Glossary Part Two 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 Montréa
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.
Automatic exercise
The practice of automatically exercising options that are in-the-money by a specified amount at expiration.
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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.
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 Montréal, the opening price of an option series that matches the greatest number of contracts based on orders in the book.
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.
Designated Options Supervisor
Designated Supervisor approved by IIROC and qualified to have overall responsibility for the supervision of options trading at a firm.
Diagonal spread
A long call (put) and short call (put) with different exercise prices and expiration dates.
European-style option
An option that can only be exercised at expiration.
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 filled is canceled.
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 Montréal 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.
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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
mount that can be used as collateral against money owing.
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.
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 Montréal who monitors the day-to-day trading on SAM.
Married put
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.
National Best Bid-Offer (NBBO)
The highest bid and lowest offer for a particular option contract from among all U.S. exchanges that list the contract.
No-cancel stage
The last two minutes of the pre-opening stage. During the no-cancel stage, orders can be entered but orders cannot be cancelled or modified.
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, 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 delta
The total delta of a position or portfolio.
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, or group 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.
Pre-opening stage
During the pre-opening stage of the trading day, orders are entered but no trades are generated until the end of the stage, the opening.
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 long or short options that any one person, or group of persons acting in concert, can hold before such a position must be reported to the applicable exchange.
Request for quote (RFQ)
On the Bourse de Montréal, 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 (système automatisé de Montréal/Montréal Automated System)
The software and system components that make up the Bourse de Montréal’s trading environment.
Sell-out
An instruction issued by the delivering clearing member to CDCC because of non-receipt of the underlying interest by the receiving clearing member by the deadline time on the exercise settlement date.
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.
STANS (System for Theoretical Analysis and Numerical Simulations)
Risk-based margining system used by the OCC.
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.
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 with different expirations; also known as a calendar spread.
