Glossary

Black Scholes Equation

The Black Scholes equation is used to price put and call options. It is a partial differential equation that describes the price of an option as a function of time, strike price, and volatility. It was developed by Fischer Black and Myron Scholes in 1973.

Options Contract

An options contract is a contract between two parties that gives the buyer the right, but not the obligation, to buy or sell an underlying asset at a specified price on or before a specified date. The seller of the contract is obligated to sell or buy the asset if the buyer chooses to exercise this right. The three main parts of an options contract are the strike price, the expiration date, and the transaction (buy or sell).

Derivative

A derivative is a financial instrument whose value is derived from the value of an underlying asset. The most common derivatives are options and futures contracts. Options contracts and futures contracts are derivatives because their value is derived from the value of an underlying asset.

Underlying Asset

Underlying Asset or colloquially simply as "underlying", is the asset that any derivative is based on. For example, if an options contract (a derivative) is based on the price of shares of Apple stock, then Apple stock is the underlying asset.

Shares

Shares are a unit of ownership in a company. For example, if a company has 100 shares and you own 10 shares, you own 10% of the company. Shares are also known as stock.

Stocks

A stock, also known as equity, is a security that represents the ownership of a fraction of the issuing corporation.

Call Option Contract

Also known more colloquially simply as "call", a call option grants the buyer the right to buy an underlying asset at a specified price on or before a specified date. The seller of the contract is obligated to sell the asset if the buyer chooses to exercise this right. The three main parts of an options contract are the strike price, the expiration date, and the .

Put Option Contract

Also known more colloquially simply as "put", a put option grants the buyer the right to sell an underlying asset at a specified price on or before a specified date. The seller of the contract is obligated to buy the asset if the buyer chooses to exercise this right. The three main parts of an options contract are the strike price, the expiration date, and the .

Cash Secured Put (CSP)

A cash secured put is a strategy that involves selling a put option while simultaneously owning the underlying asset. It is called "cash secured" because at the time of making the trade, the trader has have enough cash to buy the underlying asset if the put option is exercised.

Exercise

To exercise an option is to choose to buy or sell the underlying asset at the strike price.

Assignment

To assign an option is to be forced to buy or sell the underlying asset at the strike price. This can only happen when selling (writing) an options contract, because you are selling (giving up) your right to buy or sell the underlying asset.

Covered Call

A covered call refers to the financial transaction made by a trader who holds shares in an asset then writes (sells) call options on that same asset to generate an income stream. The trader's shares in the asset is the cover because it means the trader can deliver the shares if the buyer of the call option chooses to exercise.

Open Interest

Open interest is the total number of active, or outstanding contracts for a given option.

Volume

Volume is the total number of contracts traded for a given option.

Liquidity

Liquidity is the ease with which an asset can be bought or sold in the market without affecting the asset's price. Typically an asset with a high open interest and / or high volume is considered to be liquid, while an asset with a low open interest and / or low volume is considered to be illiquid.

Delta

Delta is a measure of how much the price of an option will change in response to a change in the price of the underlying asset.

Gamma

Gamma is a measure of the rate of change in an option's delta in response to a change in the price of the underlying asset.

Theta

Theta is a measure of how much the price of an option will change in response to a change in the amount of time until expiration.

Vega

Vega is a measure of how much the price of an option will change in response to a change in the volatility of the underlying asset.

Rho

Rho is a measure of how much the price of an option will change in response to a change in the interest rate.

Phi

Phi is the sensitivity of the price of a stock option relative to dividend yield.

Vanna

Vanna is the rate of change of an option's delta in response to a change in the volatility of the underlying asset.

Charm

Charm is the rate of change of an option's theta in response to a change in the time remaining until expiration.

Volga

Volga is the rate of change of an option's vega in response to a change in the volatility of the underlying asset.

Market Breadth or Width

Market Breadth or Width is a measure of the number of stocks that are rising in price versus the number of stocks that are falling in price.

Volatility

Volatility is the standard deviation of continuously compounded annual returns of the stock. Volatility is a measure of the amount of variation in the price of an asset over time.

IV (Implied Volatility)

Implied Volatility (IV) is a measure of the market's expectation of the future volatility of the underlying asset. It is derived from the price of an option and is used to price options.

Implied Move

Implied Move is the expected price movement of an underlying asset based on the current implied volatility of its options. Because relation to IV is based on using the square root of IV, the expected move can be both positive and negative from the underlying's current price.

Volatility Skew

Volatility Skew, or colloquially simply "skew" is a measure of the difference in implied volatility between out-of-the-money and in-the-money options.

Volatility Smile

Volatility Smile, or colloquially simply "smile" is a measure of the difference in implied volatility between out-of-the-money and in-the-money options.

Volatility Smirk

Volatility Smirk, or colloquially simply "smirk" is a measure of the difference in implied volatility between out-of-the-money and in-the-money options.

Volatility Crush

Volatility Crush, or colloquially simply "crush" is a measure of the difference in implied volatility between out-of-the-money and in-the-money options.

Reverse Skew

Reverse skew occurs when the implied volatility is higher on lower options strikes. This can mean that investors have market concerns and are buying puts to hedge against a market downturn.

Forward Skew

Forward skew occurs when the implied volatility is higher on higher options strikes. This can mean that investors are expecting markets to go higher and are buying calls to hedge against a market downturn.

Option Expiry, OP-X, or OPX

Option Expiry, OP-X, or OPX is the date on which an option contract expires. This is the date on which the option is no longer valid and can no longer be exercised.

