An accordion feature is an option a company can obtain, giving it the right to increase a line of credit with a creditor.

An accordion feature is an option that a company can buy that gives it the right to increase its line of credit (or similar type of liability) with a lender. An accordion feature in a line of credit allows a business to increase that line of credit if necessary, often to obtain more working capital or emergency cash. Loan terms with an accordion feature are well suited for situations where a business shows great potential for accelerated growth, while at the same time there are indications of risks from uncertainty due to factors for which the business has no control. An accordion feature is an option that a company can buy that gives it the right to increase its line of credit (or similar type of liability) with a lender. A lender is able to somewhat mitigate the risk of the noted uncertainty by increasing a line of credit incrementally, with each increment made contingent on the future realization by the business of specific predetermined expectations, and an increased certainty of the aforementioned uncontrollable factors.

Accordion Feature

An asset-or-nothing call option is a derivative security for which there is no payoff unless the underlying asset's price exceeds the strike price.

An asset-or-nothing call is a type of digital option whose payout is fixed after the underlying asset exceeds the predetermined threshold or strike price. An asset-or-nothing call is a type of digital option whose payout is fixed after the underlying asset exceeds the predetermined threshold or strike price. An asset-or-nothing call is a type of digital option whose payout is fixed after the underlying asset exceeds the predetermined threshold or strike price. Although all digital options (sometimes referred to as binary options) may sound simple, they differ from standardized options for most securities and may be traded on unregulated platforms. American style digital options automatically exercise the moment they get ITM, unlike American style standard options.

Asset-Or-Nothing Call Option

An asset swapped convertible option transaction (ASCOT) is the use of an option to strip the equity conversion portion away from a convertible bond. 

An asset swapped convertible option transaction (ASCOT) is a structured investment strategy in which an option on a convertible bond is used to separate a convertible bond into its two components: a fixed income piece and an equity piece. An asset swapped convertible option transaction (ASCOT) is a structured investment strategy in which an option on a convertible bond is used to separate a convertible bond into its two components: a fixed income piece and an equity piece. The investment bank structures the ASCOT by writing a call option on the convertible portion of the bond and selling it back to the convertible bond trader. An asset swapped convertible option transaction, or ASCOT, is a way to separate the fixed-income and equity components from a convertible bond. An asset swapped convertible option transaction is done by writing (selling) an American option on the convertible bond.

Asset Swapped Convertible Option Transaction (ASCOT)

An Asian tail is an option that pays out based on the average price of the underlying in the last several days or weeks of the contract's life.

An Asian tail is an Asian option that bases its payout on the average price of the underlying in the last several days or weeks of the contract's life—usually the last ten to twenty days. An Asian option, also known as an average price option, pays the option holder the average price of the underlying security's price movement even if the call option trades above, or the put option trades below, the pre-established strike price. An Asian tail is an Asian option that bases its payout on the average price of the underlying in the last several days or weeks of the contract's life—usually the last ten to twenty days. The length and timespan of the Asian tail are negotiated and established at the beginning of the options contract, although conventionally the last ten to twenty days of an option's life is when the Asian tail kicks in. An Asian tail is an option that pays out based on the average price of the underlying, but only based on the last several days or weeks of the contract's life.

Asian Tail

The asymmetric volatility phenomenon (AVP) is the observed tendency of equity market volatility to be higher in declining markets than in rising markets.  

The asymmetric volatility phenomenon (AVP) is the observed tendency of equity market volatility to be higher in declining markets than in rising markets. Other explanations come from the field of behavioral finance, like behavioral feedback loops in which certain behavior incites more of the same behavior and panic selling.
AVP is considered to be a market anomaly since if markets were efficient and market participants rational actors, volatility should not be affected by whether prices moves are to the upside or the downside. The asymmetric volatility phenomenon (AVP) is the observed tendency of equity market volatility to be higher in declining markets than in rising markets. The asymmetric volatility phenomenon (AVP) is the observance that volatility increases more when prices fall than when prices rise by a similar amount. Options markets recognize this fact, and incorporate higher implied volatility (IV) levels for downside strikes, making a 10% downsize option relatively more expensive than a 10% upside option.

Asymmetric Volatility Phenomenon (AVP)

An average rate option (ARO) is a financial product that is used to hedge against the risk of adverse foreign currency fluctuations.

