The 100-day moving average is a popular technical indicator which investors use to analyze price trends.It is simply a security's average closing price over the last 100 days.
The 150-day moving average is a popular technical indicator which investors use to analyze price trends.It is simply a security's average closing price over the last 150 days.
The 200-day moving average is a popular technical indicator which investors use to analyze price trends.It is simply a security's average closing price over the last 200 days.
The 50-day moving average is a popular technical indicator which investors use to analyze price trends.It is simply a security's average closing price over the last 50 days.
In an interest rate swap, the absolute rate is the sum of the fixed rate component and the variable bank rate. If two counterparties exchange a fixed interest rate and a variable interest rate as part of an interest rate swap based on a theoretical amount of principal, the absolute rate is the total of the fixed interest, or premium piece on top of the variable bank lending rate, or reference piece.
Accelerated vesting occurs when a stock option becomes exercisable earlier than originally scheduled. For example, let's assume that John Doe receives options to buy 2,000 shares of Company XYZ, his employer, for $10 a share.
An accreting principal swap is a swap in which the two parties to the contract agree to pay interest on a growing principal amount. In a swap, one party is reducing its exposure to risk while the other party is increasing its exposure to risk in the hopes of getting a higher return.
An American option is a put option or call option that can be exercised at any time on or before its expiration date. For example, an investor holding an American option that expires on the last Friday in March has the right to exercise that option at any time on or before that date. Since the option price moves in sync with the underlying asset, the value of the option may rise and fall multiple times over the life of the contract.
The Arms Index (Trin) uses the ratio of advancing issues to declining issues to signal when the market is deeply overbought or oversold. The Arms Index is named after its designer, Richard Arms.
The ascending triangle is marked by two significant technical features.At its top, there is a line of resistance.
Asset backed securities (ABS) are securities backed by the cash flows of a pool of assets.Home equity loans, auto loans, credit card receivables, and student loans commonly back this class of securities.
An asset-or-nothing call option either pays the value equal to one unit of the underlying asset if that asset is above the strike price or pays nothing if the asset is below the strike price at expiration. An asset-or-nothing call option, also known as a binary option, specifies two possible outcomes.
An asset-or-nothing put option is an option with two possible outcomes: a fixed amount if the market value is below the strike price and no payment at all if it is higher than the strike price. A typical put option will have a market value based on the difference between the market price of the underlying asset and the strike price for that asset.
An assignable contract allows a contract holder to assign his or her rights and obligations under the contract to a third party.The most common assignable contracts are futures contracts.
Average true range (ATR) is a technical indicator that measures the volatility of an asset's average daily price movements. Average true range starts with the concept of "true range." True range (TR) is calculated by choosing the largest number from the following: Current high less current low Current high less previous close Current low less previous close Use the absolute value of each metric to ensure positive numbers and pick the largest.
A back fee is associated with exercising a compound option. Many investors know that they don’t always have to make outright purchases or sales of securities; they can also use puts and calls.
A bear spread is a strategy used in options trading.A trader purchases a contract with a higher strike price and sells a contract with a lower strike price.
A bearish engulfing pattern occurs in the candlestick chart of a security when a large black candlestick fully engulfs the small white candlestick from the period before. This pattern usually occurs during an uptrend and is believed to signal the start of a bearish trend in the security. The bearish engulfing pattern can be illustrated in the following manner using candlestick charting: In this example, the smaller white candlestick is overshadowed (or engulfed) by the larger black candlestick.
A bearish harami refers to a stock market trend indicating that the value of a stock is likely to experience a downwards, or bearish, momentum following a period of upward, bullish movement. In technical analysis, stock market trends are calculated using a number of different methods.
The Black-Scholes model is a formula used to assign prices to European options. The model is named after Fischer Black and Myron Scholes, who developed it in 1973.
Bollinger Bands are used as a technical analysis indicator.They are formed by using a 20-day moving average as a centerline and then tracing two bands, each one standard deviation wide, on either side of the moving average.
Breadth of market theory refers to a concept that the number of securities rising or falling in a market can predict the future strength of that market. The breadth of market theory is employed in technical analysis to predict market strength.
Broken dates, also known as "odd dates," are arbitrary maturity dates that do not necessarily match the duration of the bond, option, futures contract, forward contract or other maturing instrument. For example, let's assume that a futures contract for shares of Company XYZ is three months long and is issued on April 1.
A bullish engulfing pattern occurs in the candlestick chart of a security when a large white candlestick fully engulfs the smaller black candlestick from the period before. This pattern usually occurs during a down trend and is thought to signal the beginning of a bullish trend in the security. The bullish engulfing pattern can be illustrated in the following manner using candlestick charting: In this example, the smaller black candlestick is overshadowed by the larger white candlestick.This indicates the stock opened the second period lower than the previous close and tried to fall lower during the trading period.
A buy-write is an options strategy whereby an investor writes (sells) a call option at the same time he/she buys the underlying. In a buy-write, which is very similar to a covered call, an investor sells a call option and buys the underlying simultaneously.
A calculation agent is a person or company that calculates how much the parties to certain derivatives owe each other. For example, consider an interest rate swap, which is a contractual agreement between two parties to exchange interest payments.
A call on a call is a type of compound option.It is a call option on a call option.
A call on a put is a type of compound option.It is a call option on a put option.
A call option is a contract between a buyer and a seller that gives the option buyer the right (but not the obligation) to buy an underlying asset at the strike price on or before the expiration date.The buyer pays a premium to the seller in exchange for this right.
The phrase call over is used to describe the exercising of a call option. A call option gives its owner the right to buy an asset at a set price (the strike price) on or before a certain day (the expiration date).
