Trading and Stocks Term Set

Options Contract

A derivative contract granting the right (but not obligation) to buy or sell an underlying asset at a specified price before or on a certain date.

Call Option

Gives the holder the right to buy an asset at a set strike price before expiration.

Put Option

Gives the holder the right to sell an asset at a set strike price before expiration.

Strike Price (Exercise Price)

The fixed price at which an option holder can buy or sell the underlying asset.

Expiration Date

The date when an option contract becomes void if not exercised.

Premium

The price paid to purchase an option; reflects intrinsic value plus time value.

Intrinsic Value

The amount an option is “in the money” if exercised immediately.

Time Value

Portion of an option premium based on time remaining until expiration and volatility expectations.

In-the-Money (ITM)

Call: underlying price above strike; Put: underlying below strike.

Out-of-the-Money (OTM)

Call: underlying price below strike; Put: underlying above strike.

At-the-Money (ATM)

When the underlying price equals the strike price.

Option Greeks

Risk measures describing how an option’s price reacts to underlying factors (Delta, Gamma, Theta, Vega, Rho).

Delta

Measures how much the option price changes for a $1 move in the underlying asset.

Gamma

Rate of change of Delta; measures how stable Delta is as underlying moves.

Theta (Time Decay)

Amount an option’s value erodes per day as expiration approaches.

Vega

Sensitivity of an option’s price to changes in volatility of the underlying.

Rho

Sensitivity of an option’s price to changes in interest rates.

Implied Volatility (IV)

Market’s forecast of future volatility reflected in option prices.

Historical Volatility

Past volatility of the underlying, used as a reference for IV.

Volatility Smile

Pattern where IV is higher for deep ITM or OTM options than ATM options.

Volatility Skew

Asymmetry in implied volatilities across different strikes or expirations.

Covered Call

Strategy of holding a stock while selling call options on it to generate income.

Protective Put

Buying a put option on a stock you own to limit downside risk.

Straddle

Buying (or selling) both a call and a put at the same strike and expiration to profit from big moves.

Strangle

Similar to straddle but with different strike prices for call and put; cheaper but needs larger move.

Iron Condor

Combining two spreads to profit from low volatility, selling OTM call and put spreads.

Butterfly Spread

Low-risk, low-reward strategy centered around a target price using multiple options.

Vertical Spread

Buying one option and selling another of the same type/expiration but different strikes.

Horizontal (Calendar) Spread

Using options with same strike but different expiration dates to exploit time decay.

Diagonal Spread

Mix of vertical and horizontal spreads, different strikes and expirations.

Box Spread

Options arbitrage strategy creating a synthetic loan between different strikes.

Synthetic Long

Creating a long stock position using options (e.g., long call + short put).

Synthetic Short

Creating a short stock position using options (e.g., long put + short call).

Delta Hedging

Adjusting a portfolio to be neutral to small price movements in the underlying asset.

Gamma Scalping

Trading underlying assets to profit from changes in Delta and capture Gamma gains.

Vega Hedging

Adjusting option positions to neutralize exposure to volatility changes.

Volatility Trading

Strategy focused on profiting from changes in implied or realized volatility rather than direction.

Calendar Arbitrage

Exploiting mispricings in options across different expiration dates.

Put-Call Parity

Mathematical relationship between puts, calls, and the underlying ensuring no arbitrage.

Bid-Ask Spread

Difference between the price you can buy (ask) and sell (bid); measures liquidity.

Open Interest

Number of outstanding option contracts, reflecting market participation.

Volume

Number of contracts traded during a session, indicating activity and liquidity.

Assignment Risk

Risk of being forced to fulfill the obligations of a short option position.

Exercise

Acting on the right to buy or sell the underlying asset at the strike price.

American Option

Can be exercised any time up to expiration.

European Option

Can only be exercised on expiration date.

Exotic Options

Nonstandard options with special features (barriers, binaries, Asians).

Barrier Option

Option that becomes active or void if the underlying crosses a certain price barrier.