An average rate option (ARO) is a currency exchange derivative product that is used by traders who seek to hedge against fluctuations in exchange rates. The process of trading in average rate options begins with a buyer and seller committing to foreign exchange currency options at a set strike price on a set schedule. If the average is lower than the strike, the manufacturer will exercise the option and the issuer will pay the manufacturer the difference between the strike price and average price. The strike price for average rate options is set at the time of the option's expiration by averaging spot rates over the life of the option. Institutional investors also have the capability to develop and orchestrate average rate options through detailed contracts and provisions that protect them from replacement risk.
Replacement or recovery risks can be a significant factor with these options since they are not regulated and supported by regulatory authorities such as the Options Clearing Corporation (OCC) or the Commodity Futures Trading Commission (CFTC).

Average Rate Option (ARO)

The back fee is the premium paid for the second option in a compound option, or the premium paid to extend certain exotic options.

A back fee is a payment made to the writer of a compound option when and if the first option is exercised. A compound option is an option contract to buy another option where the premium on the second option, known as the back fee, is due only when the first option is exercised. The exercising of the first option means the trader is now the holder of the second option—and the first option no longer exists—which requires a premium to be paid since the trader now owns a different option. Since a compound option is an option contract to buy another option, only the premium on the first option is paid upfront. For example, a trader may buy a call option on a call option, allowing them to gain possible exposure to the underlying asset at a cheaper price rather than buying a vanilla call option outright.

Back Fee

A bear put spread involves the simultaneous purchase and sale of puts on the same asset at the same expiration date but at different strike prices, and it carries less risk than outright short-selling.

A bear put spread is a type of options strategy where an investor or trader expects a moderate-to-large decline in the price of a security or asset and wants to reduce the cost of holding the option trade. Pros
Less risky than simple short-selling
Works well in modestly declining markets
Limits losses to the net amount paid for the options
Risk of early assignment
Risky if asset climbs dramatically
Limits profits to difference in strike prices
With the example above, the profit from the bear put spread maxes out if the underlying security closes at $30, the lower strike price, at expiration. An options trader can use a bear put spread by purchasing one put option contract with a strike price of $35 for a cost of $475 ($4.75 x 100 shares/contract) and selling one put option contract with a strike price of $30 for $175 ($1.75 x 100 shares/contract). A bear put spread is a type of options strategy where an investor or trader expects a moderate-to-large decline in the price of a security or asset and wants to reduce the cost of holding the option trade. Selling the put option with the lower strike price helps offset the cost of purchasing the put option with the higher strike price.

Bear Put Spread

A bear spread is an options strategy implemented by an investor who is mildly bearish and wants to maximize profit while minimizing losses.

Table of Contents
What Is a Bear Spread?
Understanding Bear Spreads
Bear Put Spread Example
Bear Call Spread Example There are two types of bear spreads that a trader can initiate—a bear put spread and a bear call spread.
The strategy involves the simultaneous purchase and sale of either puts or calls for the same underlying contract with the same expiration date but at different strike prices. A bear put spread involves simultaneously buying one put, so as to profit from the expected decline in the underlying security, and selling (writing) another put with the same expiry but at a lower strike price to generate revenue to offset the cost of buying the first put. There are two main types of bear spreads that a trader can initiate: a bear put spread and a bear call spread. A bear spread is a bearish options strategy used when an investor expects a moderate decline in the price of the underlying asset.

Bear Spread

A Bermuda option is a type of exotic contract that can only be exercised on predetermined dates.

Table of Contents
What Is a Bermuda Option? A spin on American-style options, which permit holders to exercise early at any time, Bermudian options allow investors to buy or sell a security or underlying asset at a preset price on a set of specific dates as well as the option's expiration date. The premium (price) on a Bermuda option will often be higher than a European option with the same terms, and lower than an American option due to its limitations on early exercise. So, if an investor's call option's strike price is lower than the underlying stock's market price on the first of the month, the investor can exercise and buy shares for the lower strike price. Conversely, if the investor's put option strike price is higher than the market price of the stock, the investor can sell at the strike and pick up the shares at the lower market price.

Bermuda Option

A Bermuda swaption is an option on an interest rate swap with a predefined schedule of potential exercise dates instead of just one date.

