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Market Wizard
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Everything posted by Igor

  1. In a cliquet option with a strike price of $1,200, if the option expires at $1,000, the trade will end out of the money. The cliquet option wil then ratchet the next strike price to automatically rest at the expiry price in the previous trade, which is $1000. If the trade then ends at $1,100, the trader gets a payout and the strike price is then reset to the trade expiry of $1,100 for the next trade.
  2. It is a variation of the ratio spread and is used when the trader believes the asset will make a mild bullish move, and the staggered nature of the short call strike prices prevents the trader from incurring a very large loss if the asset makes a remarkable move to the upside.
  3. Chooser Option refers to option contracts that can only be exercised on certain days. It offers flexibility to both the holder and writer.
  4. The CBOE was opened in 1973 and is located in Chicago. Presently more than one billion options contracts are traded on the CBOE annually.
  5. Due to the fact that the Delta is an estimate of the intrinsic value of an option, the Charm is especially useful for measuring the decay of an option when it is close to expiration, since the chance of an option that is out of the money expiring in the money drastically decreases as the option draws closer to expiry.
  6. A chameleon option gives investors the ability to meet varying investment expectations with a single contract instead of purchasing multiple contracts.
  7. By straddling the asset's market price, the long straddle is an option trade type that is used to benefit from up or down movements of the asset. So whether the asset price rises or falls, the long straddle is a winner. Used when the trader is sure that the asset will move in a direction, but is unsure of which direction.
  8. In trades were traders either receive or pay premiums on trades, it is necessary to know which of the trades initiated involves long trades. These are the long legs of the trades.
  9. The long jelly roll is an options trade that aims to profit from a time value spread through the sale and purchase of two call and two put options, each with different expiration dates.
  10. Lock-up options are usually priced in such a way as to deter unwanted buyers and attract only the buyers that the option owners want to sell to.
  11. Some options are usually not listed on an exchange, and that is why the listed options serve to distinguish listed assets from unlisted ones.
  12. When the interest rates payable are those of the day on which they are to be paid, it would potentially benefit investors who want to pay lower interest rates. In this case, if interest rates are falling, then the LIBOR in-arrears swap would be favourable to such investors.
  13. In trading, a trader can potentially increase the size of leveraged positions in order to benefit maximally from trade opportunities that present themselves. However, leverage build-up is a double-edged sword which can be potentially damaging if the trades that present extra leverage do not go in the trader's direction.
  14. A leg is used to describe a component of an option trade where that option trade requires more than one setup. An example of an option trade with legs is a straddle. A straddle has two trade components or legs, one above and the second below the market price.
  15. This model is most suitable for the pricing of employee stock options.
  16. An example of a lapse is the termination of an insurance contract due to failure to pay premiums by the insured party. For an options trade, the contract lapses when the asset reaches maturity, at which time the holder of that option can no longer hold the right to buy or sell the asset.
  17. This is one of the measures of implied volatility and price influences on options positions known as the "Greeks".
  18. In the ladder option, the full payout is not hinged on one outcome or one strike price. Rather, the payout is broken up and attached to several strike prices, such that the attainment of a strike delivers some degree of payout. This ensures that the trader is guaranteed some measure of profit if even one of the pre-set strike prices is achieved.
  19. This option is programmed to expire worthless when a particular price level is reached, usually in favour of the trader. There are options which will be of benefit to a trader if they expire worthless (for instance if a premium was collected on trade execution). Knock-out options have a limited profit potential.
  20. A knock-in option stays latent until when the price has exceeded or reached a pre-determined price level. Then the option now begins to function as a true option. If that price is never reached, then the knock-in option is never activated.
  21. Kappa is yet another of the measures of implied volatility known as the Greeks.
  22. "The iron condor is an option type with limited profit or loss potential. This strategy is mainly used when a trader has a neutral outlook on the movement of the underlying security i.e. the trader expects the asset to stay range-bound for the duration of the trade.
  23. The two options located at the middle strike create a long or short straddle depending on whether the options is being bought or written. The "wings" of the butterfly (the options above and below the middle strike) are created by the purchase or sale of a strangle. This strategy is used to protect the trader's position against dramatic rises and falls in price.
  24. The interest rate option is an options contract in which a fixed rate of interest is paid at a specified price and future date. They are also called debt options or fixed income options.
  25. This type of options can be used in periodic payment situations or balloon payment situations.
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