A call premium is the price of a call option.It is not the same as the strike price. Supply and demand of the call option determines its premium, but the famous Black-Scholes options pricing model offers a common (though somewhat complex) method for calculating call premiums at any point.
A call ratio backspread is a trading strategy whereby an investor uses long and short option positions to simultaneously hedge against loss and maximize profit if stock prices go up.The strategy differs from butterfly spreads and condor spreads in that it has unlimited upside potential.
Call warrants are securities that give the holder the right, but not the obligation, to buy a certain number of securities (usually the issuer's common stock) at a certain price before a certain time. Occasionally, companies offer call warrants (usually simply called "warrants") for direct sale or give them to employees, but the vast majority of call warrants are "attached" to newly issued bonds or preferred stock.
A callable security gives the issuer or a third party the right but not the obligation to repurchase the security at a specific price after a certain time. Let's assume you own 100 shares of Company XYZ callable common stock.
"Called away" refers to an investing scenario in which one party to an options contract has the obligation to deliver an underlying asset to the other party to the contract. There are three common situations in which an asset may be called away: Callable Bond is Redeemed Before Maturity Callable bonds give the company issuing the bonds the option to redeem them (or buy them back from you) before the designated maturity date.
A cambist is an expert in foreign exchange. In the old days, a cambist relied on interpreting books of information about exchange rates between various currencies.
Candlestick charts are often used in technical analysis to track price movements of securities, derivatives and currency over time. Each candlestick is made up of three parts: the upper shadow, the lower shadow, and the real body.
Also called the spot price or the current price, a cash price is the current price of a commodity if it were to be sold or purchased today. For example, if you purchase a cup of coffee in a restaurant, you pay the cash price -- the price of the good for immediate delivery.
A cash settlement is a payment in cash for the value of a stock or commodity underlying an options or futures contract upon exercise or expiration. Options and futures contracts are valued based on an underlying security or commodity that may be purchased or sold upon exercise (determined by a price) or expiration (determined by a date).
A Chartered Market Technician (CMT) is an individual who has been certified by the Market Technicians Association. The Market Technicians Association (MTA) grants the Chartered Market Technician (CMT) designation to candidates who have shown proficiency in technical market analysis as demonstrated in a series of three professional examinations.
The Chicago Board of Trade (CBOT) is a commodity futures and options exchange.Several dozen types of contracts trade on the CBOT, and the exchange facilitates hundreds of millions of these trades each year.
The Chicago Board Options Exchange (CBOE) is an exchange used for trading standardized options contracts, including stock options, LEAPS, interest rate options, foreign currency options, and index options. Originally created in 1973 as an extension of the Chicago Board of Trade (CBOT), the Chicago Board Options Exchange (CBOE) became the first exchange to offer standardized options trading.
A clean up call, also known as a calamity call, is a feature of a collateralized mortgage obligation (CMO) that requires the issuer to pay off a portion of the CMO if the underlying mortgages don't generate enough cash to make the principal and interest payments on the CMOs. Let's say Company XYZ has issued $500 million of CMOs that have principal and interest payments of $2 million per month.
A collar option strategy, also known as a "hedge wrapper," is used to lock in the maximum gain and maximum loss of a stock.To execute a collar, an investor buys a stock and an out-of-the-money put option while simultaneously selling an out-of-the-money call option.
A combination trade is an option strategy where the trader takes a position in both call and put options in the same underlying stock.While there are multiple types of combination trades, in this section we will look at a very popular trade called a long straddle.
A compound option is the opportunity to buy or sell an option. Let’s assume John Doe buys a call on an option to purchase 100 shares of Company XYZ at $25 per share by March 31.
A covered call is a call option that is sold against stock an investor already owns. For example, assume that on January 1, Charlie owns 100 shares of IBM stock.
A credit default swap (CDS) protects lenders in the event of default on the part of the borrower by transferring the associated risk in return for periodic income payments. In a credit default swap (CDS), two counterparties exchange the risk of default associated with a loan (e.g.
A credit derivative is a financial instrument thats value is determined by the default risk of an underlying asset. Credit derivatives allow a lender or borrower to transfer the default risk of a loan to a third party.
Currency risk, also called foreign-exchange risk or exchange-rate risk, is the risk that changes in the relative value of certain currencies will reduce the value of investments denominated in a foreign currency. Currency risk may be the single biggest risk for holders of bonds that make interest and principal payments in a foreign currency.
D-mark is slang for deutschmark, the national currency of Germany until it joined the European Union in 2002. For example, let's say you're at a cocktail party looking to impress some Wall Street currency traders.
Daily cut-off is a term signifying the end of the trading day for foreign exchange markets. For example, let’s look at the markets for Japanese and American currencies.
Named after famous ballroom dancer Nicolas Darvas, the Darvas box theory is a trading technique based on 52-week highs and volumes. To implement a Darvas box technique, an investor simply looks at stocks with heavy trading volume and then buys those stocks when they rise above their 52-week highs.
Data smoothing is a statistical technique that involves removing outliers from a data set in order to make a pattern more visible. For example, let's say that a university is analyzing its crime data over the past 10 years.
A death cross is a technical indicator that occurs when a stock's short-term moving average falls below its long-term moving average. Market technicians believe moving averages define the trend and provide support or resistance.
A deferred payment option is an option contract for which the payment is deferred until, and paid not sooner than, the contract’s expiration date. A deferred payment option operates no differently from a standard vanilla option contract with the exception that payment, should the holder choose to exercise the option, will not be received until the expiration date.
A delivery option is incorporated into an interest rate future contract and allows the writer to specify the time and place of delivery as well as the asset to be delivered. An interest rate future contract contains an underlying short position supplied by the writing counterparty.
