An option strategy created by selling an in-the-money put at the same time as an in-the-money call. By entering into this position, the investor, receiving a large premium up-front, hopes that the options expire worthless.
A provision contained in an underwriting agreement that gives the underwriter the right to sell investors more shares than originally planned by the issuer. This would normally be done if the demand for a security issue proves higher than expected. Legally referred to as an over-allotment option.A greenshoe option can provide additional price stability to a security issue because the underwriter has the ability to increase supply and smooth out price fluctuations if demand surges. Greenshoe options typically allow underwriters to sell up to 15% more shares than the original number set by the issuer, if demand conditions warrant such action. However, some issuers prefer not to include greenshoe options in their underwriting agreements under certain circumstances, such as if the issuer wants to fund a specific project with a fixed amount of cost and does not want more capital than it originally sought.The term is derived from the fact that the Green Shoe Company was the first to issue this type of option.
Dimensions of risk involved in taking a position in an option (or other derivative). Each risk variable is a result of an imperfect assumption or relationship of the option with another underlying variable. Various sophisticated hedging strategies are used to neutralize or decrease the effects of each variable of risk. Neutralizing the effect of each variable requires substantial buying and selling and, as a result of such high transactions costs, many traders only make periodic attempts to rebalance their options portfolios.With the exception of vega (which is not a Greek letter), each measure of risk is represented by a different letter of the Greek alphabet:Δ(Delta) represents the rate of change between the option's price and the underlying asset's price - in other words, price sensitivity.Θ(Theta) represents the rate of change between an option portfolio and time, or time sensitivity.Γ(Gamma) represents the rate of change between an option portfolio's delta and the underlying asset's price - in other words, second-order time price sensitivity. ϒ(Vega) represents the rate of change between an option portfolio's value and the underlying asset's volatility - in other words, sensitivity to volatility.ρ (Rho) represents the rate of change between an option portfolio's value and the interest rate, or sensitivity to the interest rate.
1. A seller of either call or put options who profits from the premium for which the options are sold. Synonymous with option writer.2. The creator of a trust, meaning the individual whose assets are put into the trust. 1. For example, say a writer has sold a call option, or assumed a short position in a call option. If the call option is exercised, then the writer has to sell the underlying stock at the strike price Conversely, if the writer sells a put option, he or she is said to be long, and must purchase the underlying stock at the strike price. Being a writer is relatively risky - especially on a naked position. This technique should not be used by those who are new to option markets.2. The grantor is the person who creates the trust, and the beneficiaries are the persons identified in the trust to receive the assets.
1. For a call option, when the option's strike price is below the market price of the underlying asset.2. For a put option, when the strike price is above the market price of the underlying asset. Being in the money does not mean you will profit, it just means the option is worth exercising. This is because the option costs money to buy. Watch: In The Money In the money means that your stock option is worth money and you can turn around and sell or exercise it. For example, if John buys a call option on ABC stock with a strike price of $12, and the price of the stock is sitting at $15, the option is considered to be in the money. This is because the option gives John the right to buy the stock for $12 but he could immediately sell the stock for $15, a gain of $3. If John paid $3.50 for the call, then he wouldn't actually profit from the total trade, but it is still considered in the money.
The estimated volatility of a security's price. In general, implied volatility increases when the market is bearish and decreases when the market is bullish. This is due to the common belief that bearish markets are more risky than bullish markets. Implied volatility is sometimes referred to as "vols." In addition to known factors such as market price, interest rate, expiration date, and strike price, implied volatility is used in calculating an option's premium. IV can be derived from a model such as the Black-Scholes Model.
An option contract that cannot be sold for cash quickly at the prevailing market price. Illiquid options have very low or no open interest. Most options are illiquid when they are far away from their expiration dates. If you're holding an illiquid option, you will usually notice a very large bid-ask spread on the contract. This is because there are not enough buyers to accommodate those wanting to sell. Unfortunately, if you are trying to sell an illiquid option, there is a good chance you'll be selling at a discount, if at all.
An investment strategy that attempts to profit from the differences between actual and theoretical futures prices of the same stock index. This is done by simultaneously buying (or selling) a stock index future while selling (or buying) the stocks in that index. This is done with program trading. Using software that monitors both a stock index and futures contracts on the index, traders can be notified when there is a larger than normal gap.
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