Stock Market
Terminologies
ABANDON:
The act of not exercising or selling an option before its expiration.
ACCRUED
INTEREST:
The interest
due on a bond since the last interest payment was made, up to, but not
including the settlement date. Anyone wishing to buy the bond pays the market
price of the bond plus any accrued interest. Conversely, anyone selling a bond
will have the proceeds increased by the amount of accrued interest.
ACQUISITION:
The 'A' in M&A (Mergers and Acquisitions) is when one company
buys enough stock of another company to take control of that company. When a
take-over attempt is "unfriendly", the buying company may offer a
price for the other company's stock that is well above current market value.
The management of the company that is being bought might ask for a better stock
price or try to join with a third company to counter the take-over attempt.
ADJUSTED
OPTION:
An option resulting after an event such as a stock split (2 for 1 stock
split), stock dividend, merger, or spin-off. An adjusted option may represent some
amount other than the one hundred shares that is standard in the U.S. For
example, after a 2 for 1 stock split, the adjusted option will represent 200
shares. For certain adjusted options, the multiplier of the option may be
something other than the $100 that is standard in the U.S.
AFFIDAVIT
OF DOMICILE:
A notarized
affidavit executed by the legal representative of an estate reciting the
residence of the decedent at the time of death. This document would be required
when transferring ownership of a security from a deceased person's name.
ALL-OR-NONE
ORDER (AON):
An order that
must be filled completely when the order is executed or not filled at all. In
other words, partial fills are not allowed on this type of order.
AMERICAN
DEPOSITORY RECEIPT (ADR):
Foreign
company equities traded on a U.S. exchange. The ADR is issued by a U.S. bank in
place of the foreign company's shares, which are held in trust by the bank. ADRs facilitate the trading of foreign stocks in U.S.
markets. ADRs have exposure to currency fluctuations.
AMERICAN
STOCK EXCHANGE (AMEX):
One of the major stock and option exchanges in the U.S. It is located in the financial
district of New York City.
AMERICAN-STYLE
OPTION:
An option
contract that can be exercised at any time from the time the option is
purchased to the expiration date of the option.
ARBITRAGE:
The simultaneous purchase and sale of identical or equivalent financial
instruments in order to benefit from a discrepancy in their price relationship. More generally, it refers to an
opportunity to make risk-free returns that are greater than the risk-free rate
of return.
ASK
or OFFER:
The price of
a stock or option at which a seller is offering to sell a security, that is,
the price that investor may purchase a stock or option.
ASSIGNED:
To have received notification of an assignment on short options by The
Options Clearing Corporation through a broker.
ASSIGNMENT:
When the
seller (writer) of an option receives an exercise notice that obligates him to
sell (in the case of a call) or purchase (in the case of a put) the underlying
stock at the option's strike price.
AT-THE-MONEY
(ATM):
An option is
at-the-money when the price of the stock is at or near the strike price.
AUTOMATED
ORDER ENTRY SYSTEM:
Some exchanges
have computerized systems designed to route stock and option orders directly to
the trading pit. They are intended to speed the execution of orders. These
systems generally have limits on the size of orders. Examples of these systems
are: RAES, AUTO EX, and SUPERDOT.
AUTOMATED
EXECUTION SYSTEM (AUTO EX):
The automated order routing system on the American Stock Exchange.
AUTOMATIC
EXERCISE:
The Options
Clearing Corporation (OCC) uses this procedure to exercise in-the-money options
at expiration. Doing so protects the owner of the option from losing the
intrinsic value of the option because of the owner's failure to exercise.
Unless instructed not to do so by the owner of the option (through the owner's
broker), The Options Clearing Corporation will exercise all expiring equity
options that are held in customer accounts if they are in-the-money by .05 or
more. Thinkorswim will automatically exercise an
option position if it is .05 or greater in-the-money at expiration unless the
owner of the option instructs otherwise.