Delta is the ratio comparing the change in price of an underlying asset to the change in price of a derivative.It is one of the four main statistics, known as "Greeks," used to analyze derivatives.
A derivative is a financial contract with a value that is derived from an underlying asset.Derivatives have no direct value in and of themselves -- their value is based on the expected future price movements of their underlying asset. Derivatives are often used as an instrument to hedge risk for one party of a contract, while offering the potential for high returns for the other party.
The descending triangle is a pattern observed in technical analysis.It is the bearish counterpart of the bullish ascending triangle pattern.
A detachable warrant is a warrant that can be sold separately from the security to which it was originally attached. Warrants are securities that give the holder the right, but not the obligation, to buy a certain number of securities (usually the issuer's common stock) at a certain price before a certain time.
Devaluation refers to a decrease in a currency's value with respect to other currencies. A currency is considered devalued when it loses value relative to other currencies in the foreign exchange market.
A doji candlestick is a significant signal in the technical analysis of financially traded assets. If prices finish very close to the same level (so that no body or a very small real body is visible), then that candle can also be read as a doji. There are four types of doji candlesticks -- common, long-legged, dragonfly and gravestone.
The double bottom -- one of the many charting patterns used in technical analysis -- is characterized by a fall in price, followed by a rebound, followed by another drop to a level roughly similar to the original drop, and finally another rebound. The double bottom charting pattern is among the most commonly occurring charting patterns, and closely resembles the letter "W".
Dow Theory is an analysis that explores the relationship between the Dow Jones Industrial Average (DJIA) and the Dow Jones Transportation Average (DJTA).When one of these averages climbs to an intermediate high, then the other is expected to follow suit within a reasonable amount of time.
A dragonfly doji is the most uncommon candle of the four different types of doji candlesticks.As with any doji, the dragonfly depicts a situation in which supply and demand are in equilibrium, thus possibly signaling an important reversal.
E-micro forex futures are currency futures contracts that are a 10th the size of a standard futures contract. Forex futures are financial contracts giving the buyer an obligation to purchase a certain currency (and the seller an obligation to sell that currency) at a set price at a future point in time.Let’s say you manufacture jewelry in the United States but plan to open a plant in Japan.
An E-mini is a stock index futures contract that is electronically traded on the Chicago Mercantile Exchange (CME) and is 1/5 the size of a standard stock index futures contract. An E-mini S&P 500 futures contract is valued using the following formula: E-mini S&P 500 contract value = ($50) x (S&P 500 stock index) As the price of the S&P 500 fluctuates, the price of the S&P 500 E-mini futures contract fluctuates as well.
Early exercise refers to a situation in which an option holder has the right to exercise or assign an option before its expiration date. The option holder may decide to exercise the option before it reaches maturity by buying or selling the option.
An ECN broker is a person who uses electronic communications networks to give clients access to buyers and sellers in the currency markets. An ECN broker is sort of like a market maker for currency markets.
An embedded option is a provision in a security (typically a bond) that gives either the issuer (the company) or the investor the right to take some action in the future. Different from a stand alone option, an embedded option is an option that is embedded into the stock, bond, etc., and there may be more than one embedded option in a security.
An Equity Linked Foreign Exchange Option (or ELF-X) is a put option or call option that shelters an investor from foreign exchange risk.It enables an investor to sell a foreign stock position or portfolio at a future date (the expiration date of the option contract) without the risk of foreign exchange loss.
A European option is a type of put or call option that can be exercised only on its expiration date. Suppose an investor, John, buys a European call option on March 1st that expires on the third Friday in March.
The bearish evening star candlestick formation is a major reversal candlestick pattern. In many cases, only one candle is necessary to put a trader on high alert that a reversal may be happening.
An exchange rate between two countries' currencies indicates the value of one currency relative to the other. Let's say the current exchange rate between the dollar and the euro is 1.23 $/€.This means that to obtain one euro, you would need 1.23 dollars.
Exchange-rate risk, also called currency risk, is the risk that changes in the relative value of certain currencies will reduce the value of investments denominated in a foreign currency. Exchange-rate risk may be the single biggest risk for holders of bonds that make interest and principal payments in a foreign currency.
An exercise price is the price at which the holder of a call option has the right, but not the obligation, to purchase 100 shares of a particular underlying stock by the expiration date. Options are derivative instruments, meaning that their prices are derived from the price of another security.
An exotic option is any option contract comprising attributes not common to most contracts which result in complicated valuation schemes.It is the opposite of a plain vanilla option.
The expiration date is the last day an options contract can be exercised.After that, the contract becomes null and void.
An exponential moving average (EMA) is a moving average for time-series data which places greater weight on more recent data. An exponential moving average places exponentially greater weight on data in a time series as the data becomes more recent.
FactSet is a financial data and software company. FactSet's software platform offers real-time news, quotes and tools that help analysts screen for certain securities and test portfolio models.
A fixed exchange rate pegs one country's currency to another country’s currency.It is also known as a pegged exchange rate.
The flag formation is a technical analysis pattern that occurs when there is a straight upward move in a stock. The flag formation movement is often nearly vertical, and at the very least is extremely steep.The move is so rapid, in fact, that on a daily chart a trendline can't even be drawn.
A floating exchange rate refers to changes in a currency's value relative to another currency (or currencies). Floating exchange rates mean that currencies change in relative value all the time.
Foreign currency effects refer to the fluctuations in returns on offshore investments as a result of changes in the value of the investment's denominated currency against that of the domestic currency. Investors who hold securities issued in foreign countries bear the effects of foreign currency fluctuations as manifest in lower or higher returns upon repatriation to the domestic currency.
