A | B | C | D | E | F | G | H | I | J | K | L | M | N | O | P | Q | R | S | T | U | V | W | X | Y | Z
A
ADR-Style
For a derivative on an underlying denominated in one currency, where the derivative is denominated in a different currency, payments are exchanged using a floating foreign-exchange rate. The derivative holder thus has foreign exchange risk as well as exposure to the underlying
American Depository Receipt (ADR)
A security issued by a US bank representing non-US shares held in trust by that bank.
American-Style Option
Option which can be exercised at any time during its life up until the expiration date.
Asian Option
Also known as Average option. The option pay-out depends on some average of the value of underlying. Either or both the settlement price and the strike of the option can be averaged.
Ask
The price for which an issuer (market maker) or broker is willing to sell.
At-The-Money (ATM)
The strike price is equal to the spot price of the underlying.
Automatic Exercise
The owner of the option automatically receives the intrinsic value without having to take any express action himself on the expiration date. (This may be provided for in the contractual terms and conditions of the warrant.)
B
Barrier Option
These are options which are activated or terminated when an asset price reaches a specified level between inception and expiry. Knock-In Call provides exposure to the upside in the underlying above the strike, but only if the underlying reaches a barrier level; otherwise the option expires worthless. Knock-In Put provides exposure to the downside in the underlying below the strike, but only if the underlying reaches a barrier level. Knock-Out Call provides exposure to the upside in the underlying above the strike, but only if the underlying never reaches a barrier level; if it does then the option expires worthless. Knock-Out Put provides exposure to the downside in the underlying below the strike, but only if the underlying never reaches a barrier level; if it does then the option expires worthless. There are also versions of these options where the payout depends on a second underlying reaching a barrier level. In the cas of Turbo it corresponds to the strike price. In Turbo Bulls it is set lower than the current underlying level. In Turbo Bears it is set higher than the current underlying level.
Basket Option
An option where the underlying is a basket of indices, stocks etc.
Bear Spread
An option spread strategy which benefits from a decline in the underlying. Also known as put spread.
Bermudan-Style Option
Can be exercised on one or more pre-agreed dates prior to expiry.
Bid Price
The price for which an issuer (market maker) or broker is willing to buy an option.
Binary Option
Also known as digital option. Pays a fixed amount if a specified condition is met, but nothing otherwise.
Black-Scholes Model
Fischer Black and Myron Scholes developed the first formula for figuring out the theoretical value of European-style call and put options. In this model the price of the option depends on the current price of the underlying, the strike price, the time to expiry, the interest rate, dividends, and volatility.
Break-Even Price
The minimum price which the underlying must reach so that the buyer of an option does not suffer a loss. As of the expiration date of an option, the break-even price for a call is equal to the strike price plus the option price; for a put it is equal to the strike price minus the option price
Bull Spread
An option spread strategy which benefits from a rise in the underlying. Also known as call spread.
Buy-Write
The name given to the strategy of buying a stock, and at the same time selling a call option on the stock.
C
Calendar Spread
An option spread position where the exercise prices are the same, but the expiries are different. Also known as Horizontal, or Time Spreads.
Call
A call gives the buyer of a Option the right to purchase, either at or until the expiration date, a certain quantity of a particular underlying for a pre-defined strike price . Most Options provide for cash settlement rather than actual delivery of the underlying. Exercising a call only makes economic sense when the current price of the underlying is above the strike price.
Cap
A cap is an upper limit on the extent to which the owner of a call option can participate in the difference between the strike price and the spot price of the underlying
Cash Settlement
The underlying asset is not actually delivered to the owner of the option but rather he receives in cash the difference between the strike price and the spot price of the underlying.Cash settlement is far more comfortable and cost efficient for the owner of an option than actual delivery, as he does not need to make payment of the purchase price for the agreed quantity of the underlying (call) nor must he take delivery of the agreed quantity of the underlying from the seller of the option (put.)