A Bermuda swaption is a variation of a regular ("vanilla") swaption that gives the holder the right, but not the obligation, to enter into an interest rate swap on any one of many predetermined dates. European swaptions and Bermuda swaptions are typically less expensive than American swaptions because of the larger premium that American swaptions demand from their flexibility. With an American swaption, there's a greater chance that the swaption hits its strike price when the holder can exercise it at any time, which makes it more expensive and more likely to be exercised. It is a derivative that gives the holder the ability to only exercise the swaption on any one of these dates, provided it has not already been exercised.
This swaption is similar to a Bermuda option, in that it includes a predetermined schedule of potential exercise dates. Unlike American and European swaptions, Bermuda swaptions give writers and buyers the ability to create and purchase a hybrid contract. A Bermuda Swaption is a kind of option on an interest rate swap that can only be exercised on predetermined dates—often on one day each month.

Bermuda Swaption

The Bjerksund-Stensland model is a closed-form option pricing model used to calculate the price of an American option.

The Bjerksund-Stensland model is a closed-form option pricing model used to calculate the price of an American option. The Bjerksund-Stensland model competes with the Black-Scholes model, though the Black-Scholes model is specifically designed to price European options. The Bjerksund-Stensland model was developed in 1993 by Norwegians Petter Bjerksund and Gunnar Stensland and is used by investors to generate an estimate for the best time to execute an American option—financial derivatives that give buyers the right, but not the obligation, to buy (calls) or sell (puts) an underlying asset at an agreed-upon price and date. The Bjerksund-Stensland model is a closed-form option pricing model used to calculate the price of an American option. The Bjerksund-Stensland model is a closed-form option pricing model used to calculate the price of an American option.

Bjerksund-Stensland Model

Black's Model, or the Black 76 model, is a variation of the popular Black-Scholes options pricing model that allows for the valuation of options on futures contracts.

Black's Model, sometimes called Black-76, is an adjustment of his earlier and more famous Black-Scholes options pricing model. One of the key differences between his 1976 model and the Black-Scholes model (which assumes a known risk-free interest rate, options that can only be exercised at maturity, no commissions and that volatility is held constant), is that his revised model uses forward prices to model the value of a futures option at maturity versus the spot prices Black-Scholes used. He also postulated the total long interest in any commodity contract must equal the total short interest.
Black's model also can apply to other financial instruments typically used by financial institutions such as global banks, mutual funds, and hedge funds: namely interest rate derivatives, caps, and floors (which are designed to offer protection from big swings in interest rates), as well as bond options and swaptions (financial instruments that combine an interest rate swap and an option, they can be used to hedge against interest rate risk and to preserve financing flexibility). In 1976, American economist Fischer Black, one of the co-developers along with Myron Scholes and Robert Merton of the Black-Scholes model for options pricing (which was introduced in 1973), demonstrated how the Black-Scholes model could be modified in order to value European call or put options on futures contracts. Black's Model, also known as the Black 76 Model, is a versatile derivatives pricing model for valuing assets such as options on futures and capped variable rate debt securities.

Black's Model

A bookout refers to closing out an open position in an over-the-counter derivative before it matures.

FASB Accounting Rules and Implications for Natural Gas Purchase Agreements

A bookout, sometimes spelled out as book out or book-out, is the closing out of an open position in a swap contract or other over-the-counter (OTC) derivative before it matures. Bookouts can be done by taking an offsetting position in another contract, paying the other party the market value of the agreement, or by taking a long or short position to cover the contracted amount. The party can take an offsetting position in another contract, pay the opposite party the market value of the agreement, or take a long or short position to cover the contracted amount. Bookouts on a short position are done by taking a long position, while long positions are booked out by taking a short position. A bookout, sometimes spelled out as book out or book-out, is the closing out of an open position in a swap contract or other over-the-counter (OTC) derivative before it matures.

Bookout

A bull put spread is an income-generating options strategy that is used when the investor expects a moderate rise in the price of the underlying asset.

A bull put spread is an options strategy that an investor uses when they expect a moderate rise in the price of the underlying asset. If the stock trades above the strike at expiry, the put option expires worthless, because no one would sell the stock at a strike lower than the market price. In other words, the net credit received initially is the maximum profit, which only happens if the stock's price closes above the higher strike price at expiry. The strategy has limited profit potential and misses out on future gains if the stock price rises above the upper strike price.
Let's say an investor is bullish on Apple (AAPL) over the next month. The strategy pays a credit initially and uses two put options to form a range consisting of a high strike price and a low strike price.