Foreign Exchange, also known as Forex or FX, is an over-the-counter market.Forex trading is how individuals, banks, and businesses convert one currency into another.
Foreign-exchange risk refers to the potential for loss from exposure to foreign exchange rate fluctuations. Foreign-exchange risk is similar to currency risk and exchange-rate risk.
A forward contract is a private agreement between two parties.It simultaneously obligates the buyer to purchase an asset and the seller to sell the asset (at a set price at a future point in time).
Usually reserved for discussions about Treasuries, the forward rate (also called the forward yield) is the theoretical, expected yield on a bond several months or years from now. The yield curve dictates what today's bond prices are and what today's bond prices should be, but it can also infer what the market believes tomorrow's interest rates will be on Treasuries of varying maturities.
Futures are financial contracts giving the buyer an obligation to purchase an asset (and the seller an obligation to sell an asset) at a set price at a future point in time. Futures are also called futures contracts.
Futures contracts give the buyer an obligation to purchase an asset (and the seller an obligation to sell an asset) at a set price at a future point in time. The assets often traded in futures contracts include commodities, stocks, and bonds.
Futures markets are places (exchanges) to buy and sell futures contracts.There are several futures exchanges.
The hammer candlestick is a technical indicator that typically appears after a prolonged downtrend.Here is an example of a hammer candlestick: During the period of the hammer candlestick, the stock or index experiences strong selling.
The hangman candlestick has a very long shadow and a very small real body.Typically, it has no upper shadow (or at the very most, an extremely small one).
Hard currency is currency that has been adopted as an acceptable payment method in multiple countries. Hard currencies are generally issued by developed countries that have a strong industrial economy accompanied by a stable government.
A hard loan is a loan between a lender and borrower in different countries that is denominated in a hard currency. For example, a hard loan from a lender in Cambodia to a borrower in Thailand may be denominated in U.K.
The head and shoulders pattern consists of four distinct parts: The left shoulder, the head, the right shoulder, and the neckline.Each of these four must be present for the formation to exist.
A hedgelet is a binary futures contract whose payoff is conditional upon a specific economic occurrence. A hedgelet is a futures contract which hedges that a specific event (for example, movements in interest rates, commodity prices, or exchange rates) will have occurred on or before the contract's expiration date.
The high wave candlestick has a very small real body, and it typifies a stock or index plagued by uncertainty. The spinning top has small upper and lower shadows, whereas in the high wave the shadows are longer, revealing more volatility.Here is what the high wave candle looks like: High wave candlesticks portray situations where the market is having difficulty coming to a consensus on a security's value.
The Hindenburg Omen is a technical indictor that attempts to predict market crashes. The Hindenburg Omen is triggered when three complex conditions are met: 1) The number of new daily 52-week highs and lows on the NYSE is more than 2.2% of all securities traded that day.
An Incentive share option, or ISO, is a type of company share option granted exclusively to employees. It confers an income tax benefit when exercised.
Incentive stock option (ISO) is a type of company stock option granted exclusively to employees.It gives the employee the right, but not the obligation, to purchase shares of a company, usually the option holder's employer, for a fixed price by a certain date.
Introduced in 1981, index options are call or put options on a financial index comprising many stocks. Index options usually have a contract multiplier of $100, meaning that the price of an index option equals the quoted premium times $100.Unlike options in shares of stock or even commodities, it's not possible to physically deliver the underlying index to the purchaser of an index option.
An interest rate swap is a financial contract between two parties (such as companies or investors) that want to exchange interest rates.These could be interest rates they’re paying on loans or rates they’re receiving on investments. It's important to note that loans and investments aren’t traded or altered: The parties only exchange the interest rates they pay on their loans or receive from their investments.
An international currency exchange rate is the rate at which one currency converts to another. For example, if the international currency exchange rate for one U.S.
A key currency is a currency used to set the exchange rate in an international transaction. Let's say Country A has a tiny economy and an unstable government.
A key reversal is a one-day trading pattern that may signal the reversal of a trend.Other frequently-used names for key reversal include "one-day reversal" and "reversal day." Depending on which way the stock is trending, a key reversal day occurs when: In an uptrend -- prices hit a new high and then close near the previous day's lows.
A ladder option is an option contract that allows the holder to earn a profit as long as the underlying asset's market price reaches one or more strike prices before the option expires. A traditional option contract gives the holder the right to buy (call option) or sell (put option) an underlying asset at a preset price, known as the strike price, by the contract's expiration date.
The last trading day is the last time traders may trade a derivative contract before it expires. Derivative contracts (for example, options and futures) have an expiration date, at which time the terms of the contract become null.
A long straddle is an options trading strategy that involves purchasing both a call option and a put option for a particular asset with identical strike prices and expiration dates. Because a long straddle involves purchasing both a call and put option with the same strike prices, a trader who uses this strategy will profit if the price of the underlying asset deviates from the original strike price in either direction.
Long-legged doji candlesticks are one of four types of dojis -- common, long-legged, dragonfly and gravestone.All dojis are marked by the fact that prices opened and closed at the same level.
Long-Term Equity AnticiPation Securities (LEAPS) is a registered trademark of the Chicago Board Options Exchange (CBOE).LEAPS are virtually identical to traditional exchange-traded options, but they expire up to three years in the future, which is much longer than traditional options' nine-month maximum.
A major downtrend, or bear market, is when financial assets and markets -- as with the broader economy -- fall steadily for an extended period of time. A major downtrend is when each successive decline of the primary trend carries the market to lower lows and lower highs, lasting from several months to several years.
Major pairs are the four pairs of currencies that are most commonly traded in the foreign exchange markets. The major pairs are Euro/U.S.