Chooser Options
The holder decides whether this is a put or a call option after a pre-determined period.
Citi CATS-OS
An electronic, off-exchange trading system developed by Citibank. Banks connected to this system can trade directly with Citibank via computer. The bank immediately receives a confirmation, showing all details of the transaction, which it can then pass on to its customer. Lengthy and risky time delays, which are inevitable in exchange trading, do not occur with this system
Cliquet Option
Also known as ratchet, strike reset. The option strike price is reset at predetermined dates, usually to lock-in gains on the underlying.
Closing Price
See Daily Closing.
Closing Transaction
The sale or purchase of a future or option contract to eliminate or reduce an existing position.
Collar
A hedging transaction in which a stock or index position is combined with a long out-of-the-money put and a short out-of-the-money call position.
Combination
An option strategy in which an investor either buys a call and a put, or sells a call and a put, with different strikes and/or different expiries.
Compound Options
An option on an option. E.g. a three-month option to buy a one-year at-the-money put option.
Contingent Premium Option
The purchaser only pays for the option if pre-specified barrier levels are reached.
Contract for Difference
A CFD is an over-the-counter agreement between two counterparties to exchange payments based on the change in price of an underlying instrument. Actual delivery or ownership of the underlying instrument is not involved and CFD investors do not pay the full value of the underlying instrument, but post margin instead. Investors can be either long or short. Investors who are long pay interest for the funding cost, and investors who are short receive a rebate.
Convertible Bonds
A convertible bond is a like a regular corporate bond, in that the holder is entitled to coupon and principal payments, but in addition the holder has the option to exchange the bond for a predetermined number of common shares. The latter feature gives the bondholder the right to participate in the appreciation of the underlying equity. At maturity a convertible is worth the greater of its redemption value, and the market value of the shares into which the bond can be converted. A plain vanilla convertible bond can thus be viewed as a package of a corporate bond plus an equity call option. A convertible bond is a hybrid instrument, combining features of both debt and equity securities. It can be viewed as a debt-like security which offers equity upside, and it can also be viewed as an equity-like security which offers downside protection through coupon and principal payments, as well as offering seniority over ordinary shares.
Corridor Option
The payout depends on the proportion of time that the underlying remains within a pre-agreed range.
Covered Warrant
Equity warrant issued not by the corporation itself (i.e. the corporation issuing the underlying equity) but by an issuing house. The issuer covers his obligations under such warrants in that he either holds rights to the delivery of the shares or has actually already bought the shares. The equity capital of the corporation remains unchanged when covered warrants are exercised.
CPPI
Constant proportion portfolio insurance - a method of providing a level of capital protection to a portfolio with an equity component, achieved by continuously adjusting the proportions of cash and equities in the portfolio. For example, if the equity value falls then its proportion is reduced so that further falls are less important for the portfolio, and if the equity value rises, then its proportion is increased to benefit from further rises. See Dynamic Replication.
D
Daily Closing
The last officially-determined price (i.e. the last fixing) for a security during a day's trading on an exchange. the daily closing of an underlying is often used for calculating the amount of a cash settlement.
Delta
"Delta is the amount by which the value of a option changes when the price of the underlying changes by one unit, all other factors remaining constant. For calls, the delta lies between 0 and 1; for puts between 0 and -1. The minus sign results from the fact that the value of a put option falls when the price of the underlying rises. Expressed as a percentage (between 0% and 100%), delta reflects the probability that the option will possess an intrinsic value at the expiration date. "
Delta-Hedging
If you have a position in an option, to delta-hedge you change a position in the underlying so that the overall delta is zero. The option delta changes with market conditions and time to expiry, and so the hedge needs to be adjusted continuously. In this way a position in an option has less exposure to directional movements in the underlying, leaving greater exposure to changes in implied and realized volatility.
Diagonal Spread
An option spread strategy in which both the expiry dates and exercise prices of the options are different.
