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Glossary
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Acquisition
A type of corporate action that occurs when one company purchases a majority stake in another company. Acquisitions can be paid for in cash, stock, or a combination of the two.
Asset Class
Asset classes are groups of assets with similar financial characteristics that are subject to similar laws and regulations.
Learn more about Asset ClassAssignment
A short option, regardless of whether it’s a call or put, can be assigned at any time if the option is in the money. When selling a put, the seller is contractually giving the right for the put owner to sell or “put” them stock at a given price (strike price) in a given set of time (expiration). Selling a call gives the right to the call owner to buy or “call” stock away from the seller within a given time frame. The purchaser of an option has the right to exercise an in the money option at any time prior to expiration, but not necessarily the obligation to do so. Short options are most commonly assigned if the options expire in the money, or if there is a dividend paid out (dividend risk).
Learn more about AssignmentAutomatic Exercise
A procedure whereby the Options Clearing Corporation (OCC) attempts to protect the holders of certain in-the-money expiring options by automatically exercising the options on behalf of the owner.
Learn more about Automatic Exerciseb
Backwardation
Relating to futures, a theory that involves the price of futures and the time to expiration. All else being equal, the theory suggests that as a futures contract approaches expiration it will trade at a higher price compared to contracts further from expiration.
Learn more about BackwardationBasis (futures cash)
The term “basis” has several common uses related to trading.
Learn more about Basis (futures cash)Basis Point
The term basis point in finance refers to a unit of measurement.
Learn more about Basis PointBearish
A pessimistic outlook on the price of an asset. Traders who believe that an asset price will depreciate over time are said to be bearish.
Beta
Beta measures how closely an individual stock tracks the movement of the broader market. Beta is often used to estimate the systematic risk of a security in comparison to the market as a whole. A beta of 1 indicates the movement of a security closely matches that of the broader market. A beta valued less than 1 theoretically indicates a security is less volatile than the broader market, and a beta valued above 1 theoretically indicates a security is more volatile than the broader market.
Learn more about BetaBeta Weight
Beta weighting is a means for investors to put all of their positions into one standard unit. It is a way to look at an entire portfolio and understand how it will change with a move in the market. It tells us about the size, diversity and general risk of our positions.
Learn more about Beta WeightBig Boy Iron Condor
A Big Boy Iron Condor is an Iron Condor in which the width of the spreads are very wide. This emulates a short strangle with defined risk.
Learn more about Big Boy Iron CondorBig Dawg Butterfly
A Big Dawg Butterfly is a long butterfly spread with very wide spreads. The wider the long strikes are, the greater the max loss, but the higher potential reward in this defined risk spread.
Learn more about Big Dawg ButterflyBroken Wing Butterfly
A broken wing butterfly – or a skip strike butterfly, is a net credit, high probability trade that can make money even if your speculation is directionally wrong. Learn more in this guide.
Learn more about Broken Wing ButterflyBullish
An optimistic outlook on the price of an asset. Traders who believe that an asset price will appreciate over time are said to be bullish.
Butterfly Spread
A 3-strike price spread that profits from the underlying expiring at a specific price.
Learn more about Butterfly Spreadc
Calculating Expected Move
Expected move is the amount that a stock is predicted to increase or decrease from its current price, based on the current level of implied volatility for binary events.
Learn more about Calculating Expected MoveCalendar Spread
A calendar spread is a low-risk, directionally neutral strategy that profits from the passage of time and/or an increase in implied volatility.
Learn more about Calendar SpreadCall Options
Call options are typically utilized by traders who are bullish on a certain underlying asset, where they think the stock price will rise well above their call strike price by the contract’s expiration. Learn more about call options below.
Cash Settled
Cash settled financial instruments simply settle to cash instead of the underlying instrument at expiration. There are a few notable differences that cash settled instruments have when compared to other instruments like ETF’s like the SPY.
