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3WOR Glossary of Trading Terms

American-Style Option

Ask

Assignment

At-the-Money

Average True Range (ATR)

Bear Call Spread

Bear Put Spread

Bid

Black Scholes Model

Breakout

Bull Call Spread

Bull Put Spread

Butterfly Spread

Buy Stop Order

Call

Calendar Spread

Closing Purchase

Closing Sale

Consumer Price Index (CPI)

Covered Call Option Writing

Covered Put

Day Order

Delta

Equity Options

Exercise

Expiration Date

Fundamental Analysis

Gamma

Good Til' Order (GTC)

Hedge

Holder

Implied Volatility

Index Options

In-the-Money

Intrinsic Value

LEAPS

Liquid Market

Liquidity

Long Position

Margin

Margin Requirement (for options)

Moving Averages

Naked Writer

Offset

Open Interest

Opening Purchase

Opening Sale

Out-of-the-Money

Premium

Put

Relative Strength

Relative Strength Index (RSI)

Resistance

Sell Stops

Short Position

Smoothing

Spread

Stochastic Indicator

Stock Split

Straddle

Strangle

Strike Price

Support

Technical Analysis

Theta

Time Decay

Time Value

Uncovered Call Writing

Uncovered Put Writing

Vega

Volatility

Writer

 

 

American-Style Option

 

An option contract that may be exercised at any time between the date of purchase and the expiration date. Most exchange-traded options are American-style.

 

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Ask 


This is the retail side of the transaction. When you are ready to go into the market and purchase a stock or option you will buy it at the “ASK.” When you are ready to sell you will get filled at the “BID.” The difference here is the “Spread” which is where the market makers make their money. If you are level 3 trader you can actually buy at the “bid” and then sell right a away at the “ask” and collect that spread just like the market makers do. You have to be very fast to get it.

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Assignment   


The receipt of an exercise notice by an option writer (seller) that obligates him to sell (in the case of a call) or purchase (in the case of a put) the underlying security at the specified strike price.

 

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At-the-Money 

 
An option is at-the-money if the strike price of the option is equal to the market price of the underlying security. Special Note: At-the-Money options are always the most expensive.

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Average True Range (ATR)

 
The accumulated move for a given time frame divided by the total number of time segments you are following. For example, if you are using 30 minute candlesticks, then you calculate the high and low of each 30 minutes and divide by the total number to get the ATR. If you calculate the daily charts then use the Fibonacci sequence: 8, 13, 21 or 34 days and divide the total number by your time frame to get the ATR. Here is a sample spreadsheet I use

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Bear Call Spread   


This is a great strategy when you want to make a limited amount of return and it has a low risk.  What you do is sell a call at one strike then buy a call one strike above the sold one. Your goal is for the stock to stay below the price you sold so you can keep the premium you took in. These have limited risk, which is the difference between the spread less what you took in. Typi
cally you have a five-dollar spread and its best to do these with 10 or 20 contracts and they require margin.

 

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Bear Put Spread  


This is the same concept at the Bear Call Spread. All you do is sell the lower strike price and buy the higher one for protection. The goal is for the trade to stay below the price you sold and you get to keep the premium you took in. The maximum loss or risk is the difference between the two strike prices less the debit you took in and you do need margin for this type of strategy as well.

 

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Bid


This is the wholesale side of the transaction. When you put your offer up to buy something, you buy at the ask. When you want to sell, you sell at the bid. This is where the market makers make their money between the spreads of bid and the ask. The bid is the wholesale side of the transaction. If you are level three trader you can actually buy at the bid.

 

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Black Scholes Model


The mathematical model of the market for an equity, in which the equity's price is a stochastic process. In other words, they way an option premium changes due to time decay, a stocks movement, time until expiration. Code named the Greeks: Delta, Theta, Vega, Gamma   http://bradley.bradley.edu/~arr/bsm/model.html

 

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Breakout


A rise in the price of an underlying instrument above its resistance level or a drop below the support level.

 

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Bull Call Spread


A strategy in which a trader buys a lower strike call and sells a higher strike call to create a trade with limited profit and limited risk. A rise in the price of the underlying increases the value of the spread. Net debit transaction; Maximum loss = debit; Maximum gain = difference between strike prices less the debit; no margin.

 

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Bull Put Spread  


A strategy in which a trader sells a higher strike put and buys a lower strike put to create a trade with limited profit and limited risk. A rise in the price of the underlying increases the value of the spread. Net credit transaction; Maximum loss = difference between strike prices less credit; Maximum gain = credit; requires margin.