Digital Option
See Binary Option.
Dispersion Trade
Shorting index volatility and buying constituent stock volatility against it, or vice versa for the reverse dispersion trade. Often seen as a way to gain exposure to stock correlation, but in fact the exposure is more complex.
Dividend Swap
An OTC transaction in which the investor takes a view on the actual dividends to be paid by the constituents of an index. The investor pays a fixed amount and receives floating (actual) dividend payments, or vice versa.
Dynamic Replication
Replicating the pay-out of an option by having a position in cash, buying or selling the underlying security, and adjusting the cash and security proportions continuously by delta-hedging.
E
Early Expiry
Turbos expire automatically as soon as the underlying reaches the barrier.
Elasticity
This is equal to leverage multiplied by delta. This figure represents the percentage change in the price of a warrant arising from a percentage change in the underlying.
Equity Swap
The return on an equity instrument is exchanged for a stream of cash payments. They come in total return and price return versions.
European-Style Option
An option which can only be exercised at the end of its life, i.e. on the expiration date.
Exchange of Futures for Physicals (EFP)
For example with stock index futures this is a transaction in which the investor either sells futures and buys the underlying constituent stocks, or buys futures and sells the underlying constituent stocks. It allows a cash-settled contract to be settled physically, and allows trading of both futures and stocks in a single transaction, avoiding having to trade in two separate markets.
Exchange Traded Fund (ETF)
ETFs are bought and sold on an exchange in the same way as ordinary shares. They are designed to provide the performance of the underlying index, and the holder is entitled to dividend payments on a periodic basis.
Exercise
The owner of an option making use of the right embodied in that option.
Exercise Date
The date on which the owner of an option exercises the right embodied in the option. See Expiration Date.
Exercise Period
The period span during which the option right can be exercised. After the exercise period has expired the option is worthless.
Exercise Price
The price at which the security underlying an option can be bought or sold. Also known as strike price.
Exotic Option
An option that incorporates features not found in standard �vanilla� option. Examples are Asian options, barrier options, binary options, chooser options, cliquet options, etc.
Exotic Warrant
A warrant with a non-standard structure, e.g. unusual procedures for calculating or determining the strike price, the combining of caps and floors, the use of a range, etc.
Expiration
The day on which a derivative contract terminates.
Expiration Date
The date on which an option expires. Assuming that the option has an intrinsic value, the option right should be exercised at the latest on this date - otherwise it expires and is worthless.
F
Fair Value
"The theoretical value of an option can be determined using option pricing models. These models are partially based on somewhat bold assumptions. Nevertheless, the ""fair value"" is often presented in financial journals as an important criteria when making investment decisions. If the price of an option is below its fair value the option is considered to be under-valued, if it is above then it is over-valued."
Fixing
See Spot Price.
Floor
A floor defines a lower limit on the extent to which the owner of a put option can participate in the difference between the strike price and the spot price of the underlying.
Forward
An agreement to buy or sell an asset at a certain future time, at a certain price.
Forward Start Option
The option is activated at an agreed date in the future, at an agreed percentage strike, at which point the actual strike level is set.
Future
A contract to buy or sell a security at an agreed price on a given date. They are exchange-traded, have standard terms, involve daily margining, and a clearing house is the counterparty to all trades.
Futures Options
See Option on Futures.
G
Gamma
How the delta changes for a small change in the value of the underlying. If you are delta-hedging the gamma tells you how much the hedge will need to be adjusted.
Gearing
See Elasticity.
Greeks
A set of sensitivities of option prices (or other variables) to various parameters. See Delta, Gamma, Theta, Vega, Rho.
H
Hedging
A strategy which seeks to reduce the risk of a security or portfolio of securities.
Historical Volatility
A measure of the historical fluctuations in the price of a certain underlying. See Volatility.
Horizontal Spread
See Calendar Spread.
