Bull
Spread: A spread which is put
on with the expectation that future prices will
rise.
Buyer: The purchaser of an
option, either a call option or a put option. Also referred to as
the option holder.
Call
Option: An option which gives
the option buyer the right to purchase (go "long") the
underlying futures contract at the strike price on or before
the expiration date.
Class of
Options: All call options - or
all put options - on the same underlying futures
contract.
Clearing
Corporation: The entity whose
function it is to clear (match) all purchases and sales and to
assure the financial integrity of all open futures and options
transactions on a futures (derivatives)
exchange.
Closing
Transaction: A purchase or sale
that liquidates - offsets - an existing position. That is, selling an
option that was previously purchased or buying back an option
that was previously sold.
Combination: A position created
either by purchasing both a put and a call or by writing both
a put and a call on the same underlying futures
contract.
Covered
Option: An option written
against an opposite position in a futures
market.
Credit
Spread: A spread in which the
value of the option sold exceeds the value of the option
purchased.
Debit
Spread: A spread in which the
value of the option purchased exceeds the value of the option
sold.
Delta: The amount by which an
option's price will change for a unit change in the underlying
futures price.
With the exception of deep-in-the-money options, the
change in the option premium is usually less than the change
in the futures price.
The further an option is out-of-the-money, the smaller
the change in the premium and the smaller the
delta.
Exercise: The action taken by
the holder of a call if he wishes to purchase the underlying
futures contract or the holder of a put if he wishes to sell
the underlying futures contract.
Exercise
Price: Same as Strike
Price
Expiration: The date after which
an option may no longer be exercised. Although options are
expired on a specified date during the preceding month, an
option on a June futures contract is referred to as a June
option since exercise would lead to the creation of a June
futures position.
Futures
Contract: A contract traded on a
futures exchange for the delivery of a specified commodity or
financial instrument at a future time. The contract specifies
the item to be delivered and the terms and condition of a
delivery.
Futures
Price: The price of a
particular futures contract determined by open competition
between buyers and sellers o the trading floor of the
exchange.
Hedge: The buying or selling
of offsetting positions in order to provide protection against
an adverse change in price. A hedge may involve
having positions in the cash market, the futures market and/or
the options market.
Holder: Same as
Buyer
In-The-Money: A call is said to be
in-the-money if its strike price is below the current price of
the underlying futures contract. (if the option has intrinsic
value). A put is
in-the-money if its strike price is above the current price of
the underlying futures contract. (if the option has intrinsic
value)
Intrinsic
Value: The dollar amount that
could be realized if the option were to be immediately
exercised. In
other words, the amount by which an option is
in-the-money. For
call options, it is the current S&P futures price minus
the strike price if the difference is a positive number. For put options, it is
the strike price minus the current price of S&P futures if
the difference is a positive number.
Long: The position which is
established by the purchase of a futures contract or an option
(either a call or a put) if there is no offsetting
position.
Margin: The sum of money or
securities, which must be deposited - and maintained - in
order to provide to both parties a trade. The exchange
establishes minimum performance margin accounts. Brokerage firms often
require performance margin deposits that exceed ex-change
minimums. In
turn, they post and maintain customer performance margins with
the Clearing Corporation. Option sellers can
post Treasury Bonds or other approved collateral to satisfy
initial performance margin requirements. Buyers of options do
not have to post performance margins since their risk is
limited to the option premium.
Margin
Calls: Additional funds which
a person with a futures position or the writer of an option
may be called upon to deposit if there is an adverse price
change or if margin requirements are increased. Option sellers can
post Treasury Bonds or other approved collateral to meet
variation performance margin calls. Buyers of options are
not subject to margin calls.
Naked
Writing: Writing a call or a
put on a futures contact in which the writer has no opposite
cash or futures market position. This is also known as
uncovered writing.
Opening
Transaction: A purchase or sale,
which establishes a new position.
Out-Of-The-Money: A put or call option,
which currently has no intrinsic value. That is, a call whose
strike price is above the current futures price or a put whose
strike price is below the current futures
price.
Premium: The price of an option
- the sum of money, arrived at in the competitive market,
which the option buyer pays and the option writer receives for
the rights granted by the option.
Put
Option: An option which gives
the option buyer the right to sell (go "short") the underlying
futures contract at the strike price on or before the
expiration date.
Price
Spread: The purchase and sale
of two options covering the same futures contract with the
same expiration dates but different exercise
prices.
Seller: Also known as the
option writer or grantor. The sale of an option
may be in connection with either an opening transaction or
closing transaction.
Series: All options of the
same class having the same strike price.
Short: The position created
by the sale of a futures contract or option (either a call or
a put) if there is no offsetting
position.
Spread: A position consisting
of both long and short options (all calls or all puts). For example, a long
position in a call with one strike price and expiration and a
short position in another call with a different strike price
and/or expiration.
Strike
Price: The price at which the
holder of the call (put) may exercise his right to purchase
(sell) the underlying futures contract.
Time
Spread: The purchase and sale
of two options covering the same futures contract but with the
same exercise price, but different expiration
dates.
Time
Value: Any amount by which an
option premium exceeds the option's intrinsic value. If an option has no
intrinsic value, it's premium is entirely time
value.
Uncovered
Option: The sale of an option
without a position in the underlying futures
contract.
Underlying Futures
Contract: The specific futures
contract that can be bought or sold by the exercise of an
option.
Writing: The sale of an option
in an opening transaction.