An investment strategy of short selling a security and entering a long position on its call. This almost has the same effect as buying a put; the downside loss potential of the short position is capped with the strike price of the call.
A term used in derivatives trading, such as with options. A derivative is a financial instrument whose price is based (derived) from a different asset. The underlying asset is the financial instrument (e.g., stock, futures, commodity, currency, index) on which a derivative's price is based. For example, an option on a stock gives the holder the right to buy or sell the stock for a specified amount (strike price) at a certain date in the future (expiration). The underlying asset for the stock option contract is the company's stock.
A type of options contract that is not backed by an offsetting position that would help mitigate risk. “Trading naked”, as it is called, poses significant risks. However, an uncovered options contract can be profitable for the writer if the buyer cannot excecise the option becuase it is out of the money. Generally, uncovered options are suitable only for experienced, knowledgeable investors who understand the risks and can afford substantial losses. Also called a "naked option". If a market participant sells a call option without owning the underlying instrument, the call is uncovered. If the buyer exercises his or her right to purchase to underlying instrument, the person who sold the call option (the writer) will need to buy the underlying instrument at its current market price in order to fulfill the contract. Because of the inherent risks in trading uncovered options, many brokers restrict account holders from writing uncovered option positions, thereby limiting clients' exposure to unlimited market risk.
The rate at which the vomma of an option will react to volatility in the underlying market. It is the third order derivative of the option value with respect to volatility, or the derivative of vomma with respect to the derivative of volatility. Ultima is part of the group of measures known as the "Greeks" (other measures include delta, gamma and vega) which are used in options pricing. Ultima is useful to investors who are making options trades and take the vomma and vega into consideration, especially when implementing exotic options which may change format over the period of maturity. This metric is one of the inputs utilized in the Black-Scholes model.
An event that occurs when the contracts for stock index futures, stock index options and stock options all expire on the same day. Triple witching days happen four times a year on the third Friday of March, June, September and December. This phenomenon is sometimes referred to as "freaky Friday". The final trading hour for that Friday is the hour known as triple witching. The markets are quite volatile in this final hour, as traders quickly offset their option/futures orders before the closing bell. If you are a long-term investor, triple witching will have a minimal impact on you.
A method of managing risk in options trading by establishing a hedge against the implied volatility of the underlying asset. A vega neutral option position will be not be sensitive to volatility fluctuations. These strategies are used to hedge against the risks of price sensitivity, second-order time price sensitivity and time sensitivity, respectively. A vega neutral portfolio is still subject to risk. For example, in a portfolio of options maturing at different times, changes in volatility over time can dramatically affect total returns, making the portfolio sensitive to time vega. Furthermore, if the assumptions used to establish a position turn out to be incorrect, a position that is intended to be neutral can actually be risky. Vega is one of the "options Greeks" along with delta, gamma, rho and theta. These are used to measure different types of risk in options portfolios. Other options risk-management positions include delta neutral, gamma neutral and theta neutral.
An option strategy in which an investor holds a long position in the underlying asset and writes multiple call options at varying strike prices. Variable ratio writes have limited profit potential because the trader is only looking to capture the premiums paid for the call options. This strategy is best used on stocks with limited volatility. In ratio call writing, the ratio represents the number of options sold for every 100 shares owned in the underlying stock. This strategy is similar to a ratio call write, but instead of writing at-the-money calls, the trader will write both in the money and out of the money calls. For example, in a 2:1 variable ratio write, the trader will be long 100 shares of the underlying stock. Two calls are written: one is out of the money and one is in the money. The payoff in a variable ratio write resembles that of a reverse strangle.
A type of option that ceases to exist when the price of its underlying asset has reached a pre-specified price level. This is a form of an exotic option. The prices of these options tend to be lower than "vanilla options" as the ability to exercise the option is limited.
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