I
Implied Volatility
The volatility of an asset as derived from option prices. Since the option must have an observable price, these are usually options which trade on an exchange.
In-The-Money (ITM)
An in-the-money option is one that leads to a positive cashflow to the holder if it were exercised immediately. For a call the spot price of the underlying would be higher than the strike price. For a put the spot would be lower than the strike price.
Intrinsic Value
The (positive) difference between the spot price of the underlying and the strike price of a call option or, vice versa, the strike price and the spot price of a put option.
Issuer
The party who issues a warrant/note and who must fulfil the obligations embodied in the instrument.
J
Jelly Roll
An option spread strategy which combines a long synthetic position in the underlying with a short synthetic position to a different expiry date.
K
Kappa
See Vega.
Knock-In
See Barrier Options.
Knock-Out
See Barrier Options.
L
Ladder Option
The payout increases and is locked-in as the underlying trades through specified barrier levels.
Leverage
For example : The spot price of the underlying divided by the price of an option linked to that underlying. Leverage is intended to be a measurement of how much stronger an investment in options can rise and fall in comparison to investing the same amount in the underlying asset. This simplified leverage calculation is based on the incorrect assumption that the value of the option and the value of the underlying always move in parallel, i.e. by the same absolute amount. Thus, a more refined leverage is calculated by multiplying the simple leverage with delta. The result is often referred to as elasticity.
Life
See Exercise Period.
Liquidity
A market characterised by conditions in which large-volume transactions in a financial instrument can be executed without these then having a noticeable impact on the market price of that instrument. i.e. For warrants, the current volume of trading is often used as a measure of liquidity.
Lookback
Gives the holder the right to exercise at the most favourable rate or price reached by the underlying over the life of the option. The strike can also be set by looking-back over the life of the option.
Low Exercise Price Option (LEPO)
A call with a strike price set deep in-the money. Designed to allow participation in the performance of the underlying where there are obstacles to buying the underlying directly.
M
Market Maker
"For warrants, the issuer should adopt the role of the ""market maker"" who is obliged, at all times, to quote bid and offer prices for the purchase and sale of warrants with as narrow a spread as feasible."
Maturity
See Expiration Date.
Multiplier
The factor used to determine the size of a derivatives contract. For example, the multiplier on the FTSE- 100 index option traded on Liffe is �10 per index point.
N
Naked Option
An option that is bought or sold without an accompanying position in the underlying.
O
Off-Exchange Trading
A transaction is concluded directly between two parties without involving an exchange (bourse) as an intermediary. For example, this means that the owner of a warrant can also profit from price movements which occur outside of an exchange's trading hours.
Offer Price
The price for which an issuer, market maker, or broker is willing to sell
Opening Transaction
The purchase or sale of a derivative security to establish or increase a position.
Option
"A contractual agreement between two parties which grants the buyer the right (but not the obligation) to receive (call) or deliver (put) a certain underlying asset from (to) the seller (the ""writer"") at a pre-determined strike price on a certain date or during a pre-defined period of time. The buyer acquires a right, the writer assumes an obligation to deliver (call) or receive (put) at the wish of the buyer. for this, the buyer pays the writer the option price. "
Option on Futures
Futures options are options where the underlying is a futures contract. For example, a call futures option gives the holder the right, but not the obligation, to acquire a long position in the underlying futures contract plus an amount of cash equal to the futures price at the time of exercise minus the exercise price. Futures options are common where delivery of futures contracts is cheaper or more convenient than delivery of the asset underlying the future, for example, with commodities.
Option Price
The price to be paid for buying an option. the price of an option is influenced by many different factors. The most important are: remaining life, interest rates, strike price, spot price, and volatility of the underlying.
Option Right
See Option.
Option Writer
The seller of an option is called the writer of the option. Whereas the buyer has a discretionary right, the writer of an option has an obligation to deliver at the request of the buyer.