IV Rank

IV Rank (Implied Volatility Rank) is a metric that compares the current implied volatility (IV) of an option to its historical range of implied volatility over a specified period (typically one year). It is calculated as: (Current IV - Minimum IV) / (Maximum IV - Minimum IV). IV Rank is expressed as a percentage and helps traders understand whether the current IV is high or low relative to its historical range. For example, an IV Rank of 80% means the current IV is higher than 80% of its historical values.

IV Percentile

IV Percentile (Implied Volatility Percentile) is a metric that indicates the percentage of days in a specified historical period (typically one year) where the implied volatility (IV) of an option was lower than the current IV. For example, an IV Percentile of 70% means that the current IV is higher than it was on 70% of the days in the past year. Unlike IV Rank, which compares the current IV to the absolute range of historical IV, IV Percentile focuses on the distribution of historical IV values.

Bid-Ask Spread

The bid-ask spread is the difference between the highest price a buyer is willing to pay (bid) and the lowest price a seller is willing to accept (ask) for an asset. It represents the transaction cost and liquidity of the asset.

Bid-Ask Spread

The bid-ask spread is the difference between the highest price a buyer is willing to pay (bid) and the lowest price a seller is willing to accept (ask) for an asset. It represents the transaction cost and liquidity of the asset.

Market Order

A market order is an instruction to buy or sell an asset immediately at the best available current price. It guarantees execution but not the price.

Limit Order

A limit order is an instruction to buy or sell an asset at a specified price or better. It guarantees the price but not the execution.

Stop Order

A stop order, also known as a stop-loss order, is an instruction to buy or sell an asset once it reaches a specified price, known as the stop price. It is used to limit losses or protect profits.

Stop-Limit Order

A stop-limit order is a combination of a stop order and a limit order. It triggers a limit order once the stop price is reached, ensuring the trade is executed at a specified price or better.

Margin Trading

Margin trading involves borrowing funds from a broker to trade larger positions than the trader's capital would normally allow. It amplifies both gains and losses.

Leverage

Leverage is the use of borrowed capital to increase the potential return of an investment. It is commonly used in trading to amplify exposure to an asset.

Short Selling

Short selling is a trading strategy where an investor borrows an asset, sells it, and aims to buy it back at a lower price to return it to the lender, profiting from the price decline.

Hedging

Hedging is a risk management strategy used to offset potential losses in one investment by taking an opposite position in a related asset. It is commonly used to reduce exposure to market volatility.

Arbitrage

Arbitrage is the practice of taking advantage of price differences for the same asset in different markets to make a profit with little to no risk.

Futures Contract

A futures contract is a standardized agreement to buy or sell an asset at a predetermined price and date in the future. It is commonly used for hedging or speculation.

Forward Contract

A forward contract is a customized agreement between two parties to buy or sell an asset at a specified price on a future date. Unlike futures, it is not traded on an exchange.

Swap

A swap is a derivative contract in which two parties agree to exchange cash flows or other financial instruments over a specified period. Common types include interest rate swaps and currency swaps.

ETF (Exchange-Traded Fund)

An ETF is a type of investment fund that trades on an exchange like a stock. It typically tracks an index, commodity, or basket of assets and offers diversification and liquidity.

Index Fund

An index fund is a type of mutual fund or ETF designed to track the performance of a specific market index, such as the S&P 500. It offers broad market exposure and low fees.

Blue Chip Stocks

Blue chip stocks are shares of large, well-established, and financially sound companies with a history of reliable performance and dividends. They are considered low-risk investments.

Dividend Yield

Dividend yield is a financial ratio that shows how much a company pays out in dividends each year relative to its stock price. It is expressed as a percentage.

P/E Ratio (Price-to-Earnings Ratio)

The P/E ratio is a valuation metric that compares a company's current stock price to its earnings per share (EPS). It is used to assess whether a stock is overvalued or undervalued.

Market Capitalization

Market capitalization, or market cap, is the total market value of a company's outstanding shares. It is calculated by multiplying the current stock price by the total number of shares.

IPO (Initial Public Offering)

An IPO is the process by which a private company offers shares to the public for the first time. It allows the company to raise capital and provides liquidity to early investors.

Secondary Offering

A secondary offering is the sale of new or existing shares by a company that is already publicly traded. It is often used to raise additional capital or allow insiders to sell their shares.

Bull Market

A bull market is a period of rising asset prices, typically accompanied by investor optimism and economic growth. It is the opposite of a bear market.

Bear Market

A bear market is a period of declining asset prices, typically accompanied by investor pessimism and economic slowdown. It is the opposite of a bull market.

Market Correction

A correction is a short-term decline in asset prices, typically less than 20% from recent highs. It is considered a normal part of market cycles.

Volatility Index (VIX)

The VIX, often referred to as the 'fear index,' measures the market's expectation of volatility over the next 30 days. It is derived from the prices of S&P 500 index options.

Risk-On/Risk-Off

Risk-on/risk-off refers to investor behavior in response to market conditions. In risk-on environments, investors favor higher-risk assets like stocks. In risk-off environments, they prefer safer assets like bonds.

Quantitative Easing (QE)

Quantitative easing is a monetary policy in which a central bank purchases government securities or other assets to increase money supply and stimulate the economy.

Tapering

Tapering refers to the gradual reduction of a central bank's asset purchases, often following a period of quantitative easing. It signals a shift toward tighter monetary policy.

Yield Curve

The yield curve is a graph that plots the interest rates of bonds with equal credit quality but different maturity dates. It is used to predict economic conditions and interest rate changes.

Inverted Yield Curve

An inverted yield curve occurs when short-term interest rates are higher than long-term rates. It is often seen as a predictor of economic recession.