A major uptrend, or bull market, is when financial assets and markets -- as with the broader economy -- move in an upward direction for extended periods of time. A major uptrend is when each successive advance of the primary trend peaks and troughs higher than the one preceding it, and can last from several months to several years.
A market index target-term security (MITTS) is a debt security that offers potential upside based on gains in a market index while limiting downside losses by guaranteeing the initial investment will be returned if the index declines. First conceived by Merrill Lynch, a MITTS is a debt obligation that exposes an investor to upside fluctuations in a stock market index such as the Dow Jones Industrial Average (DJIA) or S&P 500 Index.
The Market Technicians Association (MTA) is a professional association for technical analysts. The MTA is a nonprofit association that fosters an environment of ethics and professionalism among Chartered Market Technicians (CMTs).
The McClellan Oscillator was first designed by Sherman and Marian McClellan in 1969.It is an excellent tool for determining the overbought or oversold condition of the stock market.
The measuring principle allows traders to set a specific minimum price target when trading a stock.This technique works with any well-defined technical analysis pattern, such as a head and shoulders, rectangle or triangle.
Mini-sized Dow options are leveraged option contracts that use the Dow Jones Industrial Average as the underlying asset. Bought and sold on the Chicago Board of Trade (CBOT), mini-sized Dow options have a leverage ratio of 5:1.
A minimum price contract is a futures contract with a price floor. A minimum price contract has a provision that places a lower limit on the price of a futures contract's underlying asset.
A minor downtrend is a corrective movement in the market -- lasting less than three weeks -- that goes against the direction of a secondary uptrend. The minor trend is the last of the three trend types in Dow Theory -- the other two types are primary and secondary trends.
A minor uptrend is a corrective movement in the market -- lasting less than three weeks – that goes against the direction of a secondary downtrend. The minor trend is the last of the three trend types in Dow Theory -- the other two types are primary and secondary trends.
The moving average is a popular technical indicator which investors use to analyze price trends.It is simply a security's average closing price over the last specified number of days.
Moving Average Convergence Divergence, or MACD (pronounced "Mack-Dee") is a technical analysis indicator developed by famous market technician Gerald Appel. The MACD is used by traders to determine when to buy or sell a security, based on the interaction between a line constructed from two moving averages and a "trigger line." The MACD line is constructed from two moving averages -- a 12-period, or faster moving average, and a 26-period, or slower moving average.The MACD calculation subtracts the 26-period from the 12-period to create a single line.
A naked call is an options strategy in which an investor sells a call option unassociated with units of the underlying security. In a naked call strategy, the sale of a call option is predicated on the writing party's belief that the market price of the underlying security will not exceed the specified strike price prior to the expiration date.
Naked option refers to an option contract which does not comprise ownership of the underlying security by the purchasing or selling party.It is the opposite of a covered option.
Naked position refers to any securities holding which has not been hedged for risk by any accompanying options or futures contracts. A naked position in a given security is exposed entirely to fluctuations in its market price.
A naked put is a put option which is unaccompanied by the actual units of the underlying security specified in the contract. The seller, or writer, of a naked put option incorporates a specific quantity of a given security as an underlying in which he does not hold an actual short position.
A naked warrant is a warrant that is not attached to a bond or preferred stock. Warrants are securities that give the holder the right, but not the obligation, to buy a certain number of securities (usually the issuer's common stock) at a certain price before a certain time.
In the futures market, a narrow basis occurs when the spot price of a commodity is close to the futures price of the same commodity. For example, let's say the price of a bushel of wheat is $1 right now (this is called the spot price).
Used in foreign exchange (forex), a negative carry pair refers to a situation in which the investor buys the currency of a country with low interest rates and shorts the currency of a country with high interest rates.It is the opposite of a positive carry pair trading strategy.
Negative correlation describes a relationship in which changes in one variable are associated with opposite changes in another variable. For example, many economists have discovered that people tend to buy more candy and liquor during recessions.
A negative directional indicator (known as negative DI) is a technical measure of a downtrend's momentum. Mathematically speaking, a negative directional indicator exists when the difference in a security's low price for two periods is bigger than the difference in the security's high price over the same two periods.
Net interest rate differential is the difference in interest rates associated with two different currencies or two different economic regions. For example, let's assume an investor in Japan puts her Japanese savings in a Japanese bank and earns interest at Japanese interest rates (say 8%).
A net option premium is the difference between the price paid to purchase an option and the price received from the sale of a different option. The formula for net option premium is: Net Option Premium = (Price of Options Sold - Commission on sale) - (Price of Options Purchased - Commission on Purchase) Let's assume investor X buys 100 options of XYZ Company for $10 and then sells 100 options in XYZ Company for $12.
Net present value (NPV) reflects a company’s estimate of the possible profit (or loss) from an investment in a project.Companies must weigh the benefits of adding projects versus the benefits of holding onto capital.
As the name implies, new highs/new lows represents the number of all stocks making new 52-week highs or lows.The result is graphed, and the aggregate number of new highs and new lows is used as a market timing tool.
Noncallable refers to a security that cannot be redeemed by the issuer prior to maturity. Sometimes, it is referred to as non-redeemable. When a security is issued, it carries a set term (the time at which the bond may be redeemed for the full value) and coupon rate (the interest rate yield on the bond payable to the bond buyer). Often, bonds are callable, that is, the issuer may decide to retire the bonds earlier than the maturity date. When this happens, the principal and interest are paid up to the date that the bonds are redeemed. However, investors may want to lock in a long term investment at a set rate. To do this, they require that the issuer hold the debt to maturity. These debts are noncallable.
A nonqualified option (NQO) is the right but not the obligation to purchase shares of a company, usually the option holder's employer, for a fixed price by a certain date. Option grants are incentive compensation that encourages employees to focus on doing work that increases the stock price and thus shareholder value, which is the primary objective of all businesses.