Learn more about Cash SettledChicken Iron Condor
A Chicken Iron Condor is a directionally neutral, defined risk strategy that profits from a stock trading in a range through the expiration of the options. It benefits from the passage of time and any decreases in implied volatility. Unlike a regular Iron Condor where we aim to collect ⅓ the width of the strikes in credit, we look to collect ½ the width of the strikes in credit, resulting in a higher payout if we’re correct and lower maximum loss if the move exceeds expectations.
Learn more about Chicken Iron CondorCommon Stock
A type of equity, common stock is a class of ownership in a company.
Learn more about Common StockContango
Relating to futures, a theory that involves the price of futures and the time to expiration. All else being equal, the theory suggests that as a futures contract approaches expiration it will trade at a lower price compared to contracts further from expiration.
Learn more about ContangoCorrelation
Correlation is the relationship between two or more variables with a range of negative (-1) to positive (+1). It is generally measured on a historical basis with a minimum of one month. Correlation measures the rate at which two stocks have historically tended to move in relation to their mean. If they are normally on opposite sides of the mean, they tend to move in opposite directions and have a negative correlation. If they are normally on the same side of the mean, they tend to move in the same direction and have a positive correlation. If there is no clear trend, they are said to have little to no correlation (0). Understanding correlation allows us to diversify our portfolio in non-correlated underlyings.
Learn more about CorrelationCoupon Payment
A term referring to the periodic interest paid to investors of fixed income securities.
Learn more about Coupon PaymentCovered Call
A covered call is a common strategy that is used to enhance a long stock position. The position limits the profit potential of a long stock position by selling a call option against the shares. This adds no risk to the position and reduces the cost basis of the shares over time.
Learn more about Covered Calld
Day Trading
Day trading is the opening and closing of your trading positions within a short period, typically the same day. Also known as intraday trading, the goal of using this trading style is usually to take small profits which eventually add up to bigger gains over time.
Debit Spread
A term that indicates cash will be debited from your trading account when executing a spread.
Learn more about Debit SpreadDefined Benefit Plan
A retirement plan that calculates employee benefits using a formula that accounts for length of service and salary history.
Learn more about Defined Benefit PlanDelta
One of the Greeks, delta measures the rate of change in an option’s theoretical value for a $1 change in the price of the underlying security.
Learn more about DeltaDelta Neutral
Delta neutral refers to a trading approach/strategy wherein the delta exposure (directional bias) of an options position is reduced through an offsetting position in the underlying security.
Learn more about Delta NeutralDerivative
A class of marketable securities, derivatives have a price that is dependent upon (or derived from) an underlying asset.
Learn more about DerivativeDiagonal Spread
A diagonal spread is constructed by purchasing a call/put far out in time, and selling a near term put/call on a further OTM strike to reduce cost basis. The trade has only two legs, but it gives the effect of a long vertical spread in terms of directionality, and a calendar spread in terms of its positive vega.
Learn more about Diagonal SpreadDividend
A dividend is a cash distribution, usually quarterly, to shareholders based on company profits. Investors that own the stock receive the dividend. Investors that are short the stock are required to pay the dividend. Dividends are non-events from a P/L basis. When dividends are paid, the stock price is reduced by the amount of the dividend so that no arbitrage opportunity exists. With that said, it is still important to know when a dividend is coming out, to see if your option position is at risk.
Learn more about DividendDrag
Drag refers to the underperformance of a fund that attempts to replicate the return of a certain underlying. This drag is a long-term result of the daily portfolio rebalance that takes place. An underlying that shows this drag is VXX.
Learn more about DragDuration (Time Decay)
Duration is the name of the game at tastytrade. Since our primary strategy is to sell premium, we allow time decay to work in our favor. We generally enter trades that are between 25-50 days to expiration. This range gives us enough time to be right about our assumption and also offers us an acceptable amount of credit. We have found that in periods of low volatility, we can extend duration to increase our credit received. Additionally, we can use the nearest expiration for earnings plays to capitalize on the volatility contraction that ensues afterwards.
