Risk Reversal Definition

[Risk Reversal Definition]

Risk reversal involves selling a call and buying a put with the same expiry date and the same strike price. This is used to hedge risk when prices are falling. Profit potential is reduced or eliminated when the asset price returns back to the strike price.

[Risk Graph Definition]

The risk graph is one of the tools that options traders can use to assess the inherent risk in a trade before they take the plunge.

[Rho Definition]

This is the dollar equivalent amount change in the price of an option for each 100 basis points change in the interest rates. Rho measures the sensitivity of an option to interest rate fluctuations.

[Reverse Conversion Definition]

Selling short involves borrowing the asset that is owned by another market participant and then selling it expensively, later hoping to buy it back cheaply to return to the owner and profit from the price differential. Reverse conversion therefore helps brokers make money by allowing them to borrow the stocks owned by their clients, carrying out short sales and then investing in interest yielding instruments, thus making money in 2 ways.

[Replacement Swap Definition]

Profit is earned on this trade from the interest earned on the money market instruments (usually in terms of interest on the sum), and from premiums on the long call, which is the hedge trade employed to protect the short position in the replacement swap trade.

[Reload Option Definition]

It is a stock for stock option used to compensate employees of companies. Since a new strike price is set when the reload option is exercised, employees can use the reload option to set a new strike price (usually lower) for their trades.

[Registered Options Trader Definition]

Even though a registered options trader can function as a market maker, they rarely perform this function. Their job is to make sure that the options market is orderly and that trading conditions are fair to all market participants.

[Rebate Barrier Option Definition]

A knockout option is seen when an option expires before its pre-set expiry, eg. When a Touch option strike price is reached before expiry. A partial rebate is paid to the seller of the option by the option holder.

[Ratio Spread Definition]

Investors who trade using this strategy, will derive more gains when purchases are made of options having a lower implied volatility than those he is selling.

[Ratio Call Write Definition]

The strategy for a ratio call write is to make oney by receiving premiums from the sale of the options contract, while hoping that the price of the underlying asset remains unchanged during the lifetime of the contract.

[Rainbow Option Definition]

In a rainbow option, there are two or more assets that are used in the option contract, which may or may not have different strike prices and expiry dates. However, the trader must choose a SINGLE direction for all assets , and all must move in that chosen direction for the trade to be a winner.

[Quantity-Adjusting Option - Quanto Option Definition]

By paying out returns in a currency different from the one in which the options contract was initiated, and fluctuations in the currency exchange rate is avoided.

[Put-Call Ratio Definition]

Some brokers in the binary options market put up put-call ratios on their websites as a means of showing traders who want to get into a position what the market bias on that asset is. It can be used as a predictor of trade outcome in the binary options/vanilla options market.

[Put-Call Parity Definition]

This means that calls and puts on an asset are equivalent, and that the implied volatility of the calls and puts on an options contract on an asset are identical. The portfolio of a long call or a short put ate therefore equivalent to a forward contract on the transaction.

[Putable Swap Definition]

Investors in swap deals that will be on the side paying the fixed payment usually choose putable swaps to benefit from the transaction. The floating rate players usually pay the higher interest rate.

[Putable Common Stock Definition]

These are stocks that the investor can sell to the original issuer at a price that is usually low and pre-determined.

[Put To Seller Definition]

Here, the seller has the right but not the obligation to exercise the option but at a higher price than what is obtainable in the market.

[Put Ratio Backspread Definition]

The long put and short put are usually traded in ratios of 2:1 or 3:1. The aim of the put ratio backspread strategy is to make money on falling prices. The profit is unlimited but the degree of loss is limited.

[Put Option Definition]

A trader buys a put option in order to make profit from falling prices in the options or binary options market.

[Put On A Put Definition]

This is a strategy to make money when the asset is expected to be moderately bullish. It is also used to acquire leverage.

[Put On A Call Definition]

This strategy is used when the asset is expected to be moderately bearish. It is a compound option and is also known as split-fee option.

[Put Calendar Definiton]

This is an option strategy that uses the differential rates of price decline. An investor who adopts this strategy has a chance of making money if the prices do not rise in the short term and thereafter, keeps on rising. Money is made on the spread differential in the premium decays

[Put Definition]

A put is used when the trader has an expectation that the asset price will end up lower than the price at the time the trade is executed.

[Protective Put Definition]

A protective put is also known as a covered put, because it is a hedge strategy to protect against any losses on the ownership of the original shares of the asset in the parent market. As the original share ownership loses value, the value of the protective put rises, offsetting any losses.

[Privilege Dealer Definition]

The gains or losses of privilege dealers are subject to a given set of rules and not necessarily to the same that hold for other traders. This is what makes them privileged.