BACK
MONTHS:
A rather
arbitrary term that refers to the classes of options with the expiration months
that are further dated than the option class with the nearest expiration month.
BACKSPREAD:
An option
position composed of either all calls or all puts, with long options and short
options at two different strike prices. The options are all on the same stock
and usually of the same expiration, with more options purchase than sold. A backspread is the sale of an option(s) and the purchase of
a greater number of the same type of options that are out-of-the-money with
respect to the one(s) purchased. For example, an 80/90 put 1-by-3 backspread is long 3*80 puts and short 1*90 put.
BANK
GUARANTEE LETTER:
The document
supplied by a bank certifying that a person has a specific amount of funds on
deposit with the bank.
BASIS:
Generally
referring to the futures markets, it is the difference between the cash price
of the underlying commodity and the price of a futures contract based on that
underlying commodity. Cash price minus futures price equals basis.
BASIS
POINT:
A .01% tick
on a 1.00% scale used to describe the yields of interest rates or interest rate
products. For example, when the U.S. Fed raises the discount rate 25 basis
points, the discount rate goes from 5.00% to 5.25%.
BASIS
RISK:
The risk of
the basis between the cash price and the future price widening or narrowing
between the time a hedge position is implemented and
liquidated.
BEAR:
A person who believes that the price of a particular security or the
market as a whole will go lower.
BEARISH:
The outlook of a person anticipating lower prices in a particular
security or the market as a whole.
BEAR
MARKET:
Any market in which prices are trending lower.
BEAR
SPREAD:
Generally
speaking, it is any spread that theoretically profits when the market moves
down. Specifically it refers to a vertical spread.
BETA:
A measure of the return (in percentage terms) on a stock relative to the
return (in percentage terms) of an index. For example a stock with a beta of .80
should have a percentage net change equal to 80% of the percentage net change
of the index. Therefore if the index is down 2% the stock in question should be
down 1.6% (.80x2%).
BID:
The price of a stock or option at which a buyer is willing to purchase a
security; the price at which a customer may sell a security.
BID/ASK
(OFFER) SPREAD:
The
difference between the bid and ask prices for a particular stock or option.
BINOMIAL
MODEL:
A
mathematical model used to price options. Generally used for American-style
options, the model creates a binomial lattice to price an option, based on the
stock price, strike price, days until expiration, interest rate, dividends, and
the estimated volatility of the stock. One of the main differences from the
Black Scholes Model is that it factors in the
possibility of early exercise of the options.
BLACK
SCHOLES MODEL:
A
mathematical model used to price options. Generally used for European-style
options, the model prices options using a probability-weighted sum of stock and
a bond. Black-Scholes uses the stock price, strike
price, days until expiration, interest rate, dividends, and the estimated
volatility of the stock as variables in the model.
BLOCK
or BLOCK TRADE:
A large position or transaction of stock, generally at least 10,000
shares or more.
BLUE
SKY LAWS:
The popular name for laws enacted by various states to protect the public
against securities fraud. The term is believed to have been coined by a judge who stated that
some brokers were selling everything including the "blue sky" to
investors.
BOND:
A debt instrument or promissory note of a corporation, municipality, or
the U.S. Government. A bond represents debt on which the issuer of the debt usually promises
to pay the owner of the bond a specific amount of interest for a defined amount
of time and to repay the loan on the maturity date. Bonds are distinct from
stock (equity), which represents ownership.
BOX
SPREAD:
An option
position composed of a long call and short put at one strike, and a short call
and long put at a different strike. For example, a long 50/60 box spread would
be long the 50 call, short the 50 put, short the 60 call and long the 60 put.
Considered largely immune to changes in the price of the underlying stock, in
most cases, a box spread is an interest rate trade. For all intents and purposes,
the buyer of the box is lending money to the options market, and the seller of
the box is borrowing money from the options market.
BREAK-EVEN
POINT(S):
The stock price(s) at which an option position generates neither a
profit nor a loss. An option position's break-even point(s) are generally calculated for
the options' expiration date. Option pricing models can be used to calculate a
position's break-even point before the options' expiration date.
