchange

P

parity

when an option trades with no additional time premium

preferred stock

a type of stock with a claim on a company's earnings before dividends are paid

probability of profit/success

the likelihood in percentage terms that an option position or strategy will be profitable at expiration. For spreads like short verticals or iron condors, you can estimate the probability of success by taking the max loss of that position and divide it by the distance between the long and short strikes. So, if you sell a 100/105 call spread for 2.00 credit, the max potential loss is $300. If you take $300 divided by $500, you get a probability of success of 60%.

probability of expiring

the likelihood in percentage terms that a stock or index will land above or below some price on the day of expiration. The probability of expiring doesn't care about what happens between now and expiration. It only considers the probability that the stock will be above some higher price or below some lower price at expiration.

probability of touching

the likelihood in percentage terms that a stock or index will reach some higher or lower price at any time between now and expiration. The probability of touching takes into account all the possible prices that might occur in between now and expiration. It is always higher than the probability of expiring

put/call ratio

the total number of puts traded on a stock, divided by the total number of calls

put option

an option that gives the holder the right to sell stock at a specific price

R

ratio spread

a spread in which more options are sold than purchased

return on capital

this is potential maximum return you could make on an option trade. It's calculated by taking the maximum potential profit and dividing it by the margin requirement of the position. For example, if you sell a 100/105 call vertical for 2.00 credit, the return on capital would be the max profit of $200 divided by the margin requirement of $300. That yields a max return on capital of 66%.

roll

to close an existing option and replace it with an option of a later date or different strike price

S

scalp, scalper

a trader who enters and exits a position quickly for a small profit or loss

selling into strength

when the stock market or a particular underlying is at or near its highs, the tastytrade methodology is to "sell" into a short position (and inversely, close out of a long position).

short sale

a position that is opened by selling borrowed stock, with the expectation the stock price will fall

slippage

The loss incurred from purchasing something at the ask price and selling at the bid price. Slippage costs are inversely related to liquidity, which is why we like to trade extremely liquid products

spin-off

when a company divides its assets into two companies and issues shares of the new company

spread

a position involving a long and short option of different strike prices or expirations, or both

straddle

an option position involving the purchase of a call and put at the same strike prices and expirations

strangle

an option position involving the purchase of a call and put at different strike prices

strike price

the price at which stock is purchased or sold when an option is exercised

synthetic

a position that emulates another, using calls, puts or stock

systematic risk

risk inherent to the marketplace that cannot be eliminated with diversification

T

technical analysis

calculations that use stock price movement and volume to identify predictive patterns

theoretical value

estimated price of an option, derived from a mathematical model

theta

an estimate of the amount an option's value decreases with each passing day

tranche

"your trade size". example: if you normally trade 3 contract for a given strategy or underlying, 2 tranches would be 6 contracts.

TROC

"tastytrade return on capital" which is Theta/Buying Power Reduction

U

unsystematic risk (non-systematic risk)

company-specific risk that can, in theory, be reduced or eliminated through diversification

V

vega

an estimate of the amount an option's value changes due to a 1% change in implied volatility

vertical

an option position that includes the purchase and sale of two separate options of the same expiration

VIX

an index that calculates the implied volatility of the S&P 500 index

volatility

a measure of the change in stock prices, either historical or predicted in the future

W