Trading Tips & Insights

Trading Terms and Definitions

Here at YouCanTrade, we believe with the proper tools, resources and knowledge—anyone can trade. Whether you’re reading a trading term for the first time or need a refresher, our Trader’s Glossary offers A-Z definitions for common trading terms so you can continue your journey with confidence.

American Exercise

American style options allow the exercise or assignment of an option before its expiration date. This is not allowed for European style options which can only be exercised at expiration.

Assignment

The process by which a seller (or writer) of an option is notified that he is required to sell stock (when a call is assigned) or buy stock (when a put is assigned).

Back Spread

A ratio spread where in-the-money options are sold and a higher quantity of out-of-the-money options are bought. The strategy is anticipating an increase in volatility. Same as a ratio spread.

Bear Spread

A spread anticipating the underlying stock or future to decline in price. Typically built by buying puts at one strike, and selling the same number of puts with a lower strike.

Breakeven

The point at which an options position would not make or lose any money—normally referring to the option’s expiration date.

Bull Spread

A spread anticipating the underlying stock or future to rise in price. Typically built by buying calls at one strike. and selling the same number of calls at a higher strike.

Calendar Spread

A spread built by selling options at one strike at a near expiration, and then also buying options at a further out expiration with the same strike price. A Calendar may be built with either puts or calls, but never both.

Cash-Settled

An option or future that settles for cash at its expiration date, instead of being exchanged into the underlying stock or commodity.

Closing Transaction

A trade that closes a trader’s position. A closing buy order closes a short position and a closing sell order closes a long position.

Cover

To either buy back an option that was written or buy stock to close a short position.

Covered

A short naked option is covered if the trader has an offsetting position in the underlying asset. Short calls are covered by long stock and short puts are covered by short stock.

Covered Call

A strategy where a trader or investor is long stock or futures and is short a position equivalent number of calls.

Credit

Money received into an account. A credit spread is entered “at a credit,” the premium from the options sold are greater than the premium of the options bought.

Debit

Money expended from an account. A credit spread is entered “with a debit,” the premium from the options sold are less than the premium of the options bought.

Delta

The amount an option’s price will change if the underlying asset moves one point in price.

Equity Options

Options which have common stock as their underlying asset.

Equivalent Positions

Two strategies are considered equivalent if they have the same risk graph profile at expiration.

European Exercise

European style options allow only for the exercise or assignment of an option on its expiration date. Whereas American style options allow for assignment at any time during the life of the option.

Exercise

To notify your broker that you intend to exercise your right to buy stock with long call position or sell stock with a long-put position.

Expiration Date

The date on which an option contract is settled and no longer traded. For equity and index options, it is the Saturday after the third Friday of the expiration month. For futures options, each contract is different. Generally, most commodity-based futures options expire in the prior month before the future expires.

Futures

A standardized contract representing the delivery of a quantity of a commodity on a specified date in the future.

Futures Options

Options that have futures contracts as their underlying asset.

Gamma

The amount delta will change when the underlying asset moves by one point.

Historical Volatility

A statistical measure of the historical volatility of the underlying asset or futures contract, using only historical price data.

Implied Volatility

The volatility implied by the price of the option. Or the overall implied price volatility of the underlying asset calculated by using a weighted average of options prices of the underlying asset. See VIX.

In-The-Money

An option that has intrinsic value. A call is in-the-money if the stock or future is trading higher than the strike price; a put is in-the-money if the stock is trading lower than the strike price.

Inter-Market Spread

A futures spread involving contracts on two different, but generally related, markets. For example, long Gold futures and short Silver futures

Intra-Market Spread

A futures calendar spread involving the same underlying futures but with each having a unique expiration date. For example: long July Corn, short December Corn.

Intrinsic Value

The amount an option is in-the-money. For calls, the difference between the asset price and the strike price; for puts, the difference between the strike price and the asset price.

Limit Order

An order to buy or sell at a specific price. A limit buy order is placed below the current market price; a limit sell order is placed above the current market price. Used to take profits in a closing order.

Margin

The good faith deposit required by a brokerage firm that allows a trader to control a position of greater value than the margin amount. Margin is a deposit of collateral against potential losses from a position.

Momentum

A term used in conjunction with the directional trend bias of a stock or future.

Naked Option

Selling an option is deemed to be naked or uncovered if the trader does not have an offsetting position in the underlying asset or similar long option.

Open Interest

The total number of outstanding open contracts for a specific futures contract or options contract. For every opening buy, there is an opening sell. However, open interest only counts one side of each trade.

Option Chain

A comprehensive display of all options trading for an underlying asset, with real-time prices, volatility, Greek risk measures, volume and probabilities.

Out-Of-The-Money

An option with no intrinsic value. Calls are out-of-the-money when the stock or future is below the strike; Puts are out-of-the-money when the stock or future is above the strike.

Position Delta

The Delta risk for an entire option position. It is calculated by multiplying the Delta times the position size of each leg, times the point value of the options.

Premium

The price to trade an option

Put-Call Ratio

The ratio of all puts divided by all calls—using volume or open interest—for an underlying asset.

Ratio spread

A ratio spread where in-the-money options are sold and a higher quantity of out-of-the-money options are bought. The strategy is anticipating an increase in volatility. Same as a back spread.

Resistance

A term used to describe a price level above the market where there is an anticipation of sellers coming into the market

Rho

The amount an option’s price will change if the risk-free interest rate changes by one percent.

Risk Graph

An option position graph showing the profit and loss of an option position at any underlying asset price, on any day between now and expiration.

To continue the same position through an expiration into the next expiation.  Requires closing the current position and reestablishing the same or similar positions in a future expiration series.

Skew

A term to describe the variations in volatility across different options strike prices and expiration series in the same underlying security.

Spread

A position made up of both a long position and a short position.

Stop Order

An order the generates a market order to buy or sell at a specific price. A buy stop order is placed above the current market price; a sell stop order is placed below the current market price. Used to limit losses in a closing order.

Straddle

An option position using both puts and calls with the same strike price. A long straddle is buying both puts and calls with the same strike price. A short straddle is selling both puts and calls with the same strike price.

Support

A term used to describe a price level below the market where there is an anticipation of buyers coming into the market

Technical Analysis

A method of applying mathematical formulas to historical price charts in order to help make trading decisions.

Theta

The amount an option’s price will change for every day that passes. Theta accelerates closer to expiration.

Theoretical Value

The price of an option or option position based on an option pricing model using anticipated or historical volatility.

Underlying Asset

A stock, index, or futures that is the basis for a series of options.

Vega

The amount an option’s price will change if the volatility changes one percent.

Volatility

A value that measures the potential range of prices for an underlying asset over a period of time.

Volume

The number of shares or contracts trading on a stock, option, or future in a given trading day.

Write

Selling an option in called a write.