Learn more about Duration (Time Decay)e
Earnings
Earnings announcements are public announcements that display a company’s earnings, or lack thereof. These usually take place on a quarterly basis. This number is generally quantified as earnings per share. It’s important to understand how earnings can affect an underlying, as well as that underlying’s option market.
Learn more about EarningsEarnings Per Share
Earnings per share (EPS) is a key financial metric used by investors and traders to analyze the profitability of a company.
Learn more about Earnings Per ShareEarnings volatility
Earnings volatility is different from standard volatility because it is inflated by a binary event. Earnings are announced either before the market open or after the market close and volatility is typically at its peak just before the announcement. This is due to the uncertainty of stock direction and the magnitude of the move after the earnings announcement.
Learn more about Earnings volatilityEuropean-Style Option
A type of option contract that can be exercised only on its expiration date, not before.
Learn more about European-Style OptionEx-dividend Date
The date investors buying the stock will no longer receive the dividend.
Learn more about Ex-dividend DateExchange Traded Fund (ETF)
A type of indirect investment, exchange-traded funds (ETFs) are professionally managed investment vehicles that contain pooled money from individual investors.
Learn more about Exchange Traded Fund (ETF)Exchange Traded Note (ETN)
Exchange-traded notes (ETNs) are unsecured, unsubordinated debt securities that are issued by an underwriting bank.
Learn more about Exchange Traded Note (ETN)Expected Move
The amount that a stock is predicted to increase or decrease from its current price, based on the current level of implied volatility for binary events.
Expected Returns
Trading options allows us to take advantage of leverage, which can greatly increase our expected returns on a trade. This leverage also increases our risk. Because of the risk we are taking on, we expect our returns to be greater than the risk-free rate of return (which are virtually non-existent in a low IV environment).
Learn more about Expected ReturnsExpiration
The date at which an option stops trading, and all contracts are exercised or become worthless.
Learn more about ExpirationExtrinsic Value
Together, extrinsic value and intrinsic value make up the two parts of an option’s total value.
Learn more about Extrinsic Valuef
Fundamental Analysis
An investing/trading methodology that estimates a security’s fair value using relevant quantitative and qualitative information. The goal of this approach is to compare the result of fundamental analysis to the current market value of a security to determine whether it is undervalued, overvalued, or fair.
Futures
Contracts that require buyers to purchase and sellers to sell an asset (financial instrument or physical commodity) at a specified price at a specified future date. At tastytrade, we use futures to scalp, hedge and give us an overall sense of market activity.
Learn more about FuturesFutures Options
Options on futures are similar to options on stocks, but with one major exception…Futures are the underlying instrument off which the options are priced (unlike equity options which have the stock as its underlying). As a function of being priced off of futures, it’s important to be aware of the differences between futures options and equity options.
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Gamma
Gamma is the greek that gives us a better understanding of how delta will change when the underlying moves. It is literally the rate of change of an option’s delta, given a $1.00 move in the underlying. For example, if a long call option has a gamma of 0.10 and a delta of 0.50, and the underlying moves up $1.00, the option will then have a delta of 0.60, all else equal. There are a few important concepts when it comes to gamma: Long option benefits, short option risks, and expiration risk.
Learn more about GammaGreeks
In finance, the “Greeks” are parameters that measure the sensitivity of an option’s value to changes in the following: underlying price, time, volatility, and interest rates. These measurements are collectively known as the “Greeks” because they are denoted by letters from the Greek alphabet, including: delta, gamma, theta, vega, and rho.
Learn more about Greeksh
Hedging
When we use the word hedge, we are referring to reducing our risk. When we hedge a trade, we are limiting our profitability while at the same decreasing the amount of risk we are taking.
Learn more about HedgingHigh Frequency Trading
High frequency trading is a new function of the modern market where programmed trading platforms exploit inefficiencies in market pricing.
