A term identifying the date on/by which the specified actions of a contract can be reasonably completed. This date is important, as it is generally considered legally binding. The third Friday of each month is an example of a date certain for option expiry. Remember, options (and in fact all derivatives) are simply contracts between two parties.
A term used to describe a transaction, involving two derivatives, where there is no initial cost bourne by the investor when entering into the position. For example, an investor can sell a derivative and use its proceeds to purchase another security. A cylinder is different from a positive carry trade since it does not necessarily imply offsetting positions.
1. The spread between Treasury securities and non-Treasury securities that are identical in all respects except for quality rating. 2. An options strategy where a high premium option is sold and a low premium option is bought on the same underlying security. 1. For instance, the difference between yields on treasuries and those on single A-rated industrial bonds. A company must offer a higher return on their bonds because their credit is worse than the government's. 2. An example would be buying a Jan 50 call on ABC for $2, and writing a Jan 45 call on ABC for $5. The net amount received (credit) is $3. The investor will profit if the spread narrows. Can also be called "credit spread option" or "credit risk option".
An option strategy that involves writing the same number of puts and calls with the same expiration and strike price on a stock owned by the investor. A covered straddle is a bullish strategy. The covered straddle strategy is not a fully "covered" one, since only the call option position is covered. The put write position is "naked", or uncovered, which means that if assigned, it would require the option writer to buy the stock at the strike price. While gains with the covered straddle strategy are limited, large losses can result if the underlying stock tumbles to levels well below the strike price at option expiration. If the stock does not move between the date that the positions are entered and expiration, the investor collects the premiums and realizes a small gain.
An option strategy that involves the simultaneous sale of an out-of-the-money call and a put with the same expiration date on a security owned by the investor. In other words, it is a combination of a covered call and a short put position. The strategy enables the investor to receive premium income through the sale of the call and the put, in exchange for taking on the risk of doubling his or her position in the stock should its price decline below the strike price of the put by the expiration date. For example, an investor who owns a stock S that is trading at $30 sells a call option on S with a strike price of $33 and simultaneously also sells a put option on S with a strike price of $28, with both the call and the put expiring in three months. Covered combinations are used by investors who are moderately bullish on a stock and are comfortable with doubling their position in the event of a price decline. It is also used by investors who are looking for additional levels of premium income to enhance their rate of return on a stock or portfolio.
An option with an exercise price, or strike price, significantly below (for a call option) or above (for a put option) the market price of the underlying asset. Significantly, below/above is considered one strike price below/above the market price of the underlying asset. For example, if the current price of the underlying stock was $10, a call option with a strike price of $5 would be considered deep in the money. Watch: In The Money The most important characteristic of this type of option is its considerable intrinsic value, which is calculated by subtracting the strike price from the underlying asset's market price for a call option (and vice versa for a put option). As an option moves deeper into the money, the delta approaches 100% (for call options), which means for every point change in the underlying asset's price, there will be an equal and simultaneous change in the price of the option, in the same direction. Thus, investing in the option is similar to investing in the underlying asset, except the option holder will have the benefits of lower capital outlay, limited risk, leverage and greater profit potential.
A portfolio consisting of positions with offsetting positive and negative deltas. The deltas balance out to bring the net change of the position to zero. As a result, you neutralize the response to market movements for a certain range.
An options strategy that aims to reduce (hedge) the risk associated with price movements in the underlying asset by offsetting long and short positions. For example, a long call position may be delta hedged by shorting the underlying stock. This strategy is based on the change in premium (price of option) caused by a change in the price of the underlying security. The change in premium for each basis-point change in price of the underlying is the delta and the relationship between the two movements is the hedge ratio. For example, the price of a call option with a hedge ratio of 40 will rise 40% (of the stock-price move) if the price of the underlying stock increases. Typically, options with high hedge ratios are usually more profitable to buy rather than write since the greater the percentage movement - relative to the underlying's price and the corresponding little time-value erosion - the greater the leverage. The opposite is true for options with a low hedge ratio.
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