A two-dimensional graphical representation that displays the profit or loss of an option at various prices. The x-axis represents the price of the underlying security and the y-axis represents the potential profit/loss. Often called a "profit/loss diagram", this graph provides an easy way to understand and visualize the effects of what may happen to an option in various situations. The example above shows the profit/loss potential for a simple long call position of ABC Corp with a February expiration date, strike price of $50.00, contract size of 100 (shares) and a cost of $2.30 per share ($230 total). Notice this graph has three different lines, which represent the profit/loss at three different dates. The dotted line is the profit/loss today, the semi-dotted line is the profit/loss 30 days from today and the solid line is profit/loss on the expiration date (60 days from today). As you can see, as time passes, the time value of the option decreases until it reaches zero, at which point the option-holder has a maximum loss of $230 (the cost of the option contract), which would occur if the option is not exercised. Thus, using these types of graphs, an option-holder can easily view his or her potential profit/loss at or before the expiration date.
A method of offering municipal bonds or similar financial instruments in which the issuing entity and a selected underwriter negotiate the terms of the issue, as opposed to having multiple underwriting groups competitively bidding on the issue to establish its terms. |||In a negotiated sale, the underwriter, selected by the issuing entity before the sale date, will perform the financing for the issue. Lower quality issues generally reap the greatest benefit from this type of underwriting technique as the underwriter works with the company to sell the issue to the market. When the underwriter and the issuer work together to clearly explain the issue, they will often receive a better rate in the market for the issuer. Negotiated sales allow for greater flexibility to when the issue is released so that it can be better timed in the market to get the best rate.
The money that a person allocates to investing in high-risk securities. Basically, this is capital that you can lose without having to sleep on the streets. Investors who speculate in options or futures contracts should only use risk capital.
A status that the credit-rating agencies (Standard and Poor's, Moody's and Fitch) give a company while they are deciding whether to lower that company's credit rating. once a company has been placed on negative watch, it has a 50% chance of its rating being lowered in the next three months. |||When a company's credit rating is downgraded, it is considered likely to underperform compared to its peers. Having its credit rating downgraded is a big blow for a business because it will have to pay a higher rate of interest to convince investors to lend it money, if it can convince them at all. Entire countries can also be placed on negative watch.
A three-legged option strategy, often used in forex trading, that can provide a hedge against the undesired movement of an underlying asset. A seagull option is structured through the purchase of a call spread and the sale of a put option (or vice versa). The option contracts must be in equal amounts and are normally priced to produce a zero premium. This structure is appropriate when volatility is high but expected to fall, and the price is expected to trade with a lack of certainty on direction.In the second example above, a hedger purchases a seagull option structured as the purchase of a call spread (two calls), financed by the sale of one out-of-the-money put, ideally to create a zero-premium structure. This is also known as a "long seagull." The hedger benefits from a move up in the underlying asset's price, which is limited by the short call's strike price.
A derivative contract representing a designated fraction of the trading value of a standard S&P futures or options contract. Designed to expand the group of investors that could afford them, the S&P 500 Minis trade and act much like their pricier peers: the contracts are cash settled, follow the same expiration schedule and trade on the same stock exchanges. S&P 500 Mini futures require margin on the part of the investor, while Mini options contracts are priced at 1/10 the value of the underlying S&P 500 index ($100 factor is equivalent to standard options contracts). The Mini futures contracts are marked-to-market daily, and expiration date pricing is determined by the opening price of the underlying index securities on the day of expiration. Market demand for a product class like this developed as the S&P index grew from the 200-300 level in 1986 (when S&P 500 derivatives were first introduced) to more than 1,000 in 2007, effectively pricing individual investors out of the market as contract sizes grew to over $100,000. With the advent of the Mini, smaller investors can use the same hedging and speculation strategies available to institutional and accredited investors, and with high levels of liquidity and exchange-backed financial integrity.
A negative covenant in an indenture stating that the corporation will not pledge any of its assets if doing so gives the lenders less security. Also be referred to as a "covenant of equal coverage". |||A negative pledge clause is just another way for bondholders to protect their investment. By including a negative pledge clause in a bond indenture, the bondholders of the current bond issue prevent the company from issuing any debt in the future which would jeopardize their current priority claim on the company's assets.Including a negative pledge cause in a bond indenture increases the safety of the bond issue from the investors' perspective, and therefore often allows the bond issuer to borrow funds at a slightly lower interest rate.
A lookback option without an expiry date. This type of option can have either an American or a Mid-Atlantic settlement. A Russian option is a perpetual lookback option. This is another synthetic product for investors looking to adjust risk.
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