OTC
"Over-the-counter; a widely-used term to describe a contractual agreement between two counterparties for a derivatives transaction which is not traded on an exchange. The agreement is typically governed by ISDA (International Swaps and Derivatives Association, Inc.) legal definitions. "
Out-of-the-Money (OTM)
An option which would lead to a negative cash-flow if it were exercised immediately. For a call, the spot price of the underlying would be lower than the strike price. For a put the spot would be higher than the strike price.
Outperformance Option
A call on the outperformance of one instrument over another. The correlation between the two assets is one of the key factors determining the price of an outperformance option.
P
Passport Option (also known as perfect trader option)
Over the life of the option the holder can enter into a fixed number of long, short or neutral trades in the underlying up to a fixed notional amount, and at expiry the payoff is calculated as the return from these trades, with the payoff subject to a minimum of zero.
Path-Dependent Option
An option with a pay-out which depends on price of the underlying over the life of the option. See Asian Option, Barrier Option, Cliquet Option, Lookback.
Pay-later Option
A class of option where the premium is not paid when the option is purchased, eg deferred premium option, contingent premium option.
Physical Delivery
Fulfilment of the rights and obligations arising under a contract by exchanging the underlying against payment of the strike price (as opposed to cash settlement).
Point Value
The exchange ratio, i.e. the quantity of the underlying to which one option relates. The point value varies according to the underlying. For example - Warrants for the U.S.-Dollar normally relate to U.S.-$ 100. In contrast, XPI warrants only refer to 1/100 of the XPI index.
Premium
The difference between the current price of underlying asset and the break-even price. The premium is expressed as a percentage.
Price Spread
An option spread strategy in which the exercise prices are different, but the expiries are the same. Also known as vertical spread.
Principal-Protected Product
A kind of structured product which provides exposure to an asset while protecting the initial principal. Commonly constructed as long a zero-coupon bond and long a call option.
Put
An option which gives the holder the right, but not the obligation to sell a security at a specified price within a specified time period.
Q
Quanto-Style
For a derivative on an underlying denominated in one currency, where the derivative is denominated in a different currency, the FX rate is fixed at the start. This reduces the FX risk in a trade.
R
Rainbow
Any option with a payout which depends on the performance of more than one asset. This term is often used as a term for options where the payout depends on the worst or best performer of several assets.
Range Warrant
A warrant , the owner of which receives a fixed amount for each pre-defined date when the spot price of the underlying lies within a certain range
Realized Volatility (also known as Historical Volatility)
The variability of the price of an asset in the past, using actual historical prices. Usually measured as the annualized standard deviation of daily returns over a specified period.
Reverse Convertible
A structure which pays a coupon, but puts capital at risk. Commonly constructed as long a bond, and short a put. Premium from selling the put increases the coupon. If it is physically settled, and the underlying falls then the investor takes delivery of the underlying (hence the term reverse convertible).
Rho
The change in value of the option for a change in the value of the interest rate.
Risk Reversal
This commonly refers to a long put plus short call position, where the strikes may or may not be equal, and can also refer to a short put plus long call position.
S
Skew
Usually refers to the difference in implied volatility for options with the same expiry but with different strikes. See Volatility Surface.
Spot Price
"The current market price for the underlying. The officially determined mid-market price determined daily for securities quoted on German exchanges is also referred to as the ""fixing price"" "
Spread
The margin between the bid price and offer price. the closer the two prices are to each other, the better for the investor, as he might make a profit more quickly.
Stock Index Arbitrage (also known as cash and carry)
Buying or selling index futures and hedging with the underlying stocks.
Straddle
An option strategy in which the investor buys a put and a call with the same expiry and exercise price, on the same underlying.
Strike Price
The price used for calculating the cash settlement when an option is exercised. for the actual delivery, it represents the price for which the underlying can be bought (call) or sold ( put). the strike price is also called the exercise price.
Structured Products
These are products which combine several elements to create a single product, usually by combining a debt instrument with an option.