BROKER:
A broker is
an individual or firm that charges a fee or commission for
executing, either on the floor of an exchange or electronically, buy,
sell, or spread orders submitted by a customer or firm.
BROKER
LOAN RATE:
This is the
interest rate that banks charge brokerage firms to finance their (the brokerage
firms) customers' stock and option positions.
BROKER-DEALER:
Generally, a
broker-dealer is a person or firm who facilitates trades between buyers and
sellers and receives a commission or fee for his services. When a broker acts
in the capacity of a dealer, he may buy and sell stocks and options for his own
account, which can generate profits or losses.
BULL:
A person who believes that the price of a particular security or the
market as a whole will go higher.
BULLISH:
The outlook of a person anticipating higher prices in a particular
security or the market as a whole.
BULL
MARKET:
Any market in which prices are trending higher.
BULL
SPREAD:
Generally
speaking, it is any spread that theoretically profits when the market moves up.
Specifically it refers to a vertical spread.
BUTTERFLY
SPREAD:
An option
position composed of either all calls or all puts (with the exception of an
iron butterfly), with long options and short options at three different
strikes. The options are all on the same stock and of the same expiration, with
the quantity of long options and the quantity of short options netting to zero.
The strikes are equidistant from each other. For example, a long 50/60/70 put
butterfly is long 1*50 put, short 2*60 puts, and long 1*70 put.
BUY
ON CLOSE:
To buy at the end of a trading session at a price within the closing
range.
BUY
ON OPENING:
To buy at the beginning of a trading session at a price within the
opening range.
BUYING
POWER:
The amount of money available in an account to buy stocks or options. Buying power is determined by the
sum of the cash held in the brokerage account and the loan value of any marginable securities in the account without depositing
additional equity.
BUY-TO-COVER:
A buy order that closes or offsets a short position in stock or options.
BUY-WRITE:
Synonymous to
a covered call or covered write, this is a position of long stock and short a
number of calls representing the same amount of shares as the long stock
position. This position may be entered into as a spread order via Thinkorswim with both sides (buying stock and selling
calls) being executed simultaneously. For example, a buy-write is buying 500
shares of stock and writing 5*50 strike calls.
CABINET
OR "CAB" TRADE:
An option trade at a "cabinet price", which is equal to one
dollar. Generally,
cabinet trades only occur at very far out-of-the-money options. Cabinet trades
are not available via thinkorswim.
CALENDAR
SPREAD (TIME SPREAD):
An option
position composed of either only calls or only puts, with the purchase or sale
of an option with a nearby expiration offset by the purchase or sale of an
option with the same strike price, but a more distant expiration. The options
are on the same stock and have the same strike price. The
quantity of long options and the quantity of short options net to zero.
For example, long the AUG/NOV 65 call calendar spread is short 1 August 65 call
and long 1 November 65 call.
CALL
OPTION:
A call option
gives the buyer of the call the right, but not the obligation, to buy the
underlying stock at the option's strike price. The seller of the call is
obligated to deliver (sell) the underlying stock at the option's strike price
to the buyer of the call when the buyer exercises his right.
CALLED
AWAY:
The term used
when the seller of a call option is obligated to deliver the underlying stock
to the buyer of the call at the strike price of the call option.
CALL
WRITER:
An investor
who receives a premium and takes on, for a specified time period, the
obligation to sell the underlying security at a specified price at the call
buyer's discretion.
CANCELED
ORDER:
An order to
buy or sell stock or options that is canceled before
it has been executed. Generally, it is easier to cancel a limit order than a
market order. A limit order can be canceled at any
time as long as it has not been executed. Market orders can get executed so
quickly that it is usually impossible to cancel them. Thinkorswim
will not accept an order cancellation for a market order.
CAPITAL
GAIN OR CAPITAL LOSS:
Profit or
loss generated from transactions in stocks, options, bonds, real estate, or
other property.
