Glossary 2 Flashcards
Acceptable Institution (AI)
An institution that completes a Letter of Undertaking when opening an option account rather than an Options Trading Agreement
All or none order (AON)
An order where the total number of shares or contracts must be executed at the same price at the same time; partial fills are not allowed
American-style option
An option that can be exercised at any time up to the expiration of the option
Approved participant
A firm that is allowed to trade on the Bourse de Montr?al
Arbitrage
Academic or pure arbitrage refers to the simultaneous purchase and sale of instruments that are perfect equivalents, hoping to take advantage of pricing discrepancies between them to earn a risk-free profit; most real world arbitrage is not pure and there is usually some element of risk involved
At-the-money
An option (both calls and puts) whose exercise price is the same as the market price of the underlying asset
Bear call spread
The simultaneous purchase of a call option and sale of a call option with a lower exercise price on the same underlying asset and with the same expiration for a net credit
Bear put spread
The simultaneous purchase of a put option and sale of a put option with a lower exercise price on the same underlying asset and with the same expiration for a net debit
Bearish strategy
Any strategy that has the opportunity to profit from a downward move in the price of the underlying asset
Beta
A measure of the responsiveness (sensitivity) of a security or portfolio to the market as a whole
Black-Scholes option pricing model
A pricing model developed by Fisher Black and Myron Scholes for European options that incorporates the following factors: time to expiration, price of the underlying, strike price, volatility of the underlying asset, and the risk-free rate of interest
The book
A facility where off-market limit orders are placed and subsequently executed when matched
Bucketing
Confirmation of a trade where no trade has actually been executed
Bull call spread
The simultaneous purchase of a call option and sale of a call option with a higher exercise price on the same underlying asset and with the same expiration for a net debit
Bull put spread
The simultaneous purchase of a put option and sale of a put option with a higher exercise price on the same underlying asset and with the same expiration for a net credit
Bullish strategy
Any strategy that offers the opportunity to profit from an upward move in the price of the underlying asset
Buy-in
An instruction issued by the receiving clearing member to CDCC because of non-delivery of the underlying interest by the deadline time on the exercise settlement date
Calculated theoretical opening (CTO) price
On the Bourse de Montr?al, the opening price of an option series that matches the greatest number of contracts based on orders in the book
calendar spread
see Time spread
Canadian Derivatives Clearing Corporation (CDCC)
The Canadian clearing corporation for options, futures, and futures options
Clearing corporation
A service organization established for the clearance, issuance, settlement and guarantee of exchange-traded derivatives
Closing transaction
An options transaction that offsets an existing position and eliminates any right or obligations conferred by the original position
Combination
The purchase or sale of both calls and puts having different strike prices and the same expiration dates (also known as a strangle)
Contingent order
Two or more orders that are related and are to be executed simultaneously
Conversion
A long underlying position combined with a short call and a long put
Covered call
A short call combined with: i) a corresponding quantity of the underlying interest, or ii) a security convertible into at least an equivalent quantity of the underlying interest, or iii) an equivalent number of calls on the same underlying interest with an expiration equal to or longer than that of the written call
Covered put
A short put combined with: i) a short position in an equivalent amount of the underlying interest, or ii) a long position in an equivalent number of puts on the same underlying interest with an expiration equal to or longer than that of the written put
Covered put sale
The simultaneous sale of a put option and the short sale of an equivalent number of the underlying security
Delta
The amount an option?s price is expected to change given a one-unit change in the price of the underlying interest
Delta hedging
Implementation of a delta neutral strategy
Delta neutral
A position where the sum of the individual components? deltas is zero
Diagonal spread
A long call (put) and short call (put) with different exercise prices and expiration dates
Discretionary account
see Simple discretionary account
European-style option
An option that can only be exercised at expiration
?Ex-? date
Trading without dividends or rights; with a three-day settlement period, the ?ex-? date is two days prior to the record date
Exercise limit
The limit imposed by an option exchange on the aggregate number of options of the same class that can be exercised by any one person, or group acting in concert, within a specified time frame
Expiration cycle
The designation by an exchange of specific expiration months for options on an underlying interest
Fill-or-kill order
An order that stipulates that as soon as that portion of the order which can be executed (if at all) is completed, any remaining portion of the order that is not fi lled is canceled
Floor broker
An employee of a member firm who accepts and executes client and firm account orders on some U.S. exchanges
Frontrunning
Trading ahead of a client?s order in the same or related security with full knowledge of the client?s trading instructions
Hidden quantity order
An order available on the Bourse de Montr?al that hides a certain quantity of the order and exposes it to the market in pieces as part of it is filled
In-the-money
Describes an option with intrinsic value; a call option where the strike price is below the market price of the underlying; a put option where the strike price is above the market price of the underlying
Know Your Client rule
Requires the IA to determine the suitability of each and every order he/she enters, whether it is solicited or not
LEAPS
Long-term Equity AnticiPation Securities; long-dated options initially listed with a time to expiration of up to three years
Legging
Transacting each side of a spread separately
Limit order
An order to buy or sell at a specific price (or better if available)