 

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Butterfly Spread    


An option strategy combining a bull and bear spread. It uses three strike prices. The lower two strike prices are used in the bull spread and the higher strike price from the bear spread. Both puts and calls can be used.

 

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Buy Stop Order  


These are orders put in above the current stock price. Typically these orders are above a known resistance levels. When these kick in they become market orders and this will surge the stock price up intra day. If you are positioned right you can make huge profits from these breakout plays.

 

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Call

  
An Option contract that gives the holder the right, but not the obligation to buy the underlying security at a specified price for a certain, fixed period of time.

 

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Calendar Spread   


A calendar spread option strategy, which is also called a time spread, occurs when an option expiring in the future is bought and an option expiring sooner is sold where both options expire on the same expiration date. These are good to write against Leaps.  Make sure you have Intrinsic Value when you do these.

 

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Closing Purchase


A transaction in which the purchaser's intention is to reduce or eliminate a short position in a given series of options.

 

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Closing Sale  


A transaction in which the seller's intention is to reduce or eliminate a long position in a given series of options.

 

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Consumer Price Indx (CPI)  


What a market mover this one can be. It comes out every 4 weeks. It measures price changes in consumer purchases of goods and services. The Federal Reserve looks at it to help determine interest rate increases or decreases. It comes out before the market opens.

 

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Covered Call Option Writing  


These are a nice way to generate consistent cash flow. You purchase at least 100 shares of stock then sell a call with the intent to deliver the stock at the set price on the expiration of the option. When the transaction is complete you have your cash back and the premium you took in for selling the call. On the other hand if the stock falls you keep the stock and the premium you took in reduced your cost basis in the stock. Properly managed this strategy can return better than 10% per month!

 

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Covered Put  


Risky! A short put option you sold against a stock you shorted. This type of strategy is for very experienced traders and requires level 3 options approval.

 

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Day Order  


An order to buy or sell a security which expires if not filled by the end of the day.

 

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Delta  


The amount an option premium changes for every dollar movement of a stock. The higher the delta the more money you will make. This is why I recommend buying at least two strike prices in the money (ITM) for short term trading.

 

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Equity Options  


Options on shares of an individual common stock.

 

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Exercise   


To implement the right under which the holder of an option is entitled to buy (in the case of a call) or sell (in the case of a put) the underlying security.

 

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Expiration Date  


These come every third Friday of the month. This is the last day you can exercise your right to buy or sell a stock or you cash in from a properly sold call or put. If you made a bad trade this day ends the transaction taking all your money! Make sure you buy enough time!

 

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Fundamental Analysis  


An approach to trading stocks based on their historical chart, price, earnings, income, assets, relevant news, management and the companies products and services. This type of analysis can assist you in predicting the future direction of a particular stock.

 

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Gamma


The degree by which the delta changes with respect to changes in the underlying security's price.

 

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Good Til’ Canceled Order (GTC)  


Sometimes simply called "GTC", it means an order to buy or sell stock that is good until you cancel it.

 

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Hedge  


A conservative strategy used to limit investment loss by effecting a transaction which offsets an existing position.

 

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Holder  


The purchaser of an option.

 

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Implied Volatility  


Implied Volatility is a measure of future time periods for current listed options prices. The pricing models are based on the values of a stock price, strike price, time remaining until expiration and interest rates. To put it in simple terms; the more people who what to buy the fatter the premium and Market Makers like to take your money.  When the market is swinging in big movements it's better to be a seller of option premiums rather than a buyer.

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Index Options   


These types of options allow you to trade an entire index rather than one particular stock. The most popular index traded is the OEX or S&P 500 for the Dow Jones and the QQQ for the NASDAQ. This is a risky place to play the market since it swings wildly on a daily basis.

 

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In-the-Money  


A call option is in-the-money if the strike price is less than the market price of the underlying security. A put option is in-the-money if the strike price is greater than the market price of the underlying security.

 

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Intrinsic Value  


The amount by which an option is in-the-money on a particular stock. For example, if you hold an option, say July 110, and the stock is currently at $120 per share, your intrinsic value is $10. Out-of-the-money options have no intrinsic value.

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LEAPS
Long-term Equity Anticipation Securities, or LEAPS, are long-term stock or index options. LEAPS, like all options, are available in two types, calls and puts, with expiration dates up to three years in the future.

 

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Liquid Market  


A market which has no volume that subsequently creates a lot of slippage due to lack of trading volume.

 

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Liquidity  


The ease with which an asset can be converted to cash in the marketplace. A large number of buyers and sellers and a high volume of trading activity provide high liquidity.

 

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Long Position  


This is where you hold call options or you sold naked puts on a particular stock you believe is going up.