Learn more about High Frequency TradingHigh IV, Low IV
Implied Volatility refers to a one standard deviation move a stock may have within a year. If a stock is $100 with an IV of 50%, we can expect to see the stock price move between $50-150. The lower the IV is, the less we can expect to see the stock price fluctuate, and vice versa. These environments tend to be extremes, so we are very mindful of them and act fast when they arise.
Learn more about High IV, Low IVHigh Implied Volatility Strategies
High IV strategies are trades that we use most commonly in high volatility environments. When implied volatility is high, we like to collect credit/sell premium, and hope for a contraction in volatility.
Learn more about High Implied Volatility StrategiesHow to Short Sell a Stock
When share prices are expected to drop, all hope isn’t lost – there’s still an opportunity for you to benefit. Short selling a stock enables you to profit from a decline in a company’s share price. Learn how to short a stock.
Learn more about How to Short Sell a Stocki
IV Rank
A metric which tells us whether implied volatility is high or low in a specific underlying based on a given time frame of IV data.
Learn more about IV RankIV expansion / contraction
IV expansion or contraction refers to implied volatility reverting to the mean.
Learn more about IV expansion / contractionImplied Volatility
Implied volatility (IV) is an important metric when it comes to strategy selection because when there’s uncertainty there’s risk. It shows you what kind of volatility level to expect, whether you’re looking at a specific stock or market through ETFs. Learn more about IV in options trading using our guide.
Learn more about Implied VolatilityImplied Volatility Rank
IV rank is our favorite volatility measure at tastytrade. IV rank simply tells us whether implied volatility is high or low in a specific underlying based on the past year of IV data.
Learn more about Implied Volatility RankIndirect Investments
A class of marketable securities. Unlike direct investments, which investors own themselves, indirect investments are made in vehicles that pool investor money to buy and sell assets.
Learn more about Indirect InvestmentsIntrinsic Value
Together, intrinsic value and extrinsic value make up the two parts of an option’s total value.
Learn more about Intrinsic ValueInversion
Inversion refers to selling puts above calls, or calls below puts, when managing a short position.
Learn more about InversionIron Condor
An iron condor is a popular options trading strategy. In this guide, you’ll learn what makes it valuable and why it’s considered a high probability trading strategy.
Learn more about Iron CondorIron Fly
An iron fly is essentially an iron condor with call and put credit spreads that share the same short strike. This creates a very neutral position that profits from the passage of time and any decreases in implied volatility. An iron fly is synthetically the same as a long butterfly spread using the same strikes.
Learn more about Iron Flyj
Jade Lizard
A jade lizard is a slightly bullish strategy that combines a short put and a short call spread. The strategy is created to have no upside risk, which is done by collecting a total credit greater than the width of the short call spread.
Learn more about Jade LizardJunk Bond
Junk bonds are fixed income securities that carry low credit ratings.
Learn more about Junk Bondl
Leg
A term used when referring to the execution of positions with more than one component.
Learn more about LegLegging Into and Out of Trades
Legging a trade refers to the opening or closing of each leg for a non-naked strategy in separate transactions.
Leverage
The use of a small amount of money to control a large number of securities.
Learn more about LeverageLeveraged Products
Leveraged products are underlyings that track different underlyings and attempt to amplify their move by a certain multiplier. A good example of a leveraged product is UVXY, which attempts to replicate twice the daily return of a modified VIX futures contract with an average maturity of 30 days. Not all leveraged products are positively correlated. Some products are negatively correlated and experience a loss when the replicated product experiences an increase.
Learn more about Leveraged ProductsLimiting profitability
There is a direct relationship between profitability and probability of success. The higher the profitability, the lower the probability of success. At tastytrade, we limit our profitability to increase our probability of success. We do this by reducing our cost basis and by selecting our strikes strategically, to give us a high probability of success. This is one of the hardest concepts to grasp as a new trader so we like to use a baseball analogy to explain the concept…
Learn more about Limiting profitabilityLiquidity
Liquidity is how easily an investor can buy or sell an asset without losing much value. The more an asset is traded, the more liquid it becomes.
