Future & Options
A B C D E F G H I J K L M N O P Q R S T U V W X Y Z
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[ + ] Abandonment
Means, allowing an option to expire unexercised.
[ + ] American-Style of Exercise
An option, which may be exercised on any Trading Day prior to expiry.
[ + ] Assignment
Notice sent by the Clearing House to the option writer informing him that his option
has been exercised.
[ + ] At-the-money
option
An option whose strike price is the same as, or closest to, the current market price
of the underlying share. For example, if the share price is Rs.260, an option with
a strike price of Rs.260 would be precisely at-the-money.
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[ + ] Backwardation
A futures market where further dated delivery months trade at a discount to the
near month. Also, where a bid is higher than an offer.
[ + ] Bid/offer
spread
The difference between quoted bid and offer prices.
[ + ] Butterfly
recognized option strategy, which involves, in one single transaction, the simultaneous
purchase (sale) of a call (put) at one exercise price, the sale (purchase) of two
calls (puts) at a higher exercise price and the purchase (sale) of a call (put)
at an equally higher exercise price.
[ + ] Buyer
of an option
The party who, through purchase, acquires the right conveyed by the option. Also
commonly referred to as the option holder, where the purchase is to open a position.
[ + ] Buy-Write
Purchase of stock and simultaneous writing of call options against stock position.
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[ + ] Calendar
Spread
The sale /purchase of a near month call option /put option and the simultaneous
purchase /sale of a longer dated call option /put option of the same exercise price.
[ + ] Call
option
An option that conveys to the option buyer the right but not the obligation to purchase
shares at a fixed strike price per share at any time during the life of the option.
[ + ] Call
Spread
The simultaneous purchase (sale) of a call at one exercise price and sale (purchase)
of another call at a higher exercise price.
[ + ] Cash
Market
The market in the underlying instrument.
[ + ]
Cash settlement
In the case of index options contracts where it is impossible or impractical to
effect physical delivery, open positions are closed out on the day of exercise or
the last day of trading at a price determined by the underlying index level.
[ + ] Class
All listed options of a particular type (i.e., call or put) on a particular underlying
instrument, e.g., all Reliance, Tisco call options.
[ + ] Clearing
House
The organisation which guarantees the performance and settlement of exchange traded
contracts to its members – NSCCL
[ + ]
Closing purchase
A transaction whereby an option writer buys an option identical to one previously
sold, thus ending his obligations as an option writer.
[ + ] Closing
sale
A transaction whereby an option holder sells an option identical to one previously
purchased, effectively terminating his rights as an option holder.
[ + ] Contango
A futures market where further dated delivery months trade at a premium to the near
month.
[ + ] Contract
size
The number of shares of the underlying security.
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[ + ] Delta
The rate of change in option premium for a given change in the price of the underlying.
[ + ] Delta
Neutral
A position where the sum of the deltas of the component legs adds up to 0.
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[ + ] European-Style Exercise
An option, which may be exercised only on its expiry day.
[ + ] Ex
dividend
The day on which a dividend paying stock trades without the right to receive the
dividend.
[ + ] Exercise
The use of the right by the option holder to purchase the underlying shares at
the exercise price if the option is a call, or to sell the underlying shares at
the exercise price if the option is a put. Equity options traded on LIFFE are ‘American-style’
options; they can be exercised by the option holder at any time prior to expiry.
When a call is exercised, the writer is obliged to make delivery of i.e. sell the
underlying shares at the exercise price of the option and the buyer is obliged to
take delivery i.e. buy. When a put is exercised, the writer is obliged to take delivery
of i.e. purchase the underlying shares at the exercise price of the option and the
buyer is obliged to make delivery i.e. sell.
[ + ] Exercise Notice
A formal notification to the Clearing House
that the holder of a call (put) option wishes to buy (sell) the underlying at the
exercise price.
[ + ] Exercise price
The fixed price per share at which a call option
conveys the right to purchase the underlying shares and at which a put option conveys
the right to sell the underlying shares. Also referred to as the option strike price.
Example: A call option with an exercise price of Rs.260 conveys the right to purchase
1,000 shares at a price of Rs.260per share.
[ + ] Expiry date
The last date on which an option holder can exercise
the right conveyed by the option. After that date, the option ceases to exist.
[ + ] Extrinsic Value
Time value. That part of the option premium,
which is not accounted for by its intrinsic value.
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[ + ] Gamma
The rate of change of an option’s delta relative to a given
change in the underlying.
[ + ] Guts
A recognized option strategy, which involves the simultaneous
purchase (sale) of an in-the-money call at one exercise price and the purchase (sale)
of an in-the-money put at a higher exercise price in one single transaction.
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[ + ] Implied Volatility
The volatility of the underlying instrument
implied by the market price of options.
[ + ] In-the-money option
An option that has intrinsic value. In the
case of a call, an option whose exercise price is below the current underlying share
price, or in the case of a put, an option whose exercise price is above the current
underlying price.