Notional principal amounts never change in an interest rate swap, and they are the core of the calculations involved in these transactions. An interest rate swap is a contractual agreement between two parties to exchange interest payments.
Notional values are most discussed in derivatives and currency transactions because those transactions often involve hedging, which means that a small amount of money can influence a very large investment.The term helps distinguish between the amount of money actually invested from the amount of money involved in the whole transaction.
OEX is the ticker symbol of index options on the S&P 100, which trade on the Chicago Board Options Exchange (CBOE). The Standard & Poor's 100 index (S&P 100) is a subset of the famous S&P 500 index.
An offset is a transaction that cancels out the effects of another transaction. Offsetting transactions are common in options and futures markets.
An offsetting transaction is a transaction that cancels out the effects of another transaction. Offsetting transactions are common in options and futures markets.
An offshore banking unit is a bank branch in another country. For example, let's assume that Bank XYZ is an American bank with a branch in Bermuda.
On Balance Volume (OBV) was designed by Joseph Granville to track the flow of volume in and out of a stock or index.Essentially, OBV is a running total of volume.
Open outcry is a trading mechanism that uses verbal bids and offers.It is usually conducted in trading pits on futures and options exchanges.
An option is a financial contract that gives an investor the right, but not the obligation, to either buy or sell an asset at a pre-determined price (known as the strike price) by a specified date (known as the expiration date). Options are derivative instruments, meaning that their prices are derived from the price of their underlying security, which could be almost anything: stocks, bonds, currencies, indexes, commodities, etc. Many options are created in a standardized form and traded on an options exchange like the Chicago Board Options Exchange (CBOE), although it is possible for the two parties to an options contract to agree to create options with completely customized terms.
Option pricing theory is the theory of how options are valued in the market.The Black-Scholes model is the most common option pricing theory.
The Options Clearing Corporation (OCC) is a clearinghouse for equity options and is a guarantor of the obligations in listed options contracts. The OCC confirms, certifies and clears contract trades. It also acts as a market maker and trading specialist for a variety of options contracts.
Options contracts are agreements between a buyer and seller which give the buyer the right to buy or sell a particular asset at a later date (expiration date) and an agreed-upon price (strike price). They’re often used for securities, commodities, and real estate transactions.In other words, buyers can purchase them much like other types of assets within brokerage accounts. What Are Call & Put Options?
"Out of the money" describes an option that is worthless if exercised today.In the case of a call option, the option has no intrinsic value because the current price of the underlying stock is less than the option strike price.
In finance, a perfect hedge is an investing strategy intended to protect an investment or portfolio against all losses.It usually involves securities that move in the opposite direction than the asset being protected.
A point-and-figure chart is a graph which records discrete price changes without accounting for an associated period of time.They are often used in technical analysis as a means of predicting future price changes.
Portfolio hedging describes a variety of techniques used by investment managers, individual investors and corporations to reduce risk exposure in an investment portfolio.Hedging uses one investment to minimize the negative impact of adverse price swings in another.
Price action is a term often used in technical analysis to interpret and describe price movements of securities. Technical trading revolves around chart and pattern analysis, and when patterns change dramatically, technical traders often refer to this as price action. Price action isn't just about the amount of a security's price change; it also describes how prices behave when they reach certain high and low points.For example, an analyst might conclude that the market as a whole is going up when a certain security or index price rises above a 52-week high and then keeps setting new 52-week highs over a period of time.
A price by volume (PBV) chart is a horizontal histogram that shows a cumulative total of how many shares of a stock traded at a given price. Mechanically speaking, a PBV chart is simply price, plotted as a line on the X axis, and volume, plotted on the Y axis as a bar.
In technical analysis, a price channel is an upper limit (called the resistance) and a lower limit (called the support) in which a security's price tends to stay. Price channels can slope up (indicating bullish sentiment) or down (indicating bearish sentiment); they don't have to simply go "sideways." The important geometric characteristic is that the resistance and support lines are parallel, as shown in this price channel for ChevronTexaco (NYSE: CVX): The channel lines themselves are often based on multiday moving averages or logarithmic scales that reflect price movements in percentage terms.
Also called relative strength, price persistence is the tendency of a security's price to stay on trend relative to a market index such as the S&P 500.It is a measure of momentum.
The price rate of change is simply the percentage change in a security's price between two periods. The formula for the price rate of change is: Price Rate of Change = (Price at Time B - Price at Time A) / Price at Time A For example, let's say Company XYZ's share price was $10 yesterday and was $5 a week ago.Using the formula above, we can calculate that the price rate of change is: Price Rate of Change = ($10-$5) / $5 = 100% The price rate of change can be used to measure not just the direction of a trend but the momentum or speed of a stock price trend.
A price-based option is a derivative based on the price of an underlying debt security, usually a bond. A price-based option gives the holder the right, but not the obligation, to purchase or sell (depending on whether the option is a call or a put) the underlying bond for a specific price (the strike price) on or before the option's expiration date. For example, let's say you purchase a price-based option on bonds of Intel (INTC) with a strike price of $1,010 and an expiration date of April 16th.
A put option is a financial contract between the buyer and seller of a securities option allowing the buyer to force the seller (or the writer of the option contract) to buy the security. In options trading, a buyer may purchase a short position (i.e.
Put-call parity refers to the relationship between put and call options for a given security, strike price and expiration date.Under put-call parity, the option prices should match, yielding no profit or loss.
A qualifying disposition is the sale, transfer or exchange of stock that an investor acquires from an incentive stock option (ISO) or employee stock purchase plan (ESPP) and is taxed at the capital gains rate. For example, let's assume that John Doe works as a financial analyst in Company XYZ.