Long Butterfly Spread
A long butterfly spread is a neutral position that’s used when a trader believes that the price of an underlying is going to stay within a relatively tight range.
Learn more about Long Butterfly SpreadLow Implied Volatility Strategies
When implied volatility is low, we will utilize strategies that benefit from increases in volatility as well as more directional strategies.
Learn more about Low Implied Volatility Strategiesm
Managing Winners
The term managing winners refers to closing a trade prior to expiration and prior to max profit.
Learn more about Managing WinnersMargin Trading
Margin is the amount of capital required to open a trade.
Market Awareness
Market awareness refers to our ability to assess the entire stock and option marketplace from a macro level. Having a better market awareness allows us to avoid poor decisions and optimize our good ones. We like to break market awareness down in three levels: Sector awareness, fear awareness & participant awareness.
Learn more about Market AwarenessMarket Efficiency
A theory focusing on the degree to which asset prices reflect all relevant and available information.
Learn more about Market EfficiencyMarket Order
An order type for immediate execution at current market prices. If willing buyers or sellers exist to take the other side, market orders are filled.
Learn more about Market OrderMean Reversion (Contrarian)
Mean reversion is very important to what we do at tastytrade. As mean reversion traders, we look to exploit price extremes and volatility because we believe they will revert to their mean over time. Volatility proves to be the one variable that is recognized as being ‘mean reverting’ in many option-pricing models.
Measuring Implied Volatility
Measuring implied volatility (IV) with a few metrics enables traders to put context around current and historic IV levels. At tastytrade, we focus on two measurements - IV rank & IV percentile.
Learn more about Measuring Implied VolatilityMoney Market Instruments
A class of marketable securities, money market instruments are short-term equity and debt securities with maturities of one year or less that trade in liquid markets.
Learn more about Money Market Instrumentsn
Naked Options
Short naked options are calls or puts that are sold that have nothing to limit their risk (shares of stock, long options). It is a bullish strategy when selling a put option and a bearish strategy when selling a call option.
Learn more about Naked OptionsNotional Value
The notional value of a position is the real amount at risk, excluding margin relief. If we own 100 shares of stock at $50 per share, we have $5,000 of notional value at risk. If the stock price drops to $0, we stand to lose $5,000. In a margin account, we are offered 2:1 leverage on stock purchases. What does this mean? Basically, that same 100 shares of stock would only require $2,500 of capital to purchase. What we have to remember is that we still have that same $5,000 of notional value. In other words, we only have to put up $2,500 at first, but if the stock price goes to $0 we still lose $5000.
Learn more about Notional ValueNumber of Occurrences
When it comes to probabilities, we have to understand that there are winners and losers. Even if we have a 99% probability of success on a trade, one percent of those trades will still be losers over a very large pool of occurrences. Let’s say that we reach our true probability over 1,000 occurrences. We could expect to see 990 winners and 10 losers. The question is - where will those 10 losers occur? Nobody knows, and that’s the importance of trading small.
Learn more about Number of Occurrenceso
Open a Brokerage Account
Allocating a minimum of $2,000 to a trading fund.
Option Delta
One of the Greeks, delta measures the rate of change in an option’s theoretical value for a $1 change in the price of the underlying security.
Learn more about Option DeltaOption Value
Where an option gets its price can seem like smoke and mirrors when first learning about option trading, but it is actually pretty simple. Option value, also known as option premium, is really just made up of two contributing factors - intrinsic & extrinsic value. These values change based on three inputs: strike price in relation to the stock price, implied volatility, and time until expiration. That’s it! We won’t leave you there though - let’s dive a little deeper and start with intrinsic value.
Learn more about Option ValueOptions Clearing Corporation (OCC)
The Options Clearing Corporation (OCC) provides central counterparty clearing and settlement services to 15 exchanges.