[ + ] Intrinsic value
The amount, if any, by which an option is currently
in the money. An option that is not in-the-money has no intrinsic value.
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[ + ] Last Trading Day
The final day for dealing in options contracts
for a particular expiry month.
[ + ] Long
An open “bought” position.
[ + ] Lot
One equity options contract. In case of Nifty Index, the
lot size is 100 Nifty.
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[ + ] Margin
Funds that an option writer must maintain on deposit with
his broker to assure his ability to fulfill his financial obligation to make or
take delivery of the underlying shares. Since the buyers of equity options, pay
the entire option premium when the option is purchased, they have no further financial
obligations and are not subject to a margin requirement. However, if an option buyer
exercises his right to acquire the underlying shares, he would then become subject
to the margin requirements applicable to the shares acquired. Margin is called from
the time the option is exercised until the transaction is settled.
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[ + ] Opening purchase
A transaction whereby the buyer becomes the
holder of an option.
[ + ] Opening sale
A transaction whereby the seller becomes the writer
of an option.
[ + ] Open Interest
The net long and short amount of outstanding positions
in a particular contract.
[ + ] Out-of-the-money option
An option that has no intrinsic value.
That is an option which theoretically, it would not be worthwhile to exercise immediately
e.g. a call option whose exercise price is above the current underlying share price
or a put option whose exercise price is below the current underlying share price.
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[ + ] Premium
The sum of money that an option buyer pays for the right
to acquire the option, and that an option seller receives for incurring the obligation
the option entails. Option premiums are expressed as a cost in Rs.per share. The
total cost of an option contract for 1,00 shares (referred to as a ‘lot’) would
therefore be 1,00times the premium, e.g. one contract with a premium of Rs.14 would
cost Rs.1400 (100×14).
[ + ] Put option
An option that conveys to the option buyer the right
but not the obligation to sell a predefined quantity of the underlying asset, e.g.,
1,00shares, at a fixed price at any time during the life of the option.
[ + ] Put Spread
The simultaneous purchase (sale) of a put at
one exercise price and the sale (purchase) of a put at a lower exercise price.
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[ + ] Rho
The rate of change in option premium for a given change in
interest rates.
[ + ] Rollover
The transfer of a futures or options position from one
delivery/expiry month to another – involving the purchase (sale) of the nearby month
and the simultaneous and corresponding sale (purchase) of a further delivery or
expiry month.
[ + ] Round-trip
The opening purchase (sale) of an option or future
and the subsequent opposite and closing transaction in the same contract. Transaction
costs are often quoted on a round-trip basis.
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[ + ] Series
All option contracts on the same underlying instrument
with the same exercise price and the same expiry date. Put options and call options
with the same strike price and same expiry date from two different series.
[ + ] Seller of an option
The party whose market transaction is the
sale of an option. Where the party’s opening transaction is a sale, he is referred
to as the option writer. Unlike the option buyer, who acquires a specific right,
the writer of an option incurs a specific liability (the obligation to make or take
delivery of the underlying asset if the holder chooses to exercise the option).
[ + ] Settlement price
The price used for daily revaluation of open
positions.
[ + ] Short
An open “sold” position.
[ + ] Spread
A market position involving a degree of risk offset in
two or more positions. For options such strategies as ratio, horizontal and vertical
spreads are used across strikes prices and expiry months.
[ + ] Straddle
The simultaneous purchase (sale) of a call and put option
in the same expiry month with the same exercise price.
[ + ] Strangle
The simultaneous purchase (sale) of a call option at
one exercise price and a put option at a lower exercise price but with the same
expiry date.
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[ + ] Theoretical Value
The fair value premium of an option based on
recognised pricing methods.
[ + ] Theta
The rate of change of option premium for a given change
in the number of days to expiry.
[ + ] Ticksize
The smallest permitted price movement in a particular
contract.
[ + ] Time value
The amount, if any, by which an option’s premium exceeds
its intrinsic value. If an option is not in the money, its premium consists entirely
of time value.
[ + ] Time Decay
The process whereby the value of an option premium
is eroded as expiry approaches.
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[ + ] Uncovered (Naked)
A position, which is not covered by an offsetting
position in the underlying instrument.
[ + ] Underlying share
The specific share to which call and put options
relate – e.g. 1,000 shares of Ranbaxy.
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[ + ] Vega
The rate of change in option premium for a 1% change in
the volatility of the underlying.
[ + ] Volatility
A statistical measurement of the variability of a
share’s price, often expressed by the standard deviation.
[ + ] Volatility Trade
A recognized option strategy which involves
the simultaneous purchase (sale) of calls against the sale (purchase) of the underlying
or the simultaneous purchase (sale) of puts against the purchase (sale) of the underlying
in one single transaction.
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[ + ] Writer
The seller of an option contract who is obliged to deliver
or take delivery of the underlying instrument upon notification by the buyer (holder).