CARRY/CARRYING
CHARGE:
Interest is
charged on any money borrowed to finance a position of stocks or options. The
interest cost of financing the position is known as the carry.
CASH
ACCOUNT:
An account in which all positions must be paid for in full. No short positions in stocks or
options are allowed in a cash account.
CASH
MARKET:
Generally
referred to regarding futures markets, the cash market is where transactions
are made in the commodity or instrument underlying the future. For example,
there are cash markets in physical commodities such as grains and livestock,
metals, and crude oil, financial instruments such as U.S. Treasury Bonds and
Eurodollars, as well as foreign currencies such as the Japanese yen and the
Canadian dollar. As it relates to futures on stock indices, the cash market is
the aggregate market value of the stocks making up the stock index.
CASH
SETTLED OPTION:
An option that delivers a cash amount, as opposed to the underlying
stock or futures contracts such as with options on stocks or futures, when
exercised. The
amount of cash delivered is determined by the difference between the option
strike price and the value of the underlying index or security. In the U.S.,
stock index options like the OEX and SPX are cash settled options.
CHICAGO
BOARD OF TRADE (CBOT):
Founded in
1848 with 82 original members, today the CBOT is the one of the largest futures
and options exchanges in the world. It is known for its grain and U.S. Treasury
Bond futures. Futures and futures options are traded at the CBOT.
CHICAGO
BOARD OPTIONS EXCHANGE (CBOE):
The Chicago
Board Options Exchange is currently (2000) the largest option exchange in the
U.S. Formed in 1973, the CBOE pioneered "listed options" with
standardized contracts. Equity and index options are traded at the CBOE.
CHICAGO
MERCANTILE EXCHANGE (CME):
Originally
formed in 1874 as the Chicago Produce Exchange, where products such as butter,
eggs, and poultry were traded, the CME is now one of the biggest futures and
options exchanges in the world. The CME trades futures on stock indices,
foreign currencies, livestock, and Eurodollars. Futures and futures options are
traded at the CME.
CLASS
OF OPTIONS (OPTIONS CLASS):
Options of
the same type either all calls or all puts on the same underlying security.
CLEAR/CLEARING:
The process
by which orders are accounted for and matched, and
funds transferred.
CLEARING
BROKER-DEALER:
A broker-dealer that clears its own trades as well as those of
introducing brokers.
CLEARING
HOUSE:
An agency
connected with an exchange through which all stock and option transactions are
reconciled, settled, guaranteed, and later either offset or fulfilled through
delivery of the stock and through which payments are made. It may be a separate
corporation, rather than a division of the exchange itself.
CLEARING
MEMBER:
Clearing
members of U.S. exchanges accept responsibility for all trades cleared through
them, and share secondary responsibility for the liquidity of the exchanges'
clearing operation. Clearing members earn commissions for clearing their
customers' trades. Clearing members must meet minimum capital requirements.
CLOSE
(C), THE:
The time at
which trading on a stock or option ends for the day. In reference to the O,H,L,C "C" represents the closing price of the
session.
CLOSING
PRICE:
The price of a stock or option at the last transaction of the day.
CLOSING
PURCHASE:
A transaction
in which a person who had initially sold short a stock or option exits or
closes his short position by buying back the stock or option.
CLOSING
RANGE:
The range of
high and low prices, or bid and ask prices, recorded during the close (the
final closing minutes of the trading day).
CLOSING
TRANSACTION:
A transaction
in which a person who had initially bought or sold stock, futures or options
exits or closes (liquidates) his position by selling his long stock, futures or
options or buying back his short stock, futures or options.
COMBO:
Often another
term for synthetic stock, a combo is an option position composed of calls and
puts on the same stock, same expiration, and typically the same strike price.
The quantity of long options and the quantity of short options nets to zero.
Buying a combo is buying synthetic stock; selling a combo is selling synthetic
stock. For example, a long 60 combo is long 1*60 call
and short 1*60 put. Sometimes, combo is used to describe options at two
different strikes, in which case it would not be synthetic stock.
