Alpha:

Often considered to represent the value that a portfolio manager adds to or subtracts from a fund\’s return. A positive alpha of 1.0 means the fund has outperformed its benchmark index by 1%. Correspondingly, a similar negative alpha would indicate an underperformance of 1%.

Alpha Indexes:

Each Alpha Index measures the performance of a single name “Target” (e.g. AAPL) versus a “Benchmark (e.g. SPY). The relative daily total return performance is calculated daily by comparing price returns and dividends to the previous trading day. The Alpha Indexes were set at 100.00 as of January 1, 2010. The Alpha Indexes were created by NASDAQ OMX in conjunction with Jacob S. Sagi, Financial Markets Research Center Associate Professor of Finance, Owen School of Management, Vanderbilt University and Robert E. Whaley, Valere Blair Potter Professor of Management and Co-Director of the FMRC, Owen Graduate School of Management, Vanderbilt University.

American- Style Option:

An option contract that may be exercised at any time between the date of purchase and the expiration date.

At-the-Money:

An option is at-the-money if the strike price of the option is equal to the market price of the underlying index.

Back Month:

For an option spread involving two expiration months, the month that is farther away in time.

Benchmark Component:

The second component identified in an Alpha Index.

Break Even Point:

An underlying stock price at which an option strategy will realize neither a profit nor a loss, generally at option expiration.

Call Options:

An option contract that gives the holder the right to buy the underlying index at a specified price for a certain fixed period of time.

Cash Settlement:

A settlement style that is generally characteristic of index options. Instead of stock changing hands after a call or put is exercised (physical settlement), cash changes hands. When an in-the-money contract is exercised, a cash equivalent of the option’s intrinsic value is paid to the option holder by the option seller (writer) who is assigned.

Class of Options:

Option contracts of the same type (call or put) and style (American or European) that cover the same underlying index.

Closing Purchase:

A transaction in which the purchaser’s intention is to reduce or eliminate a short position in a given series of options.

Closing Sale:

A transaction in which the seller’s intention is to reduce or eliminate a long position in a given series of options.

Closing Transaction:

A transaction that eliminates (or reduces) an open option position. A closing sell transaction eliminates or reduces a long position. A closing buy transaction eliminates or reduces a short position.

Commission:

The fee charged by a brokerage firm for its services in the execution of a stock or option order on a securities exchange.

Contract Notional Value:

Contract Notional Value is the value of a derivative contract\’s underlying assets at the spot price. In the case of an option contract, this is the number of units of an asset represented by the contract, multiplied by the spot price of the asset.

Contract Size (Shares):

This is the number of shares of the underlying stock represented by the option contract.

Cost-to-Carry:

The total costs involved with establishing and maintaining an option and/or stock position, such as interest paid on a margined long stock position or dividends owed for a short stock position.

Covered Call Option Writing:

A strategy in which one sells call options while simultaneously owning an equivalent position in the underlying security.

Covered Put Option Writing:

A strategy in which one sells put options and simultaneously is short an equivalent position in the underlying security.

Credit (transaction):

Any cash received in an account from the sale of an option or stock position. With a complex strategy involving multiple parts (legs), a net credit transaction is one in which the total cash amount received is greater than the total cash amount paid.

Debt (transaction):

Any cash paid out of an account for the purchase of an option or stock position. With a complex strategy involving multiple parts (legs), a net debit transaction is one in which the total cash amount paid is greater than the total cash amount received.

Delta:

The amount a theoretical option’s price will change for a corresponding one-unit (point) change in the price of the underlying security.

Effective Gearing:

Effective gearing is the relative percent change of the value of the option for one percent change in the price of the underlying stock. Note that effective gearing is not constant. It changes with other factors.

For out-of-the money options or options which are close to expiry, the effective gearing will be higher.

Equity Option:

The last day that an options is valid. The option expires and becomes worthless if the buyer chooses not to exercise the option on or before the expiry date.

European-Style Option:

An option contract that may be exercised only during a specified period of time just prior to its expiration.

Even Money (Transaction):

With a complex strategy involving multiple parts (legs), an even money transaction results when the total cash amount received is the same as the total cash amount paid.