Swap
See Equity Swap.
Synthetic Convertible Bonds
A synthetic convertible is a combination of bonds and equity options that resembles a convertible bond. More generally a synthetic convertible combines separate securities that together have the main features of a convertible bond, which typically would involve fixedincome securities and securities which offer the right to acquire equity securities. The fixed-income element can include securities such as bonds, preferred stocks, or money-market instruments, while the equity element can include warrants or equity options. Less commonly the term synthetic convertible is used to refer to an equity-linked note issued by an entity other than the issuer of the underlying equity.
Synthetic Position
A long position created by buying a call and selling a put, or a short position created by selling a call and buying a put. Exercise prices and expiries are the same for both positions.
T
Term
See Exercise Period.
Term Structure
Usually refers to the term structure of volatility; the different implied volatilities for different expiries for a given strike. See Volatility Surface.
Theta
The change in the price of an option for a one-day decrease in the time to expiration. Positive gamma is usually associated with negative theta, and vice versa.
Time Decay
The loss in value of a long option position as the time to expiration decreases, other things being equal.
Time Value
The amount by which the current option price exceeds the intrinsic value of the option. The higher the volatility for the underlying, the higher the time value of the option (for a given remaining life to expiration). a buyer is willing to pay more than just the intrinsic value for a option as there exists the possibility that, up until expiration, the intrinsic value will increase.
Turbo
Securitised derivative that allows to benefit from the increase (Turbo Bull) or the decrease (Turbo Bear) of the underlying, with a delta of almost 1. It benefits of a higher lever effect compared to warrant and has a higher risk because of the barrier: when the barrier is hit, the Turbo expires automatically.
Turbo Bear
Allows to benefit from a decrease of the underlying.
Turbo Bull
Allows to benefit from an increase of the underlying.
U
Uncovered
A short option position where the investor does not have another position which would meet the obligation of the option contract.
Underlying
The financial asset to which an option relates. This could be e.g. an exchange rate, an equity index, shares or debt instruments.
V
Value Date
"The date ""as of"" which an options transaction is settled. "
Vanilla Option
A standard put or call option that does not incorporate any special features. It can be described by specifying the underlying security and its price, the option style (American or European), whether it is a put or call, the exercise price, and the maturity.
Variance
A measure of the variability of the price of an instrument. Usually measured as the annualized variance of daily returns. Variance is the volatility squared. See Volatility, Historical Volatility and Implied Volatility.
Variance Swap
See Volatility Swap.
Vega
The change in the value of an option for a change in volatility.
Vertical Spread
See Price Spread.
Volatility
A statistical measure for the fluctuations in price of an underlying, expressed as an annualised value. The stronger the fluctuations, the higher the volatility. If the volatility of an underlying reduces, the price reduces even if the spot price of the underlying remains unchanged. Volatility is the square-root of the variance. See Historical Volatility and Implied Volatility.
Volatility Skew
See Skew.
Volatility Surface
Options on the same underlying but for different strikes and expiries usually trade at different volatilities, so a 3D plot of the volatilities with expiries on one axis and strikes on another will look like a curved surface. See Volatility Skew, Term Structure.
Volatility Swap
An OTC transaction in which an investor takes a view on the realized volatility of some instrument, usually an index, over a specified time period. Conceptually at expiry the investor pays a fixed amount and receives an amount which depends on the actual realized volatility, or vice versa. A variance swap is similar, but here the variable payment depends on the realized variance.
W
Warrant
Put and call warrants are options which are issued by a company or a financial institution and usually traded on an exchange. Strikes and expiries are not restricted to those of regular exchange-listed options, and expiries are typically longer. The underlyings can be equities, indices, debt, currencies and commodities.
X
Y
Z
Zero-Coupon Bond
A bond which is sold at a discount to face value and which makes no periodic interest payments.
Zero-Strike Call Option
See Low Exercise Price Option (LEPO).
