Glossary
All
| Term | Definition |
|---|---|
| 401(k), 403(b), and 457 |
Employer-sponsored retirement plans named after the respective Internal Revenue Code sections in which they appear. |
| Adjusted Options |
Non-standardized stock options. Contract size may not represent 100 shares in addition to other customized terms relevant to stock's capital structure. ETNtrade does not endorse trading adjusted options. Please see American-Style Option, which is the type of option contract ETNtrade does use for educational purposes. |
| Adjusted Strike Price |
The change in the strike price of an option contract that results from a corresponding change in the underlying stock, index or exchange traded fund (ETF). The adjustment in the strike price is proportionate to the change in the stock price as a result of the split. If the stock does a 2 for 1 split, the option strike will adjust as well. For example: If 1 share of a $100 stock is now 2 shares of a $50 stock, the option to buy 1 contract for $100 is now 2 contracts to buy at $50. In short, the value of the position remains unchanged. |
| All-or-None (AON) Order |
An All-or-None order allows a trader to buy or sell a specified number of contracts at a single price. The number of contracts must meet or exceed a predetermined threshold level, and these orders must be executed during pit trading sessions. All Or None orders are routed to the primary exchange where they are manually held and executed when eligible. Furthermore, these orders are not reflected in the bid / ask quotes. |
| American Stock Exchange (Amex or AMEX) |
The American Stock Exchange is one of the three major stock exchanges in the U.S., with the New York Stock Exchange and the Nasdaq being the other two. It was founded in 1842 in New York City. It trades a wide variety of equity and index options as well. |
| American-Style Option |
An option contract that may be sold (or exercised) at any time between the date of purchase and the expiration date. Unlike a Warrant and/or European-style options, there is no requirement to hold the contract for any specified period of time. Most exchange-traded options are American-style. |
| Arbitrage |
A technique almost exclusively used by floor traders and other professionals to capitalize on small price discrepancies between different option exchanges. |
| Ask (or Ask Price) |
The price you pay, or the lowest price that someone is currently willing to sell stock shares or option contracts. The ask price is also known as the offer. |
| Ask Size |
The number of options contracts offered at a specific price. |
| Assignment |
The process through which an option seller is notified by the Option Clearing Corporation (OCC) that the person who bought an option contract has decided to exercise the right to buy or sell shares at the strike price. Upon notification, the option seller is obligated to deliver or receive shares according to the terms of the contract. |
| At-the-market |
Any trade executed at the prevailing bid or ask. For example, if the bid-ask spread on an option is 2.50 – 2.70, a customer who places a market order to sell the option will receive the current bid of 2.50. Likewise, a customer looking to buy the option will pay 2.70. |
| At-the-Money (ATM) |
The option strike price that is the closest to the stock’s current trading price. ATM options have the highest time (Theta) decay compared to OTM or ITM options for same expiration month. This is very useful for spread trading when time decay is a consideration for profitability. The further away the options move both ITM and OTM, the less Theta decay will erode value. |
| Automatic Exercise |
When the Options Clearing Corporation attempts to protect the holder of an expiring in-the-money option by automatically exercising the option on behalf of the holder. In doing so, the intrinsic value is maintained through purchase of the shares. However, the shares now owned are vulnerable to market movement until the position is sold. |
| Backspread |
A spread strategy in which the net position has more long options than short ones. To create a call backspread you might sell one lower strike call and buy two higher strike calls. This position offers limited risk and unlimited profit potential. Typically backspreads are initiated as delta neutral positions. |
| Bear Call Spread |
This strategy is a credit spread, and involves selling a call with a lower strike and buying a call with a higher strike. The idea is to allow the entire position to expire and keep the net credit collected as a result of the opening buy/sell. The maximum profit is the credit collected upon opening the position, which is achieved when the stock trades at or below the lower (short) strike through expiration. The maximum risk for the trade is the difference between the strikes less the credit collected. |