Qualitative analysis is the use of non-quantifiable methods to evaluate investment or business opportunities and make decisions.This is different from quantitative analysis, which relies on a company's income statement, balance sheet and other quantifiable metrics.
Quantitative analysis is the use of math and statistical methods to evaluate investment or business opportunities and make decisions. In portfolio management, quantitative analysis is often used to mathematically determine when to buy or sell securities.
Also called secondary currency or counter currency, a quote currency is the currency being purchased in a currency pair. Four main pairs of currencies are most commonly traded in the foreign exchange markets.
R-squared, usually represented as R2, is a technique that evaluates the statistical relationship between two series of events.It is commonly used to describe the portion of a security's movement in the market relative to the movement of a related index.
A rainbow option is an option linked to two or more underlying assets. Just as rainbows have many colors, options can have many underlying assets.
Rate of Change (ROC), is the percentage change in price over a specified time frame.It is one of the most basic ways to measure momentum.
A rectangle formation describes a price pattern where supply and demand are in approximate balance for an extended period of time.In such a scenario, the shares tend to move in a narrow range, hitting resistance at the rectangle's top and finding support at its bottom.
Regression is a statistical method used in finance and other fields to make predictions based on observed values.It is a measure of how correlated a group of actual observations are to a model’s predictions.
Also called price persistence, relative strength is the tendency of a security's price to follow the trend of an index like the S&P 500.It is a measure of momentum.
The Relative Strength Index (RSI) was first developed by renowned technical analyst J.Welles Wilder.
The relative strength line compares a stock's price performance against that of the overall market, usually as measured by the S&P 500.However, if the trader desires, the comparison can be made to another stock or index.
Also called systematic risk or non-diversifiable risk, relevant risk is the fluctuation of returns caused by the macroeconomic factors that affect all risky assets. Diversifiable risk is the risk of something going wrong on the company or industry level, such as mismanagement, labor strikes, production of undesirable products, etc.Relevant risk + Diversifiable risk = Total risk Relevant risk is comprised of the “unknown unknowns” that occur as a result of everyday life.
In technical trading analysis, resistance is an upper limit in a price channel in which a security’s price tends to stay. Price channels can slope up (indicating bullish sentiment) or down (indicating bearish sentiment); they don’t have to simply go “sideways.” The important geometric characteristic is that the resistance lines and support lines (the opposite of the resistance) are parallel, as shown in this price channel for ChevronTexaco (CVX).
The RSI indicator mirrors and anticipates price patterns in the underlying stock or index chart.The indicator's designer, Welles Wilder, intended for the RSI Indicator to help traders spot chart formations not obvious on a bar chart.
The "rule of 72" is a method of estimating how long it will take compounding interest to double an investment. The rule of 72 is a method used in finance to quickly estimate the doubling or halving time through compound interest or inflation, respectively.
A runs test is a statistical procedure that can be used to decide if a data set is being generated randomly, or if there is some underlying variable that is driving results. If data points are randomly distributed above and below a regression curve, you should be able to predict the number of patterns (runs) you'd expect to see.
A Russian option is a type of lookback option which does not have an expiration date. As a lookback option, a Russian option may be exercised according to American or mid-Atlantic settlement rules based on the underlying security's most profitable market price during the life of the option.
The shooting star candlestick is a chart formation consisting of a candlestick with a small real body, and a large upper shadow.This pattern represents a potential reversal in an uptrend.
Spinning tops have small real bodies, and they portray a stock or index plagued by uncertainty.The spinning top has small upper and lower shadows.
Springs are false breakouts that can trap the unsuspecting trader.Spring patterns quickly reverse, with the stock or index then often testing the opposite end of the trading range.
Springs and upthrusts are false breakouts that can trap the unsuspecting trader.Both patterns quickly reverse, with the stock or index then often testing the opposite end of the trading range.
The stochastics indicator is a momentum indicator that shows the location of the current closing price relative to the high/low range over a set number of periods. The stochastics indicator tries to identify turning points by measuring how fast prices are rising or falling.
A stock option gives the holder the right, but not the obligation, to purchase (or sell) 100 shares of a particular underlying stock at a specified strike price on or before the option's expiration date.There are two kinds of options: American and European.
Straight line basis refers to a method of calculating the depreciation of an asset. Straight Line Basis calculates depreciation which is an accounting measure of the "loss" of value of an asset over time. In other words, depreciation represents the value an asset losses each time it is used. Depreciation is measured over a period of time -- called the "useful life of the asset." Each asset has an established useful life.
Strike price, also referred to as “exercise price,” is the specific price at which an investor can exercise an option to buy or sell an option contract’s underlying security, such as stocks, bonds, and commodities. The strike price of an option is a fixed dollar amount that stays the same during the entire option contract term.
Subscription privileges are a clause in an option, security, or merger agreement that gives the investor the right to maintain his or her percentage ownership of a company by buying a proportionate number of shares of any future issue of the security. Subscription privileges are sometimes called "subscription rights," "anti-dilution provisions," or "anti-dilution provisions." Subscription privileges are particularly relevant for convertible preferred stock.
Subscription rights are a clause in an option, security, or merger agreement that gives the investor the right to maintain his or her percentage ownership of a company by buying a proportionate number of shares of any future issue of the security. Subscription rights are sometimes called "anti-dilution provisions," "preemptive rights," or "subscription privileges." Subscription rights are particularly relevant for convertible preferred stock.
In technical trading analysis, support is a lower limit in a price channel in which a security’s price tends to stay. Price channels can slope up (indicating bullish sentiment) or down (indicating bearish sentiment); they don’t have to simply go “sideways.” The important geometric characteristic is that the resistance lines (which are the opposite of support lines; they are the upper limits of the price channel) and support lines are parallel, as shown in this price channel for ChevronTexaco (CVX).
