A model used in quantitative finance to calculate the unpredictability of the underlying current asset of a financial derivative. Because of the treatment of the underlying asset price as the sole random variable, local volatility models are not suitable for the pricing of all options, such as cliquet options. Local variance, another calculation used in quantitative finance, is the square of local volatility. Local volatility models are often used alongside stochastic volatility models in order to compare assumptions on different derivative valuations. The local volatility model "knows" volatilities in advance, while in stochastic volatility models volatility is treated as an uncertainty. The concept of local volatility was put forth by Emanuel Derman and Iraj Kani.
A type of order that allows an option trader to simultaneously buy or sell a number of different options that traditionally could only be achieved by placing separate orders. This type of order is primarily used in multi-legged strategies such as a straddle, strangle, ratio spread and butterfly. This type of order gives the average option trader the ability to incorporate advanced options strategies that consist of many options by placing one order and only paying one commission. For example, one multi-leg order can be used to buy one call option with a strike price of $35 and one put option with a strike price of $35 (straddle strategy). Historically, this strategy could only be achieved by placing two separate orders (one for the call option and the other for the put option).
A Canadian derivatives exchange that facilitates the trading of stock options, interest rate futures and options, as well as index options and futures. Located in Montreal, Quebec, it is the country's main financial derivative market, while the Winnipeg Commodities Exchange in Manitoba is the home to Canadian commodity derivative trading. The equity option trading on the Montreal Exchange covers most of the larger Canada-traded companies but is not as broad as the U.S. options markets. The interest rate derivatives cover short-term banker's acceptances ranging from the overnight rate to the three-month rate and two- and ten-year Canadian Government Bonds. The index futures and options cover the S&P Canada 60 index and several S&P/TSX sector indexes.
A description of a derivative relating its strike price to the price of its underlying asset. Moneyness describes the intrinsic value of an option in its current state. Moneyness tells option holders whether exercising will lead to a profit. There are many forms of moneyness, including in,out or at the money. Moneyness looks at the value of an option if you were to exercise it right away. A loss would signify the option is out of the money, while a gain would mean it's in the money. At the money means that you will break even upon exercising the option.
An options strategy that consists of buying and selling out-of-the-money calls and puts and is designed to lock in investor returns above or below a designated trading price. The modidor is a modified version of the iron condor, but differs in that there is just one breakeven price. It resembles a broken-winged butterfly when charted. Whereas an iron condor is best used in a volatile environment in the hope that a security will trade within a discernible range, the modidor allows for profits regardless of an issue’s volatility. With a modidor, the underlying stock must simply move above (in a bullish scenario) or below (in a bearish scenario) a specific breakeven price.
An acronym representing the months March, June, September, and December. MJSD is one of the option cycles.
A type of option for which the underlying assets are Dow Jones Industrial Average futures contracts. The option has a 5 times multiplier, which means that each option contract on the index controls 5 times the value of the index. This gives the option holder more leverage on his/her investment compared to cash index options at a lower cost. The option is traded on the Chicago Board of Trade. When purchasing a Mini-Sized Dow Option, the premium paid is 5 times the quoted price and the contract would be exposed to 5x the index value. For example, if the quoted price is 200 for the index value of 10,200, then the premium for the option is $1,000 (5 x 200) and the exposure of the contract is 51,000 index points (10,200 x 5).
An option that can be exercised at different times during the life of the option. The various times set for exercise are written within the option and allow for flexibility for both the writer and holder of the option. The Mid-Atlantic option is named as such because its exercise dates are more flexible than European options and less flexible than American options. Thus, it is in the middle, just like the Atlantic Ocean is between Europe and America. Mid-Atlantic options are also referred to as Bermuda, Quasi American, or Semi-American options.
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