Loan value
Amount that can be used as collateral against money owing
Long combination
see Combination
Long straddle
see Straddle
Managed account
An account in which the investment portfolio of a client of a member firm is managed by the member, usually for a management fee or other consideration, through discretionary authority granted by the client on a continuing basis
Margin call
Calculated as the margin requirement less any cash or loan value in the account; issued by a member firm to a client to request additional margin to bring the account on side; can be met with a deposit of cash, fully-paid for securities, or any combination thereof
Margin requirement
The amount of margin required for specific positions or strategies or combinations thereof
Marginable spread
A legitimate spread for margin purposes; the short side of the spread expires on or before the long side of the spread
Market maker
An individual who is obliged to trade in specified option classes in order to maintain a fair, orderly and liquid market
Market order
An order to buy or sell a specified number of option contracts at the best available price
Market supervisor
An employee of the Bourse de Montr?al who monitors the day-to-day trading on SAM
Married put
A long position in an underlying interest combined with a long put
Matched trade
An option trade in which both the buyer and seller agree on the terms of the trade that has been accepted by the applicable clearing corporation
Montr?al Automated System (SAM)
see SAM
Non-professional trader
An investor whose options transactions are taxed as capital gains/losses; anyone who isn?t a professional trader
Opening transaction
Initiation of an options position whether long or short
Option class
All options of the same style (American or European) within the same maturity category (regular or long-term) on the same underlying interest and guaranteed by the same clearing corporation
Option series
Options of the same class and the same type, with the same exercise price and expiration date
Options Account Application Form
A form required to open an options account which provides the necessary personal and financial information for an IA to judge the suitability of options for a client, facilitates adherence to option regulations, helps make clients aware of industry rules, and clarifies their position with regards to option trading
Options Clearing Corporation (OCC)
Originally established in 1973 by the CBOE; now jointly owned by all U.S. options exchanges and is the clearing corporation for all equity, interest rate, currency and index options traded in the U.S.
Options Trading Agreement
A form required to open an options account which must be signed by the client; outlines the rights and obligations of the member firm and the client with regards to options transactions
Out-of-the-money
Describes an option with no intrinsic value; a call option where the strike price is above the market price of the underlying; a put option where the strike price is below the market price of the underlying
Position limit
For any option class, the maximum number of options on the same side of the market (long calls combined with short puts and long puts combined with short calls) that any one person, orgroup of persons acting in concert, can hold
Pre-arranged trading
Occurs when two market participants consult in advance and agree to make a certain trade at a certain price
Price spread
The purchase and sale of calls or puts with different strike prices and the same expiration
Professional trader
An investor whose options transactions are taxed as income; one who holds him/herself out to the public as a trader or dealer in securities, who uses special information not available to the public to realize trading profits, and whose conduct indicates the carrying on of a business
Protected short sale
The simultaneous purchase of a call option and the short sale of an equivalent number of the underlying security
Reporting level
For any option class, the maximum number of options on the same side of the market that any one person, or group of persons acting in concert, can hold before such a position must bereported to the applicable exchange
Request for quote (RFQ)
On the Bourse de Montr?al, a request made by a market participant to a market maker for a bid and offer quote for a large number of contracts
Reverse conversion
A short underlying position combined with a long call and a short put
Risk Disclosure Statement
A document, generally describing the risks and attributes of options trading, that is given to options clients when an options account is opened
SAM (syst?me automatis? de Montr?al/Montr?al Automated System)
The software and system components that make up the Bourse de Montr?al?s trading environment
Sell-out
An instruction issued by the delivering clearing member to CDCC because of non-receipt ofthe underlying interest by the receiving clearing member by the deadline time on the exercise settlement date
Short combination
see Combination
Short straddle
see Straddle
Simple discretionary account
Accounts opened as a matter of convenience and managed by a member on a temporary basis at the written request of a client
SPAN (Standard Portfolio ANalysis of risk)
Risk-based margining system developed in 1988 by the Chicago Mercantile Exchange
Spread
The purchase and sale of calls or puts; may be classified as price, time or diagonal spreads depending on the strike price and expiration of the individual components
Straddle
The purchase or sale of both calls and puts having the same strike price and the same expiration
Stop order
A market order to buy or sell that is triggered when the option trades at a certain price
Stop-limit order
A limit order to buy or sell that is triggered when the option trades at a certain price
Strangle
see Combination
Synthetic
A position that offers the same risk and reward profile (at maturity) or another position
Synthetic call
A long position in the underlying interest combined with a long put; the payoff of this position at maturity will replicate that of a long call
Synthetic put
A short position in the underlying interest combined with a long call; the payoff of this position at maturity will replicate that of a long put
Time spread
The purchase and sale of calls or puts having the same strike price but withdifferent expirations; also known as a calendar spread
TIMS (Theoretical Intermarket Margin System)
Risk-based margining system used by the OCC
