An option that is sold on a registered exchange, such as the Chicago Board Options Exchange (CBOE) or Euronext. Listed options cover securities such as common stocks, ETFs, market indexes and commodities. All listed options have stated exercise prices and expiration dates. Also known as "exchange-traded options". There are many options contracts that are sold OTC in very illiquid market situations, but such trading is usually limited to the buyers and sellers, and the terms tend to be more variable. There are two types of listed options: American style and European style. The main difference between the two is that American style options can be exercised at any time up to the expiration date, while European style options have a smaller window in which they must be exercised. Most options found on the national exchanges are American style options.
The accumulation of additional debt to enter a position that has the potential for large returns. From the perspective of portfolio management, leverage build up involves partaking in excessive leveraged positions for the opportunity to magnify returns. Leverage build up also occurs in corporate takeovers where a highly leveraged company purchases another leveraged company. Thus, the total debt of the parent increases. Leverage build up, whether referring to portfolio management or corporate finance, increases the risk exposure of the investment. If the position does not come to fruition, the debt must still be repaid in a timely manner in order to avoid bankruptcy.
1. Term describing an order entry technique used by brokers. A leg occurs when a broker executes contingent orders in separate phases, thus increasing the risk for price swings through time delays. 2. A description of different aspects in a combination option. 1. An example is when a broker attempts to execute an option straddle order as two separate transactions. The possibility for profit and loss occurs though the fluctuating price of the options. Sometimes referred to as a leg plant. 2. A straddle has two legs, one put and one call.
An option pricing model that involves the construction of a binomial tree to show the different paths that the underlying asset may take over the option's life. A lattice model can take into account expected changes in various parameters such as volatility over the life of the options, providing more accurate estimates of option prices than the Black-Scholes model. The lattice model is particularly suited to the pricing of employee stock options, which have a number of unique attributes. The lattice model's flexibility in incorporating expected volatility changes is especially useful in certain circumstances, such as pricing employee options at early-stage companies. Such companies may expect lower volatility in their stock prices in the future as their businesses mature. This assumption can be factored into a lattice model, enabling more accurate option pricing than the Black-Scholes model, which inputs the same level of volatility over the life of the option.
An options strategy in which a put option is purchased as a speculative play on a downturn in the price of the underlying equity or index. In a long put trade, a put option is purchased on the open exchange with the hope that the underling stock falls in price, thereby increasing the value of the options, which are "held long" in the portfolio. The options can either be sold prior to expiration (for a profit or loss) or held to expiration, at which time the investor must purchase the stock at market prices, then sell the stock at the stated exercise price. The long put strategy represents an alternative to an investor simply selling a stock short, then buying it back at a profit if the stock falls in price. Options can be favored over shorting due to increased liquidity (especially for stocks with smaller floats), increased leverage and a capped maximum loss (the investor cannot lose more than premiums paid).
An option strategy that aims to profit from a time value spread through the sale and purchase of two call and two put options, each with different expiration dates. A jelly roll is created by entering into two separate positions simultaneously. One position involves buying a put and selling a call with the same strike price and expiration. The second position involves selling a put and buying a call. The strike prices of the put and call in the second position are identical but different from the previous position, and the duration of the second position is longer than the previous position. This position creates a synthetic near-term short position and long-term long position that work to capitalize upon the time differential between futures prices.
A futures and options exchange in London, England that was modeled after the Chicago Board of Trade and the Chicago Mercantile Exchange. Similar to its American counterparts, this exchange used to deal with futures, options and commodities contracts. However, in 2002, LIFFE was acquired by Euronext as part of its strategy to increase its presence as a derivatives market. LIFFE has been renamed Euronext.liffe. During most of its existence as an independent exchange, LIFFE used the open outcry system to facilitate trades. LIFFE's reluctance to change to an electronic trading system was a cause of its downfall. By the time LIFFE had implemented LIFE CONNECT, a widespread electronic trading platform, fully electronic exchanges had been in operation for almost 10 years and had already snatched up a sizable market share.
A stock option offered by a target company to a white knight for additional equity or for the purchase of a valuable portion of their company. An undesired third party is deterred from acquiring a major portion of the target company due to the very high value of the lockup option. Also known as Lock-Up Defense.
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