A support level is the price at which stock buyers jump in to purchase shares, establishing a floor beneath which it's difficult for the price to fall. Support, along with its cousin, resistance, are extremely important concepts in swing trading, and they are predicted by drawing horizontal trendlines on a stock price chart.
A swap spread is the difference between the fixed rate component of a given swap and the yield on a Treasury item or other fixed-income investment with a similar maturity. Companies engage in swaps in order to benefit from an exchange of comparative interest rate advantage.
Swing trading is a short-term strategy used by traders to buy and sell stocks whose technical indicators suggest an upward or downward trend in the near future -- generally one day to two weeks. Swing trading uses technical analysis to determine whether or not particular stocks might go up or down in the very near term.
The symmetrical triangle is one of three important triangle patterns defined in classical technical analysis.The other two triangles are the bullish ascending triangle pattern and the bearish descending triangle pattern.
A synthetic collateralized debt obligation is a collateralized security which is backed by derivatives such as swaps and options contracts. A synthetic collateralized debt obligation, commonly called a synthetic CDO, seeks to generate income from swap contracts, options, and other non-cash derivatives rather than straightforward debt instruments such as bonds, student loans, or mortgages.
A synthetic futures contract comprises call options accompanied by put options in order to imitate the attributes of a futures contract. A synthetic long futures contract can be simulated using a short put option in conjunction with a long call option.
Also called market risk or non-diversifiable risk, systematic risk is the fluctuation of returns caused by the macroeconomic factors that affect all risky assets. Unsystematic risk is the risk that something with go wrong on the company or industry level, such as mismanagement, labor strikes, production of undesirable products, etc.Systematic risk + Unsystematic risk = Total risk Systematic risk is comprised of the "unknown unknowns" that occur as a result of everyday life.
Technical analysis is a methodology that makes buy and sell decisions using market statistics.It primarily involves studying charts showing the trading history and statistics for whatever security is being analyzed.
A technical rally is a price increase brought on by traders reacting to signals from technical analysis. A technical rally occurs after a security has experienced a substantial price decline and begins to recover its market value.
In the options trading world, there are two components that make up an option's price.The first is intrinsic value (which accounts for the underlying security's perceived value), and the second is time value.
A trailing stop loss order (or trailing-stop) is a special type of trade stop order that manages risk and offers profit protection.This exit strategy adjusts the stop price of a stock or stocks by a certain percentage below the market price.
Trend analysis is a technical analysis of the movement of a stock based on past performance. A trend analysis is a method of analysis that allows traders to predict what will happen with a stock in the future.
The tweezers candlestick pattern is a formation that always involves two candles.At a tweezers top, the high price of two nearby sessions are identical, or very nearly so.
Also known as “being naked,” an uncovered option is the sale of an option involving securities the seller does not own.It is the opposite of a covered option.
An underlying asset is a security on which a derivative is based. For example, options are derivative instruments, meaning that their prices are derived from the price of another security.
An underlying security is an asset that a derivative instrument (e.g.futures, options) derives its value from.
A vanilla option refers to a normal option with no special features, terms, or conditions. Options come in a variety of "flavors." A plain vanilla option offers the right to purchase or sell an underlying security by a certain date at a set strike price. In comparison to other option structures, vanilla options are not fancy or complicated.
Variability is the degree to which a data series deviates from its mean (or in the accounting world, how much a budgeted value differs from an actual value). For example, let's say Company XYZ stock has the following prices: The average of these prices is $21.33.
A vest fleece occurs when a company accelerates the vesting of its employee stock options. For example, let's assume that John Doe receives options to buy 2,000 shares of Company XYZ, his employer, for $10 a share.
Warrants are securities that give the holder the right, but not the obligation, to buy a certain number of securities (usually the issuer's common stock) at a certain price before a certain time.Warrants are not the same as call options or stock purchase rights.
Warrant coverage is an agreement to provide warrants to a shareholder. Warrants are securities that give the holder the right, but not the obligation, to buy a certain number of securities (usually the issuer's common stock) at a certain price before a certain time.
A warrant premium is the percentage difference between the market price of a security and the price an investor pays for that security when buying and exercising a warrant.The formula for the warrant premium is: Warrant Premium = 100 x [(Warrant Price + Exercise Price – Current Share Price) / Current Share Price] Warrants are securities that give the holder the right (but not the obligation) to buy a certain number of securities (usually the issuer's common stock) at a certain price before a certain time.
A weak currency is a currency that is going down in value. A currency's value fluctuates all the time.
A weak dollar is used to describe the United States' currency decreasing in value relative to other currencies. The dollar's value is fluctuating all the time.
Weak longs are investors who buy a stock (known as being "long"), but who will sell it at the first sign of a price decline. Weak longs tend to be traders, not investors.
Weak shorts are investors who short sell a stock (known as being "short"), but who will buy it back at the first sign of a price increase. Short-term traders typically only enter a short position long enough to capture a quick gain on their investment.
The witching hour is the last hour of the trading day. The witching hour occurs between 3 and 4 p.m.
Xenocurrency is a currency that trades in foreign markets. For example, Euros trade in American markets, making the Euro a xenocurrency.
An XPO is a perpetual option. An option gives the holder the right, but not the obligation, to purchase (or sell) 100 units of a particular underlying security at a specified strike price on or before the option's expiration date.
A zero cost collar is a short-term option trading strategy that offsets the volatility risk by purchasing a cap and a floor for the price of a derivative. A zero cost collar strategy would combine the purchase of a put option (i.e.