A quadratic curve fit is made between the IV values and the strike prices for all the call options for a stock for a given expiration month. Likewise a curve fit is done for the puts. The option IV assigned for that option series fit is the constant coefficient of the polynomial. This constant coefficient is the point in the quadratic curve fit where the slope is zero and the option polynomial "smile" is at a minimum.
This option series IV is usually very close to the IV of the close price of the stock because the weights in the polynomial curve fit emphasize the At the Money (ATM)
strikes. This option series IV is referred to as the ATM IV in the Optionetics option trade ranker tool.
A strategy in which a trader sells a lower strike call and buys a higher strike call to create a trade with limited profit and limited risk.
A fall in the price of the underlying increases the value of the spread. Net credit transaction; Maximum loss = difference between the strike prices less credit;
Maximum gain = credit; requires margin.
A strategy in which a trader sells a lower strike put and buys a higher strike put to create a trade with limited profit and limited risk.
A fall in the price of the underlying increases the value of the spread. Net debit transaction; Maximum loss = d ifference between strike prices less the debit;
The bid (the highest price a buyer is prepared to pay for a trading asset) and the asked (the lowest price acceptable to a prospective seller of the same security)
together comprise a quotation, or quote.
The point at which gains equal losses.
The market price that a stock or future must reach for an option to avoid loss if exercised.
For a call, the break-even equals the strike price plus the premium paid.
For a put, the break-even equals the strike price minus the premium paid.
A strategy in which a trader buys a lower strike call and sells a higher strike call to create a trade with limited profit and limited risk.
A rise in the price of the underlying increases the value of the spread. Net debit transaction; Maximum loss = debit; Maximum gain = difference
between strike prices less the debit; no margin.
A strategy in which a trader sells a higher strike put and buys a lower strike put to create a trade with limited profit and limited risk.
A rise in the price of the underlying increases the value of the spread. Net credit transaction; Maximum loss = difference between strike prices less credit;
Maximum gain = credit; requires margin.
The sale (purchase) of two identical options, together with the purchase (sale) of one option with an immediately higher strike, and one option with an immediately
lower strike. All options must be the same type, have the same underlying and have the same expiration date.
Many options are spreads that have a buy option leg and a sell option leg. Buy IV is the implied volatility of the option leg with a buy component.
Sell IV is the implied volatility of the option leg with a sell component.
An option contract which gives the holder the right, but not the obligation, to buy a specified amount of an underlying security at a specified price within a
specified time in exchange for a paying a premium.
The sale or purchase of 2 options with consecutive exercise prices, together with the sale or purchase of 1 option with an immediately lower exercise
price and 1 option with an immediately higher exercise price.
A deep-in-the-money call option has a strike price well below the current price of the underlying instrument. A deep-in-the-money put option has a strike price
well above the current price of the underlying instrument. Both primarily consist of intrinsic value.
The stock price is randomly projected into the future using the stock's 20-day statistical (historical) volatility (SV) in the Optionetics option trade ranker tool.
The stock price projection stops at the expiration of the earlist expiring option leg. The stock price future statistical distribution at option expiration is
used to compute possible profits and losses. Expected Profit is the predicted profits minus the predicted losses expressed in total dollars.
An index is a group of stocks which can be traded as one portfolio, such as the NIFTY 50. Broad-based indexes cover a wide range of industries and companies and
narrow-based indexes cover stocks in one industry or economic sector.
Call options and put options on indexes of stocks are designed to reflect and fluctuate with market conditions. Index options allow investors to trade in a
specific industry group or market without having to buy all the stocks individually.
A "call" option is in-the-money if the strike price is less than the market price of the underlying security. A "put" option is in-the-money if the strike price is greater than the market price of the underlying security Intrinsic Value
The amount by which a market is in-the-money. Out-of-the-money options have no intrinsic value. Calls = underlying -strike price. Puts = strike price - underlying.
A deposit contributed by a customer as a percentage of the current market value of the securities held in a margin account is thus the margin amount.
This amount changes as the price of the investment changes.
At the end of each business day the open positions carried in an account held at a brokerage firm are credited or debited funds based on the settlement
price of the open positions that day. In this way, losses are never allowed to accumulate.
Buying or selling securities at the price given at the time the order reached the market. A market order is to be executed immediately at the best available price,
and is the only order that guarantees execution.
The moving average is probably the best known, and most versatile, technical indicator.
A mathematical procedure in which the sum of a value plus a selected number of previous values are divided by the total number of values.
Used to smooth or eliminate t he fluctuations in data and to assist in determining when to buy and sell.
A security that represents the right, but not the obligation, to buy or sell a specified amount of an underlying security (stock, bond, futures contract, etc.)
at a specified price within a specified time.
A call option is out-of-the-money if its exercise or strike price is above the current market price of the underlying security. A put option is out-of-the-money if its exercise or strike price is below the current market price of the underlying securi ty.
An option contract giving the owner the right, but not the obligation, to sell a specified amount of an underlying security at a specified price within a specified time. The put option buyer hopes the price of the shares will drop by a specific date w hile the put option seller (or writer) hopes that the price of the shares will rise, remain stable, or drop by an amount less than their profit on the premium by the specified date.
The sale of shares or futures that a seller does not currently own. The seller borrows them (usually from a broker) and sells them with the intent to replace what s/he has sold through later repurchase in the market at a lower price.
A position consisting of a long (short) call and a long (short) put where both options have the same underlying, the same expiration date, but different strike prices. Most strangles involve OTM options.
A measure of the amount by which an underlying is expected to fluctuate in a given period of time. Volatility is a primary determinant in the valuation of options premiums and time value. There are two basic kinds of volatility, implied and historical (statistical). Implied volatility is calculated by using an option pricing model (Black-Scholes for stocks and indices and Black for futures). Historical volatility is calculated by using the standard deviation of underlying asset price changes from close to close trading going back 5 to 20 days.
The theory that options that are deeply out-of-the-money tend to have higher implied volatility levels that at-the-money options. Volatility skew measures and accounts for the limitation found in most options pricing models and uses it to give the trader an edge in estimating an option's worth.