Exchange-Traded Fund (ETF):

A security that represents shares of ownership in a fund or investment trust that holds a basket (collection) of specific component stocks. ETF shares are listed and traded on securities exchanges just like stock, and so may be bought and sold throughout the trading day

Ex-Dividend Date:

When a corporation declares a dividend, it will simultaneously declare a “record date” on which an investor must be recorded into the company’s books as a shareholder to receive that dividend. Also included in the declaration is the “payable date,” which comes after the record date, and is the actual date dividend payments are made. Once these dates are established, the exchanges will then set the “ex-dividend” date (“ex-date”) for two business days prior to the record date. If you buy stock before the ex-dividend date, you will be eligible to receive the upcoming dividend payment. If you buy stock on the ex-date or afterwards, you will not receive the dividend.

Exercise:

To employ the rights an equity option contract conveys to its buyer to either buy (in the case of a call) or sell (in the case of a put) 100 shares of the underlying security at the strike price per share at any time before the contract expires.

Exercise Price (Strike Price):

The stated price per unit of which the underlying index may be purchased ( in the case of a call) or sold (in the case of a put) by the option holder upon exercise of the option contract.

Exercise Settlement Amount:

The difference between the exercise price of the option and the exercise settlement value of the index on the day an exercise notice is tendered, multiplied by the index multiplier.

Expiration Cycle:

An Expiration cycle relates to the dates on which options expire. An option other than the LEAPS®, will be assigned to one of three cycles, the January cycle, the February cycle or the March cycle. At any point in time, PHLX sector index options have contracts with five expiration dates outstanding (three months from the March, June, September, December cycle plus two additional near-term month).

Expiration Date:

The last day on which an option may be exercised. FLEX® Options Allow traders to specify option contract terms such as expiration date, strike price, exercise style (American or European), and the settlement value with choice of either a.m. settlement (reported at the opening of trading) or p.m. settlement (reported at the close of trading).

Expiry:

The last day that an options is valid. The option expires and becomes worthless if the buyer chooses not to exercise the option on or before the expiry date.

Front Month:

For an option spread involving two expiration months, the month that is nearer in time.

Gamma:

Gamma is the rate of change of Delta. Delta shows how much an option price will change for a one-point move of the underlying. However Delta is not constant and will increase or decrease at different rates. Gamma is the rate that delta will change based on 1% change in the stock price. Think of delta is the speed at which option prices change. Gamma is then the acceleration of the option prices changes. Gamma is the highest when the option is at-the-money. As option expiry day draws nearer, the gamma of at-the-money options increases while the gamma of in-the-money and out-of-the-money options decreases. Gamma is the same for call or put with the same strike and same expiry. Gamma is positive for longing a call or a put. Gamma is negative for shorting a call or a put.

Gearing:

Gearing is the ratio of the underlying stock price to the option price. If the gearing of an option is 5 times, then the investment cost of such option is 1/5 of the underlying stock. Note that gearing only shows the relationship between investment cost of the underlying stock and the option. It does not reflect the price movement relationship between the option and the underlying stock. Please refer to effective gearing for such relationship

Gross Open: Interest:

It is defined as either the sum of the total number of long or short positions in options contract held by all market participants. For details, please read “How to read open interest figures”.

Hedge:

A conservative strategy used to limit investment loss but effecting a transaction which offsets an existing position.

Historical Volatility (HV):

HV is calculated from historical pricing data on the stock. It is calculated by determining the standard deviation from the average price of the stock in the given time period. HV is frequently compared with implied volatility to determine if options prices are over-priced or under-priced.

Holder:

The purchaser of an option.

Implied Volatility (IV):

Unlike historical volatility, implied volatility is deduced from option prices instead of calculated from historical pricing data on the stock. It reflects the expectation on the volatility of the underlying stock in the market prices of the option. Assuming all other factors remain constant, the higher the implied volatility, the higher the value of the option (both call and put) and vice versa.

Index Option:

An option contract whose underlying security is an index (like the NASDAQ), not shares of any particular stock.

In-the-Money:

An equity call contract is in-the-money when its strike price is less than the current underlying stock price. An equity put contract is in-the-money when its strike price is greater than the current underlying stock price.

Intrinsic Value:

The in-the-money portion (if any) of a call or put contract’s current market price.

Leaps:

Long-term Equity AnticiPation Securities, or LEAPS, are long-term option contracts. Equity LEAPS calls and puts can have expirations up to three years into the future and expire in January of their expiration years.

Leg:

1: One part of a complex position composed of two or more different options and/or a position in the underlying stock.

2: Instead of entering one order to establish all parts of a complex position simultaneously, one part is executed with the hope of establishing the other part(s) later at a better price.