 

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Margin

   
Typically you are borrowing cash from your broker or leverage as some put it. When the stock goes up you are making more since you control more. If the stock falls you can get a margin call or the broker will liquidate your position to protect his. Most margin accounts are 50% and of course you pay interest on the used portion.

 

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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 usually 25%-50% and changes daily.

 

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Moving Averages  


The 18 and 40 day moving averages are the most followed technical indicators of a stock. This is a mathematical procedure in which the sum of a value plus a previous selected sum of days is divided by the total number of days. This produced a flowing line on a chart used to determine the future movement of a stock. Other major moving averages are the 100 and 200 day. For short term trading you would use the 5 and 10 day moving average.

 

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Naked Writer  

 
This is not streaking in the market or what first comes to your mind. See Uncovered call writing or Uncovered Put writing.

 

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Offset    


To offset a long position, a sale is made; to offset a short position, a purchase is made.

 

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Open Interest  


This is the amount of option contracts sold in a particular stock. There are four exchanges offered; CBOE, AMEX, PHLX, PCX. I recommend only buying options with a minimum open interest of 100 contracts.

 

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Opening Purchase  


A transaction in which the purchaser's intention is to create or increase a long position in a given series of options.

 

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Opening Sale  


A transaction in which the seller's intention is to create or increase a short position in a given series of options.

 

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Out-of-the-Money  


A call option is out-of-the-money if the strike price is greater than the market price of the underlying security. A put option is out-of-the-money if the strike price is less than the market price of the underlying security.

 

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Premium  


This is what you pay for an option contract for the right to exercise that option on or before expiration. If you are a seller of premium this is the amount you are paid for agreeing to perform based on the terms of the option contract.

 

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Put  


An option contract that gives the holder the right to sell the underlying security at a specified price for a certain fixed period of time.

 

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Relative Strength  


A stock’s price movement over the past year as compared to a market index.

 

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Relative Strength Index (RSI)  


An indicator used to identify price tops and bottoms.

 

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Resistance  


The technical price level the market has a hard time breaking through to the upside.

 

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Sell Stops  


These can take the wind out of a long play. They are sell orders placed below the current stock price. Once they are triggered they become market orders and can tank a stock fast. They work like buy stops. These are placed below major support areas to stop out traders should the stock fail.

 

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Short Position

 
This is where you feel the stock is going to fall so you short it without buying the stock or you buy puts and or sell calls. If the stock rebounds and runs on you the broker will call you to cover the short since you do not have any stock. This requires a cash transaction and therefore takes considerable experience to do this type of trading.

 

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Smoothing  


The mathematical technique that removes excess data in order to maintain a correct evaluation of the underlying trend.

 

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Spread  


The difference between the bid and the ask of a particular security. This is what the Market Maker makes his living on.

 

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Stochastic Indicator  


A technical indicator based on the observation that as prices increase, closing prices tend to accumulate closer to the highs for the period. This indicator is best used on rolling type stock patterns.

 

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Stock Split  


When a company feels its stock price is too high it splits it down to make it more affordable. For us options traders these are what make you rich since they drive a stocks price up wildly. There are 5 ways to profit from these see our training section.

 

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Straddle  


A position consisting of a long or short call and a long or short put, where both options have the same strike price and expiration date. In order to profit, the stock must move far enough in one direction to pay for the loss on the opposing play and secure a profit.

 

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Strangle  


A position consisting of a long or short call and a long or short put where both options have the same underlying security, the same expiration date, but different strike prices. Most strangles involve OTM options.

 

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Strike Price  


The stated price per share for which the underlying security may be purchased (in the case of a call) or sold (in the case of a put) by the option holder upon exercise of the option contract.

 

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Support  


The technical price level at which falling prices have stopped falling and either moved sideways or reversed direction.

 

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Technical Analysis  


The method of evaluating securities by analyzing statistics generated through market activity, such as past prices, volume, momentum and stochastics.

 

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Theta

 
The Greek measurement of the time decay of an option.

 

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Time Decay  

 


The value of an option decreases each day as expiration draws closer.

 

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Time Value    


The portion of the option premium that is attributable to the amount of time remaining until the expiration of the option contract. Time value is whatever value the option has in addition to its intrinsic value.

 

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Uncovered Call 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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Uncovered Put Writing  


A short put option position in which the writer does not have a corresponding short position in the underlying security or has not deposited, in a cash account, cash or cash equivalents equal to the exercise value of the put.

 

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Vega  


The amount by which the price of an option changes when the volatility changes.

 

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Volatility  


A measure of the fluctuation in the market price of the underlying security. Mathematically, volatility is the annualized standard deviation of returns.

 

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Writer  


The seller of an option contract.

 

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