Learn more about Options Clearing Corporation (OCC)Options Expiration
The date at which an option stops trading, and all contracts are exercised or become worthless. Expiration is one of the differentiating factors between stocks and options. As long as a company is publicly traded, there is no expiration on shares. Options, on the other hand, have expirations.
Learn more about Options Expirationp
Pairs Trading
Pairs trading refers to trading a discrepancy in the correlation of two underlyings.
Learn more about Pairs TradingPin Risk
The risk that a stock price settles exactly at the strike price when it expires.
Learn more about Pin RiskPoor Man Covered Call
A poor man’s covered call is a long call diagonal debit spread that is used to replicate a covered call position. The strategy gets its name from the reduced risk and capital requirement relative to a standard covered call.
Learn more about Poor Man Covered CallPoor Man Covered Put
A poor man’s covered put is a put diagonal debit spread that is used to replicate a covered put position. The strategy gets its name from the reduced risk and capital requirement relative to a standard covered put. The strategy is also much safer than a covered put because there is no naked short stock component.
Learn more about Poor Man Covered PutPot Odds
The term “pot odds” refers to the statistical relationship between expected return and expected risk. If we have good pot odds on a trade, we can expect to make more than what we’ve risked. For example, we would risk two to make three, but we would not risk four to make three in a random environment.
Learn more about Pot OddsPreferred Stock
A type of equity, preferred stock is a class of ownership in a company.
Learn more about Preferred StockPrimary Market
A term referring to the segment of the capital markets where new securities are issued, like an initial public offering (IPO).
Learn more about Primary MarketProbability of Profit
Probability of profit (POP) refers to the chance of making at least $0.01 on a trade. This is an interesting metric that is affected by a few different aspects of trading - whether we’re buying options, selling options, or if we’re reducing cost basis of stock we are long or short.
Learn more about Probability of ProfitProbability of Profit/Success
The likelihood in percentage terms that an option position or strategy will be profitable at expiration.
Learn more about Probability of Profit/Successq
Quote
A term referring to the current bid/ask price of an asset in the marketplace.
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Ratio Spread
A front ratio spread is a neutral to slightly directional strategy placed so that there is either no upside or downside risk. A front ratio spread is created by purchasing a put or call debit spread with an additional short put or call at the short strike of the debit spread.
Learn more about Ratio SpreadReturn on Capital
Return on Capital, also known as ROC, is calculated by taking the max potential profit (for a short position) and dividing it by the total amount of capital used.
Learn more about Return on CapitalReverse Stock Split
A type of corporate action that decreases the number of shares outstanding in a company.
Learn more about Reverse Stock SplitRisk Management
Risk Management refers to the strategic risk that we take when trading options. This covers everything from our trade size, to our strike selection, product choice and type of strategy. We are able to control all of these factors in order to increase our probability of success and avoid large drawdowns in our account.
Riskless Arbitrage
A type of arbitrage in which a profit is theoretically guaranteed. May also be referred to as "Risk-Free Arbitrage."
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Scaling
Scaling refers to the adaptation of a growing or shrinking account, which ensures we are using our capital effectively and wisely. We may change our size and take on more risk when our account grows, and we will continue to primarily sell premium.
Learn more about ScalingScalp/Scalper
Scalping refers to buying and selling an underlying multiple times in the same day for a small profit.
Learn more about Scalp/ScalperSelling Option Premium
The term “selling premium” refers to selling options. There are many benefits to selling premium as opposed to buying premium, but there are environments where each strategy can flourish.
Learn more about Selling Option PremiumSelling Premium
Selling options in anticipation of a contraction in implied volatility.
Learn more about Selling PremiumSkewed Iron Condor
A skewed iron condor is a defined risk strategy that combines an iron condor and an embedded call spread. It takes what is a normally non-directional trade and makes it directional (although we can also make it directional through strike selection). With a normal iron condor we would sell the call spread and the put spread at the same width, but with a skewed iron condor we might sell a $1 wide put spread and a $2 wide call spread to create the skewed iron condor. We use this strategy in a high IV environment or when we have a directional bias (selling into strength or buying into weakness).