COMMINGLING:
The combining
by a brokerage firm of customer securities with firm securities and pledging
them as joint collateral for a bank loan; this practice is prohibited unless
authorized by customers.(FINRA)
COMMISSION:
The one time fee charged by a broker to a customer when the customer
executes a stock or option trade through the brokerage firm.
CONDOR
SPREAD:
An option
position composed of either all calls or all puts (with the exception of an
iron condor), with long options and short options at four different strikes.
The options are all on the same stock and of the same expiration, with the
quantity of long options and the quantity of short options netting to zero.
Generally, the strikes are equidistant from each other, but if the strikes are
not equidistant, the spread is called a pterodactyl. For example, a long
50/55/60/65 call condor is long 1*50 call, short 1*55 call, short 1*60 call,
and long 1*65 call. In a long (short) condor the highest and lowest stikes are both long (short) while the two middle strikes
are both short (long).
CONFIRMATION
STATEMENT:
After a stock
or options transaction has taken place, the brokerage firm must issue a
statement to the customer. The statement contains the name of the underlying
stock, the number of shares or options bought or sold and the prices at which
the transactions occurred.
CONSOLIDATED
TAPE:
The ticker
reporting transactions of NYSE listed stocks that take place on the NYSE or any
of the other regional stock exchanges. Similarly, transactions of AMEX listed
securities, and certain other securities listed on regional stock exchanges,
are reported on a separate tape.
CONTINGENCY
ORDER:
When you
place a stock or options order you can choose to place contingencies on that
order, meaning that the order will be filled only when a specific event has
occurred. For example, a contingency order might be, "Buy 10 XYZ 80 calls
at the market if XYZ stock trades above 75".
CONTRACT:
The basic unit of trading for options. An option, whether it's a put or a call,
is an agreement between two parties (the buyer and the seller) to abide by the
terms of the option contract as defined by an exchange.
CONTRACT
MONTH:
Generally
used to describe the month in which an option contract expires.
CONTRACT
SIZE:
The number of
shares of the underlying stock that an options contract would deliver if
exercised. Contract sizes for equity options in the U.S. are generally 100
shares, unless the contract size has been adjusted for a split, merger, or spin-off.
For example, if you are long 1 XYZ 50 call with a contract size of 100 and you
exercise that call, you will get 100 shares of XYZ for a price of $50 per
share. If you are long 1 ABC 90 call with a contract size of 250 and you
exercise that call, you will get 250 shares of ABC for a price of $90 per
share. Thinkorswim incorporates the contract size in
the calculation of your delta and gamma.
CONVERSION:
A position of
long stock, short a call, and long a put (with the call and put having the same
strike price, expiration date, and underlying stock). The short call and long
put acts very much like short stock, thus acting as a hedge to the long stock.
So, a conversion has a very small delta. A conversion is a way to exploit mispricings in carrying costs.
CORRECTION:
A temporary reversal of direction of the overall trend of a particular
stock or the market in general.
COST
BASIS:
The original
price paid for a stock or option, plus any commissions or fees. It is used to
determine capital gains or losses when the stock or option is sold.
COVER:
Frequently
used to describe the purchase of an option or stock to exit or close an
existing short position.
COVERED
WRITE OR COVERED CALL OR PUT/COVERD CALL OR PUT WRITING (SELLING):
An option
strategy composed of a short call option and long stock, or a short put option
and short stock. For example, selling (writing) 2 XYZ 50 calls while owning 200
shares of XYZ stock is a covered call position.
COVERED
WRITER (SELLER):
Someone who
sells or "writes" an option is considered to have a
"covered" position when the seller of the option holds a position in
the underlying stock that offsets the risk of the short option. For example, a
short put option is covered by a short position in the underlying stock, and a
short call option is covered by a long position in the underlying stock.