Binary Option

Pays a fixed amount if the underlying meets a condition; otherwise pays nothing.

Asian Option

Payoff depends on the average underlying price over a period.

Margin Trading

Borrowing money from a broker to buy securities, increasing leverage and risk.

Maintenance Margin

Minimum equity required to keep a leveraged position open.

Margin Call

Broker’s demand for more funds if equity falls below required maintenance margin.

Short Selling

Selling borrowed securities to profit from price declines, with obligation to repurchase later.

Leverage

Using borrowed capital or derivatives to amplify returns (and losses).

Liquidity

How easily an asset can be bought or sold without moving the price significantly.

Slippage

Execution at a worse price than expected due to market movement or low liquidity.

Order Types

Instructions to brokers on how to execute trades (market, limit, stop, stop-limit).

Market Order

Buys or sells immediately at best available price.

Limit Order

Buys or sells only at a specified price or better.

Stop Order

Converts to a market order once a certain price is reached.

Stop-Limit Order

Converts to a limit order once a certain price is reached.

High-Frequency Trading (HFT)

Using automated systems to execute large numbers of trades at very high speeds.

Algorithmic Trading

Using computer programs to follow rules for trading strategies automatically.

Quantitative Strategy

A trading strategy derived from statistical and mathematical models.

Mean Reversion

Strategy betting prices will return to a historical average.

Momentum Strategy

Strategy betting that assets moving strongly in one direction will continue.

Pairs Trading

Market-neutral strategy going long one asset and short another correlated asset.

Statistical Arbitrage

Using statistical models to exploit pricing inefficiencies between securities.

Event-Driven Strategy

Profiting from price movements caused by corporate events like mergers or earnings.

Market Making

Providing liquidity by continuously quoting bid and ask prices and profiting from spreads.

Execution Algorithm

Automated routine designed to minimize market impact when executing large orders.

VWAP (Volume Weighted Average Price)

Trading benchmark using the average price weighted by volume.

TWAP (Time Weighted Average Price)

Benchmark using evenly spaced trades over time.

Slippage Cost

Hidden cost of executing trades due to order book depth.

Sharpe Ratio

Performance metric measuring return per unit of risk (standard deviation).

Sortino Ratio

Variation of Sharpe that penalizes downside volatility only.

Alpha

Excess return above a benchmark due to skill or strategy.

Beta

Measure of an asset’s sensitivity to market movements.

Standard Deviation (Volatility)

Statistical measure of dispersion used to quantify risk.

Correlation

Degree to which two assets move together; crucial for diversification.

Value at Risk (VaR)

Statistical estimate of the maximum loss over a given time at a certain confidence level.

Conditional VaR (CVaR)

Expected loss given that VaR has been breached; tail risk measure.

Maximum Drawdown

Largest peak-to-trough decline in a portfolio’s value over time.

Win Rate

Percentage of trades that are profitable.

Risk-Reward Ratio

Comparison of expected profit to potential loss in a trade.

Kelly Criterion

Formula for optimal bet sizing to maximize long-term growth.

Position Sizing

Determining how large each trade should be based on risk tolerance.

Diversification

Spreading investments across multiple assets to reduce risk.

Hedging

Using derivatives or other positions to offset potential losses in another investment.

Imbalance

Large difference between buy and sell orders causing price shifts.

Dark Pool

Private exchange where large orders can be executed anonymously to avoid market impact.

Market Microstructure

Study of how trades occur, order books, and price formation mechanisms.

Order Book

Real-time list of buy and sell orders organized by price level.

Liquidity Provider

Trader or institution offering to buy and sell to maintain market liquidity.

Circuit Breaker

Exchange rule halting trading after large market moves to reduce panic.

Bid Size

Number of shares traders are willing to buy at the bid price.

Ask Size

Number of shares traders are willing to sell at the ask price.

Spread Compression

Tightening of bid-ask spreads due to increased competition or liquidity.

Short Gamma

Position exposed to increasing Delta risk when underlying moves sharply; often from selling options.