Lognormal Distribution:

With respect to stock prices over a period of time, a lognormal distribution of daily price changes represents not the actual dollar amount of each change, but instead the logarithms of each change. Mathematically, this type of distribution implies that a stock’s price can only range between 0 and infinity, which in the real world is the case. So in a sense a lognormal distribution could be considered to have a bullish bias. A stock can only drop 100% in value but can increase by more than 100%. In general, assumptions made by option pricing models about a stock’s future volatility are based on a lognormal distribution of future price changes

Long Position:

A position wherein an investor’s interest in a particular series of options is a net holder (i.e., the number of contracts bought exceeds the number of contracts sold).

Long Options:

A position resulting from the opening purchase of a call or put contract and held (owned) in a brokerage account.

Long Stock:

Shares of stock that are purchased and held in a brokerage account and which represent an equity interest in the company that issued the shares.

Margin Requirement (for Options):

The amount of cash and/or securities an option writer is required to deposit and maintain in a brokerage account to cover an uncovered (naked) short option position. This cash can be seen as collateral pledged to the brokerage firm for the writer’s obligation to buy (in the case of a put) or sell (in the case of a call) shares of underlying stock in case of assignment.

Mean:

For a data set, the mean is the sum of the observations divided by the number of observations. The mean is often quoted along with the standard deviation: the mean describes the central location of the data, and the standard deviation describes the range of possible occurrences.

Moneyness:

Describes the relationship between the strike price of an option and the current price of its underlying asset. An option can be classified as in-the-money (ITM), at-the-money (ATM) or out-of-the-money (OTM).

ITM option:

A call option is ITM when its strike price is below the current price of the underlying asset. While a put option is ITM when its strike price is above the current price of the underlying asset. An ITM option consists of intrinsic value.

ATM option:

An ATM option is a call or put option that has a strike price that is equal to the current price of the underlying asset. ATM options possess no intrinsic value and contain only time value

Net Open Interest:

Net Open Interest (NOI), as suggested by its name, has added the “netting” effect. The long and short positions in a particular contract held by a Participant in all its accounts are netted to arrive at either a net long or net short figure before being summed up to arrive at the NOI. This represents the total exposure from individual Participants to the clearing house. NOI, which eliminates the gross effect, provides an alternative angle for analysis. For details, please read “How to read open interest figures”. No. of Board Lot(s) of Underlying This is the number of board lots of the u

No. of Board Lot(s) of Underlying:

This is the number of board lots of the underlying stock represented by the option contract. Please note that some of the option contracts represent more than one board lot of its underlying shares.

Normal Distribution:

One of the most familiar mathematical distributions, it is a set of random observed numbers (or closing stock prices) whose distribution is symmetrical around the mean or average number. A graph of the distribution is the familiar “bell curve,” with the most frequently occurring numbers clustered around the mean, or the middle of the bell. Since this a symmetrical distribution, when the numbers represent daily stock price changes, for every possible change to the upside there must be an equal price change to the downside. The result is that a normal distribution would theoretically allow negative stock prices. Stock prices are unlimited to the upside, but in the real world a stock can only decline to zero. See “lognormal distribution.”

Open Interest:

The net total of outstanding open contracts in a particular option series. An opening transaction increases the open interest, while any closing transaction reduces the open interest.

Open Purchase:

A transaction in which the purchaser’s intention is to create or increase a long position in a given series of options.

Opening Sale:

A transaction in which the seller’s intention is to create or increase a short position in a given series of options.

Opening Transaction:

A transaction that creates (or increases) an open option position. An opening buy transaction creates or increases a long position; an opening sell transaction creates or increases a short position (also known as writing).

Option Premium (%):

It is the amount paid/received expressed in percentage of spot underlying stock price when and investor buy/sell and option.

Option Pricing Model:

A mathematical formula used to calculate an option’s theoretical value using as input its strike price, the underlying stock’s price, volatility and dividend amount, as well as time until expiration and risk-free interest rate. Generated by an option pricing model are the option Greeks: delta, gamma, theta, vega and rho. Well-known and widely used pricing models include the Black-Scholes, Cox-Ross-Rubinstein and Roll-Geske-Whaley.

Out-of-the-Money:

An equity call option is out-of-the-money when its strike price is greater than the current underlying stock price. An equity put option is out-of-the-money when its strike price is less than the current underlying stock price.

Physical Settlement:

The settlement style of all equity options in which shares of underlying stock change hands when an option is exercised.