CREDIT:
An increase in the cash balance of an account resulting from either a
deposit or a transaction. As it relates to option orders, a credit is how much the premium
collected from selling options exceeds the premium paid for buying options.
CREDIT
BALANCE (CR):
This is the
money the broker owes the customer after all commitments have been paid for in
full. The money could come after a sale of securities, or simply be cash in the
customer's account.
CREDIT
SPREAD:
Any option
spread where you collect a credit when you execute the spread.
CROSSED
MARKET:
A situation
that occurs on multiple-listed stock and options, where the highest bid price
for a stock or option on one exchange is higher than the lowest ask price for
that same stock or option on another exchange.
CROSSING
ORDERS:
The practice of using one customer's orders to fill a second customer's
order for the same security on the opposite side of the market. For this to occur each order must
be first offered on the exchange floor; if there are no takers, the broker may
cross the orders usually at a price somewhere in between the existing bid and
ask prices.
CURRENT
MARKET VALUE (CMV):
The current worth of the securities in an account. The market value of listed
securities is based on the closing prices on the previous business day. Syn. long market
value (LMV). (FINRA)
CUSTOMER:
Any person or entity that opens a trading account with a broker-dealer. The customer may be classified in
terms of account ownership, payment methods, trading authorization or types of
securities traded.
CUSTOMER
AGREEMENT:
The document
a customer signs when opening a margin account with a broker- dealer; this
document allows the firm to liquidate a portion or all of the customer's
account if the customer fails to meet margin requirements set by the firm or
Exchange.
CUSTOMER
STATEMENT:
This document
displays a customer's trading activity, positions and account balance. The SEC
requires the statement be sent quarterly, however, Thinkorswim's customer statements will be sent daily via
email or may be accessed on line at anytime day or night.
DATE
OF RECORD (RECORD DATE):
Date on which you must own shares of a stock to be entitled to the
dividend payment on that stock. The day after the record date and until the day the dividend is
actually paid, the stock trades ex-dividend.
DAY
ORDER:
A day order
is an order that is "good for the day" and is automatically cancelled
if it cannot be executed the day it was placed. Compare to good-til-cancelled (GTC) orders.
DAY
TRADE:
A stock or option position that is purchased and sold on the same day.
DAY TRADING:
Buying and
selling the same stock or option position in one day's trading session, thus
ending the day with no position.
DEALER:
A firm or
individual engaged in the business of buying or selling securities for its own
account. Thinkorswim is not a dealer.
DEBIT
BALANCE (DR):
In a
customer's margin account, that portion of the value of stocks that is covered
by credit extended by the broker to the margin customer. In other words, the
amount of money a customer owes the brokerage firm. (FINRA)
DEBIT
SPREAD:
Any option
spread where you pay money for the spread. The debit occurs when the amount of
premium paid for the option purchased exceeds the premium received for the
option sold.
DECK:
The stack of
stock or option orders that are to be filled by a broker on the floor of an
exchange.
DECLARATION
DATE:
The date a
company announces the payment date, record date and amount of an upcoming
dividend.
DEFERRED:
Refers to "back month" options or futures.
DELAYED
OPENING:
Exchange
officials can postpone the start of trading on a stock beyond the normal
opening of a day's trading session. Reasons for the delay might be an influx of
large buy or sell orders, an imbalance of buyers and sellers, or pending
important corporate news that requires time to be disseminated.
DELAYED
QUOTES:
Stock or option price quotes that are delayed by the exchanges 15 or 20
minutes from real-time.
DELIVERY:
When
referring to stock options, delivery is the process of delivering stock after
an option is exercised. If a trader is long a call, and he exercises that call,
the person who is short that call must deliver the underlying stock to the
trader who is long the call. If a trader is long a put, and he exercises that put,
the trader will deliver the underlying stock to the person who is short that
put. Actually, the delivery of the stock takes place through clearing firms
under very specific terms and procedures established by the exchange where the
option is traded. See assignment and exercise.
