Options & Derivatives

In an interest rate swap, the absolute rate is the sum of the fixed rate component and the variable bank rate.
Accelerated vesting occurs when a stock option becomes exercisable earlier than originally scheduled.
An accreting principal swap is a swap in which the two parties to the contract agree to pay interest on a growing principal amount.
An American option is a put option or call option that can be exercised at any time on or before its expiration date. 
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 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.
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.
A back fee is associated with exercising a compound option.
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. This strategy is used to maximize profit of a
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.
The Black-Scholes model is a formula used to assign prices to European options.
Broken dates are arbitrary maturity dates that do not necessarily match the duration of the bond, option, futures contract, forward contract or other maturing instrument. Broken dates are also known as
A buy-write is an options strategy whereby an investor writes (sells) a call option at the same time he/she buys the underlying.
A calamity call, also known as a clean-up 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
A calculation agent is a person or company that calculates how much the parties to certain derivatives owe each other.
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 gives the holder the right, but not the obligation, to purchase 100 shares of a particular underlying stock at a specified strike price on the option's expiration date.
The phrase call over is used to describe the exercising of a call option.
A call premium is the price of a call option. It is not the same as the strike price. 
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
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.
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.
"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.
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.
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.
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
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
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
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
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
A compound option is the opportunity to buy or sell an option.
A covered call is a call option that is sold against stock an investor already owns.
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.
A credit derivative is a financial instrument thats value is determined by the default risk of an underlying asset.
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 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.
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
A detachable warrant is a warrant that can be sold separately from the security to which it was originally attached.
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 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.
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
A European option is a type of put or call option that can be exercised only on its expiration date.
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.
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.
A forward contract is a private agreement between two parties 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.
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.
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 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.
Futures markets are places (exchanges) to buy and sell futures contracts. There are several futures exchanges. Common ones include The New York Mercantile Exchange, the Chicago Board of Trade, the Chicago
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. ISOs are also referred to as "incentive stock
Incentive stock option (ISO) is a type of company stock option granted exclusively to employees. It confers an income tax benefit when exercised. 
Introduced in 1981, index options are call or put options on a financial index comprising many stocks. 
An interest rate swap is a contractual agreement between two parties to exchange interest payments.
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.
The last trading day is the last time traders may trade a derivative contract before it expires.
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.
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
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
Mini-sized Dow options are leveraged option contracts that use the Dow Jones Industrial Average as the underlying asset.
A minimum price contract is a futures contract with a price floor.
A naked call is an options strategy in which an investor sells a call option unassociated with units of the underlying security.
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 put is a put option which is unaccompanied by the actual units of the underlying security specified in the contract.
A naked warrant is a warrant that is not attached to a bond or preferred stock.
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.
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.
Noncallable refers to a security that cannot be redeemed by the issuer prior to maturity.  Sometimes, it is referred to as non-redeemable.
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.
Notional principal amounts never change in an interest rate swap, and they are the core of the calculations involved in these transactions.
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
Odd dates are arbitrary maturity dates that do not necessarily correspond to the duration of the bond, option, futures contract, forward contract or other maturing instrument. Odd dates are also called
OEX is the ticker symbol of index options on the S&P 100, which trade on the Chicago Board Options Exchange (CBOE).
An offset is a transaction that cancels out the effects of another transaction.
An offsetting transaction is a transaction that cancels out the effects of another transaction.
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
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. 
An options contract is an agreement between a buyer and seller that gives the purchaser of the option the right to buy or sell a particular asset at a later date at an agreed upon price.  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
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
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
A price-based option is a derivative based on the price of an underlying debt security, usually a bond.
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.
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
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
A rainbow option is an option linked to two or more underlying assets.
A Russian option is a type of lookback option which does not have an expiration date.
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.
The strike price is the specified price at which an option contract can be exercised.
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
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
A synthetic collateralized debt obligation is a collateralized security which is backed by derivatives such as swaps and options contracts.
A synthetic futures contract comprises call options accompanied by put options in order to imitate the attributes of a futures contract.
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
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
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.
An underlying security is a security on which a derivative is based.
A vanilla option refers to a normal option with no special features, terms, or conditions.
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
Warrant coverage is an agreement to provide warrants to a shareholder.
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
An XPO is a perpetual option.
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.
In finance, a zero-sum game refers to trades or investments in which one investor gains when another investor loses.