Glossary of Investment Terms

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Buy-Write

An options strategy where an investor buys a stock and sells a call option against it.

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Call

An option contract that gives the buyer the right to purchase the specified shares of the underlying stock or index at the given strike price. This creates an obligation to sell for the seller.

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Historical volatility

The actual fluctuation of an underlying security's price either up or down.

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Implied volatility

The estimated volatility of a security's price which is used by option traders to price an option, based on a particular option-pricing model.

In-the-money

For a call option, when the strike price is below the market price of the underlying asset. For a put option, when the strike price is above the market price of an underlying asset.

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Long contract

A position in options in which one has purchased a contract.

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Market cycle

Period of time during which stock market evolves from a bull market (rising prices), to a bear market (falling prices), then back to a bull market.

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Nominal value

An economic value expressed in monetary terms (units of currency) and includes the effects of inflation over time.

Notional

The value of an asset expressed in dollars used to construct derivative transactions.

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Option drag

The drag on performance for an underlying asset attributed to the presence of an option position.

Option spread

An option position that is constructed of equal number of options of same class (calls or puts) and underlying asset but differs in either strike price or expiration.

Out-of-the-money

For a call option, when the strike price is above the market price of the underlying asset. For a put option, when the strike price is below the market price of an underlying asset.

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Premium

The amount of money the buyer pays and the seller receives to engage in an option transaction.

Put

An option contract that gives the buyer the right to sell the specified shares of the underlying stock or index at the given strike price. This creates an obligation to purchase for the seller.

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Realized volatility

The actual fluctuation of an underlying security's price either up or down.

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Short contract

A position in options in which one has written (sold) a contract.

SPX

Ticker symbol for the S&P 500® Index.

Strike (exercise) price

The stated price per share for which and underlying stock may be purchased (call) or sold (put) by the long option holder.

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VIX

Ticker symbol for the CBOE Market Volatility Index which is a measure of the implied volatility of the S&P 500® Index.

Volatility

The tendency of the underlying security's market price to fluctuate up or down.

Volatility derivative

A type of derivative security where the payoff to the investor is explicitly tied to some measure of the volatility of an underlying asset.