The cash or securities an investor must deposit in his account as collateral before writing options. Margin requirements vary by option type. Margin requirements are established by the Federal Reserve Board in Regulation T; individual brokers may impose additional requirements. Brokers require investors to deposit margin funds because they may be needed to buy or sell underlying stocks if the options are exercised. They may also be needed to close losing positions. Margin requirements for options trading are different from margin requirements for trading stocks or futures. Also, some options trading strategies have no margin requirement. This is because the underlying stock can be used as collateral. Neither covered calls nor covered puts have a margin requirement, for example.
A type of mutual fund with the goal to generate current income for its investors from the premium it earns by selling option contracts. The profits investors earn on the options are taxed as ordinary income, not as dividends, so option income funds are best held in tax-advantaged accounts. This income generating strategy is much riskier than investing in dividend paying stocks, although the returns can be much higher. In his 2005 report to the Securities and Exchange Commission (SEC) stating that Madoff’s hedge fund was a fraud, Harry Markopolos compared the Gateway Option Income Fund (GATEX) and other option income funds to Madoff's fund. This comparison showed that Madoff's returns were not realistic. These were just two of the 29 red flags Markopolos reported to the SEC in his 19-page memo.
A publication issued by the Options Clearing Corporation (OCC) that first-time option traders are required to read before being allowed to make any option trades. The document prepares traders for the options market. The document outlines the various types of options and requisite options terminology, provisions for exercising and settling options, tax implications and the unique risks inherent in derivative instruments.
A pattern of months in which option contracts usually expire (usually a nine month period). There are three common cycles:JAJO - January, April, July, and OctoberMJSD - March, June, September, and DecemberFMAN - February, May, August, and November Option cycles are used for equity, commodities, and currency options.
The set of all the call options or all the put options for a particular stock, index fund, or futures security on a listed exchange. The number of options available for purchase or sale within a given option class will depend on the size and trading volume of the underlying company or index, as well as overall market conditions. An options class can be studied as a gauge of investor sentiment for a given security, as activity in the all of the calls (options to buy) or all of the puts (options to sell) along with premium values signify investors' bets on future price activity. With the advent of LEAPs, these evaluations can go out as far as a year, or more.
A hedged position in which the offsetting position is for a greater amount than the underlying position held by the firm entering into the hedge. The over-hedged position essentially locks in a price for more goods, commodities or securities than is required to protect the position held by the firm. For example, if a firm entered into a January futures contract to sell 25,000 mm Btu at $6.50/mm Btu but the firm had only an inventory of 15,000 mm Btu that they're trying to hedge, but due to the size of the futures contract the firm now has excess futures contracts that amount to 10,000 mm Btu, this would be a speculative investment.
An option that is bought or sold by itself; in other words, the option position is not hedged by another offsetting position. An outright option can be either a call or a put. Most option trades involve outright options. The opposite strategy to purchasing outright options is a spread trade strategy, which involves purchasing one option and selling another option of the same class but of a different series.
An exotic call option that's value is determined by the differing performance of two underling assets or securities. The holder gains on the amount one asset outperforms another, both of which are pre-determined. These options are typically European-style, settled in cash, and traded in the over-the-counter market.Also referred to as "margrabe option". For example an investor may purchase an outperformance option, where they gain if the S&P 500 outperforms the FTSE 100 over a six-month period. If at the end of the six months the S&P 500 outperforms the FTSE 100, the option holder will gain. However, if the S&P has underperformed the FTSE 100 over this time period, the option will expire worthless.
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