Learn more about Skewed Iron CondorSpin-Off
A type of corporate action in which an existing publicly-traded company sells a segment of its assets, or distributes new shares, with the purpose of forming an independent company.
Learn more about Spin-OffStandard Deviation
In statistics, standard deviation (SD) is a unit of measurement that quantifies certain outcomes relative to the average outcome.
Learn more about Standard DeviationStaying Small
While traditional investing advocates for fewer occurrences and values the buy and hold strategy, we at tastytrade take a statistical approach to trading. We believe in putting on many small high probability trades to increase our probability of success.
Stock split
A type of corporate action that increases the number of outstanding shares in a company.
Learn more about Stock splitStop Order
A conditional order type that activates and becomes a market order when a stock reaches the designated price level.
Learn more about Stop OrderStraddle
A short straddle is a position that is a neutral strategy that profits from the passage of time and any decreases in implied volatility. The short straddle is an undefined risk option strategy.
Learn more about StraddleStrangle
A short strangle is a position that is a neutral strategy that profits when the stock stays between the short strikes as time passes, as well as any decreases in implied volatility. The short strangle is an undefined risk option strategy.
Learn more about StrangleStrike Price
A strike price is the price in which we choose to become long or short stock using an option. Unlike stock where we’re forced to trade the current price, we can choose different option strikes that are above or below the stock price, that have different premium values and probabilities of profit. When choosing strikes, there are a few crucial concepts: The probability of the option expiring worthless, and whether the option is in the money (ITM), at the money (ATM) or out of the money (OTM).
Learn more about Strike PriceStrike Price Interval
A term referring to the price differential between strikes in a given option series.
Learn more about Strike Price IntervalSunny Side Up
The sunny side up trade is an original tastytrade strategy. It’s structured by buying an ATM call spread and financing the spread with the sale of a far OTM call option. For example, buying a vertical call spread (purchasing a call 1 strike ITM and selling a call 1 strike OTM) and then selling a naked call at least 84% OTM to finance the purchase of the call spread. We typically look to use the sunny side up strategy for earnings announcements where we have a strong bullish assumption.
Learn more about Sunny Side UpSynthetic
A term used to describe a position that is built to simulate another position, but utilizes different financial instruments.
Learn more about SyntheticSynthetics
Synthetics are a way to artificially create a financial position with a different strategy. Derivatives allow investors to synthetically create various different positions without needing to use as much capital.
Learn more about Syntheticst
Technical Analysis
A investing/trading methodology used to forecast price direction using historical price and volume data. Technical analysts rely on charts and other data to evaluate a security’s strength or weakness in order to forecast future price changes.
Learn more about Technical AnalysisTheta
Theta is the daily decay of an option’s extrinsic value. This metric is the cloudiest of all, as it assumes implied volatility & price movement are held constant. For this reason, it’s better to think of theta decay from the bigger scheme of things.
Learn more about ThetaTime In Force
Designations that dictate the length of time over which an order will keep working before it is cancelled.
Learn more about Time In ForceTriple Witching
Triple witching refers to one of the four days a year when index futures, index options and stock options expire on the same day.
Twisted Sister
A twisted sister is a neutral, undefined risk strategy. This strategy is the opposite of a jade lizard. To construct this strategy we would sell an OTM call, and sell an OTM put spread at the same time. Maximum profit is achieved if the stock price ends up between the short strikes at expiration. We have found that twisted sisters underperform in the long run when compared to jade lizards because jade lizards take advantage of volatility skew.
Learn more about Twisted Sisteru
Undefined Risk
Undefined Risk refers to the risk that is accompanied with naked options and when your possible max loss is unknown on order entry. This normally refers to a naked call as the underlying equity could possibly go up indefinitely. Naked puts also have undefined risk, however we know that an underlying can only go to zero so we can consider this our max loss.