DELTA:
An approximation of the change in the price of an option relative to a
change in the price of the underlying stock when all other factors are held
constant. For
example, if a call has a price of $1.5 and a delta of .33, if the underlying
stock moves up $1, the option price would be $1.83 ($1.5 + (.33 x $1.00)).
Generated by a mathematical model, delta depends on the stock price, strike
price, volatility, interest rates, dividends, and time to expiration. Delta
also changes as the underlying stock fluctuates. See gamma.
DERIVATIVE
SECURITY:
A security
whose value is derived from the value and characteristics of another security,
called the underlying security. Calls and puts are derivative securities on
underlying stocks.
DESIGNATED
ORDER TURNAROUND (DOT):
NYSE's
automated order entry system.
DISCOUNT
RATE:
The rate that
the Federal Reserve Bank charges on short term loans it makes to other banks
and financial institutions.
DISCRETIONARY
ACCOUNT:
An account in which the customer has given the registered representative
authority to enter transactions at the rep's discretion. thinkorswim does not offer this type of account.
DIVIDEND:
A payment
made by a company to its existing shareholders. Dividends are usually cash
payments made on a quarterly basis. Dividends can also be in the form of
additional shares of stock or property.
DIVIDEND
FREQUENCY:
Indicates how
many times per year (quarterly, semi-annually) a particular stock pays a
dividend.
DIVIDEND
YIELD:
The annual percentage of return that received from dividend payments on
stock. The yield is
based on the amount of the dividend divided by the price of the stock and of
course fluctuates with the stock price.
DON'T
KNOW (DK) NOTICE:
A term used
when brokers or traders compare confirmations on a transaction. If one party
receives a confirmation on a trade that it does not recognize, that party would
send the other party a D.K. notice.
DOWN-TICK:
A term used
to describe a trade made at a price lower than the preceding trade. A short
sale may not be executed on a down or minus tick.(FINRA)
DOWNTREND:
Successive downward price movements in a security over time.
DUAL/MULTIPLE
LISTED:
When the same stock or option is listed on two or more different
exchanges. For
example, IBM options are traded on the CBOE, PHLX and AMEX.
DUPLICATE
CONFIRMATION:
SRO
regulations require a duplicate confirmation (of a customer's confirmations) be
sent to an employing broker-dealer, if the customer is an employee of another
broker dealer. Also, this duplicate confirmation may be sent to a customer's
attorney if the request is put in writing. (FINRA)
EARLY
EXERCISE:
A feature of American-style options that allows the buyer to exercise a
call or put at any time prior to its expiration date.
EQUITY:
Equity can
have several meanings, including 1) stock, as it represents ownership in a
corporation, or 2) in a margin account, equity represents a customer's
ownership in his account; it is the amount the trader would keep after all his
positions have been closed and all margin loans paid off.
EQUITY
OPTIONS:
See Stock
options.
EUROPEAN-STYLE
OPTIONS:
An option contract that can only be exercised upon its expiration date. Compare to American-style
options.
EXCESS
EQUITY:
The value of
cash or securities held in a margin account that exceeds the federal
requirement. (FINRA)
EXCHANGE:
An association of persons (members) who participate in buying and
selling securities. It also refers to the physical location where the buying and selling
takes place.
EXCHANGE-LISTED
SECURITY:
Securities that have met certain requirements and have been admitted for
full trading privileges on an exchange such as the NYSE or AMEX. These securities will have a
three letter designation (IBM) rather than a four letter designation (MSFT) for
over-the-counter securities.
EX-DIVIDEND:
Describes a stock whose buyer does not receive the most recently
declared dividend. Dividends are payable only to shareholders recorded on the books of the
company as of a specific date of record (the "record date"). If you
buy the stock any time after the record date for a particular dividend, you
won't receive that dividend.
EX-DIVIDEND
DATE:
The day on
and after which the buyer of a stock does not receive a particular dividend.