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VIX
VIX options are a cash settled product that have little to no put value. Front and back month options do not have a linear mathematical relationship.
Learn more about VIXVIX tells
The idea that the movement of the /VX give some type of prediction of future market activity.
VX
/VX is the ticker symbol for the CBOE VIX Index Futures. While the cash VIX index is derived from SPX option prices, VIX futures are priced by the marketplaces anticipation of the 30-day market volatility.
Learn more about VXVXX
The VXX is an Exchange Traded Note (ETN) that tracks the VIX short-term futures. To be more specific, the VXX is a portfolio composed of the front two month /VX futures that bear continuously changing weights. VXX is just one of the available volatility products, and it is important to note that it does not always perform like the other products may (such as the VIX).
Learn more about VXXVega
One of the Greeks, vega measures the rate of change in an option’s theoretical value given a 1% change in implied volatility.
Vertical Debit Spread
A vertical debit spread is a defined risk, directional options trading strategy where we buy an option that we want to increase in value, while selling a similar option type against it to reduce the overall cost and risk of the trade.
“Vertical” in this case just means that the options are in the same expiration cycle.
“Debit” means we are paying for the spread, and we want the overall spread to increase in value. The long option is our asset in a debit spread, and the short option is our cost basis reduction component.
“Spread” indicates that we have a long and short option component in the same trade, where one offsets the P/L of the other to a degree.
Vertical Spread
A vertical spread is a directional strategy made up of long and short puts/calls at different strikes in the same expiration. Vertical spreads allow us to trade directionally while clearly defining our maximum profit and maximum loss on entry (known as defined risk).
Learn more about Vertical SpreadVolatility
A measure of the fluctuation in the market price of a security or index. Also defined as the annualized standard deviation of returns. Volatility is frequently used as an input in models that calculate the theoretical value of options.
Learn more about VolatilityVolatility Products
In recent years, it has become increasingly common to consider volatility as its own asset class. With this progression, many different volatility products have been invented and are now available to trade. The most common of these products include the VIX, VIX options, VIX futures, VXX, UVXY, SVXY and VXST. The VIX index gauges 30-day implied volatility in SPX and the options on the VIX allow investors to trade their volatility assumptions, whether it is to speculate or hedge portfolio positions.
Learn more about Volatility ProductsVolatility Skew
Volatility Skew refers to the difference in implied volatility of each opposite, equidistant option. The current volatility skew in the market results in puts trading richer than calls, because the IV in OTM puts is higher than the equivalent OTM calls. Velocity also attributes to the skew, since markets can fall much faster than they rise. Before the crash of 1987, this skew did not exist.
Learn more about Volatility Skeww
Watchlist
An options watchlist is simply a list of underlyings that we can keep track of in a trading platform. Building and maintaining a watchlist is an important aspect of everyday trading. From our watchlist we can see trends, spot price extremes, and get a general scope of the market conditions.
Learn more about WatchlistWeeklys
Certain underlyings offer weekly expiration cycles, which allow traders to take their chance in short-term directional plays. At tastytrade, we avoid weekly expiration cycles unless they are part of an earnings play.
Learn more about WeeklysWriting an option
A colloquial expression that means “selling an option to open.” The “writer” of the option is the seller. Not used when closing a long position because opening sales represent a different risk exposure than closing sales.
Learn more about Writing an optionz
ZEBRA
The ZEBRA (zero extrinsic value back ratio spread) is a near-100 delta stock replacement strategy with all of the upside profit potential with a fraction of the risk compared to owning 100 shares of stock. It is constructed by purchasing two ITM (in-the-money) options and selling one same-style ATM (at-the-money) option against it to eliminate all of the extrinsic value in the two long options you’re buying.
Learn more about ZEBRA© copyright 2013 - 2022 tastytrade.
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