This date is sometimes referred to simply as the "ex-date," and can
apply to other situations beyond cash dividends, such as stock splits and stock
dividends. On the ex-dividend date, the opening price for the stock will have
been reduced by the amount of the dividend, but may open at any price due to
market forces.
EXECUTION:
The actual completion of an order to buy or sell stock or options.
EXERCISE:
If the buyer
of a stock option wants to buy (in the case of a call) or sell (in the case of
a put) the underlying stock at the strike price or, in the case of a
cash-settled option, to receive the index price and the strike price settlement
amount, the option must be exercised. To exercise an option, a person who is
long an option must give his broker instructions to exercise a particular
option (or if the option is .05 in-the-money at expiration it will be
automatically exercised for a customer) Someone with short option positions
must be aware of the possibility of being assigned if his short options
in-the-money, and he must make sure he has adequate buying power available in
his account to cover any such potential assignment.
EXERCISE
PRICE (STRIKE PRICE):
The cost per share at which the holder of an option may buy or sell the
underlying security. (FINRA/Options)
EXPIRATION
CYCLE:
The
expiration cycle has to do with the dates on which options on a particular
underlying security expire. A stock option, other than LEAPS, will be in one of
three cycles, the January cycle (with options listed in January, April, July or
October), the February cycle (with options listed in the February, May, August
or November) or the March cycle (with options listed in March, June, September
or December). At any given time, an option will have contracts with four
expiration dates outstanding.
EXPIRATION
(EXPIRATION DATE):
On the
expiration date, an option and the right to exercise it cease to exist. Every
option contract becomes null and void after its expiration date. For stock
options, this date is the Saturday following the third Friday of the expiration
month.
EXTRINSIC
VALUE (TIME VALUE):
The difference between the entire price of an option and its intrinsic
value. For example,
if a call option with a strike price of $50 has a price of $2.75, with the
stock price at $52, the extrinsic value is $.75. The price of an
out-of-the-money (OTM) option is made up entirely of extrinsic value.
FAST
MARKET:
The exchange
declares trading in stocks or options to be in a "fast market" when
transactions in the pit occur in such volume and with such rapidity that price
reporters are behind in entering quotes. During this time, executing brokers
are not held to any fills if a price is traded through on a limit order.
FED
FUNDS (FEDERAL FUNDS):
The money a
bank borrows from another to meet its overnight reserve requirements.
FED
FUNDS RATE:
Set by the
Federal Reserve Board, the Fed Funds Rate is the rate banks charge each other
on overnight loans held at the Federal Reserve Bank.
FEDERAL
OPEN MARKET COMMITTEE (FOMC):
A committee of the Federal Reserve Board which operates by buying and
selling government securities in the open market. This buying and selling is how
the Federal Reserve Board controls the U.S. money supply. The FOMC decides
whether to change the discount rate or not.
FEDERAL
RESERVE BOARD (FRB):
A
seven-member board of governors of the Federal Reserve System, appointed by the
U.S. President and confirmed by the Senate, that is
responsible for monetary policy within the United States. It controls the
supply of money and credit to try to control inflation and create a stable,
growing economy.
FENCE:
An option and
stock position consisting of long stock, long an out-of-the-money put and short
an out-of-the-money call, which emulates a bull spread. Alternatively, a
reverse fence can be long stock, long in-the-money put and short in-the-money
call which emulates a bear spread. All the options
have the same expiration date.
FILL:
The result of executing an order.
FILL
OR KILL (FOK):
A type of order that is canceled unless it is
executed completely within a designated time period, generally as soon as it is
announced by the floor broker to the traders in the pit. Compare to all-or-none (AON).
FINANCIAL
INDUSTRY REGULARY AUTHORITY (FINRA):
Regulatory
authority responsible for overseeing brokers and dealers in the securities
business (changed its name from "NASD" in July 2007.)
FLAT:
Used to describe an account that has no open positions in stocks or
options. Flat can
also be regarding a position with little or no delta or gamma.
FLOAT:
Number of shares of stock of a corporation that available for public
trading.