Bull Put Spread

A bull vertical spread requires the simultaneous purchase and sale of options with different strike prices, but of the same class and expiration date.

A bull vertical spread requires the simultaneous purchase and sale of options with different strike prices, but of the same class and expiration date. Of the two types of bull vertical spreads, the bull call vertical spread includes buying an in-the-money call and selling an out-of-the-money call. A call vertical bull spread involves buying and selling call options, while a put spread involves buying and selling puts. For a bull put vertical spread, the investor will receive income from the transaction, which is the premium from selling the higher strike put less the cost of buying the lower strike put option. Bull vertical spreads come in two types: bull call spreads, which use call options, and bull put spreads, which use put options.

Bull Vertical Spread

Buying a spread is an options strategy involving buying and selling options on the same underlying and expiration but different strikes for a net debit.

Buying a spread refers to the act of initiating an options strategy involving buying a particular option and selling a similar, less expensive option in a single transaction. Buy orders usually imply that the trader pays money to buy the spread (also known as a debit spread) and hopes to sell the spread when the spread is worth more than was originally paid for it. Initiating sell orders usually imply that the trader collects money to sell the spread (also known as a credit spread) and hopes to keep some or all of that money as the spread loses value or expires worthless. Options spreads where one contract is purchased with a strike that is at the money, and another contract is simultaneously purchased two or more strikes out of the money, are common amount debit spread traders. Bear put spreads involve purchasing put options at a specific strike price while also selling or writing the same number of puts on the same asset and same expiration date but at a lower strike price.

Buy A Spread

A call on a call is a type of compound option that gives the holder the right to buy a different plain vanilla call option on the same underlying security.

A call on a call (CoC, or CaCall) is a type of exotic option that gives the holder the right to buy a call option on the same underlying. For example, if the compound call holder finds the price of the underlying call option to be beneficial to their investment plans, they may exercise the first leg of the option to obtain the plain vanilla option with a future expiration date. With a call on a call option, the holder has a secondary call option which gives them the right but not the obligation to buy a plain vanilla call option with specified terms at a specified price. A call on a call option is an exotic option that gives the holder the right to purchase a plain vanilla option before the contract expires. If the compound option holder chooses to only execute the first leg of the contract, then they will receive the plain vanilla call option at its specified expiration and exercise price for future enactment.

Call on a Call

A call on a put refers to a compound option where there is a call option on an underlying put option.

A call on a put refers to a trading setup where there is a call option on an underlying put option, and it is one of the four types of compound options. If the option owner exercises the call option, they receive a put option, which is an option that gives the owner the right but not the obligation to sell a specific asset at a set price within a defined time period. The initial premium is paid up front for the call option, and the additional premium is only paid if the call option is exercised and the option owner receives the put option. If it has won the project contract, is in a winning position, and still desires to hedge its currency risk, it can exercise the call option and obtain the put option on 10 million euros. The premium, in this case, would generally be higher than if the option owner had only purchased the underlying put option, to begin with.

Call on a Put

A call swaption is a position on an interest rate swap that gives the holder the right to pay a floating rate of interest and receive a fixed rate of interest from the swap counterparty. 

A call swaption, or call swap option, gives the holder the right, but not the obligation, to enter into a swap agreement as the floating rate payer and fixed rate receiver. In order to capitalize or hedge this possibility, the put swaption holder is willing to pay the fixed rate for the chance to profit from the fixed rate differential as the floating rate increases. A call swaption, or call swap option, gives the holder the right, but not the obligation, to enter into a swap agreement as the floating rate payer and fixed rate receiver. Thus, the receiver swaption can now plan to pay a floating rate on their balance sheet debt and receive the fixed rate from the put swaption position. These constructs allow call swaption buyers to take advantage of floating rate payments in markets with falling interest rates, and gives put swaption buyers the insurance against such markets.

Call Swaption

The call ratio backspread uses long and short call options in various ratios in order to take on a bullish position.

A call ratio backspread is an options spreading strategy that bullish investors use if they believe the underlying security or stock will rise by a significant amount while limiting losses. In the above example, the stock price has to move high enough whereby you make enough money on the two at-the-money call options combined with the initial credit to more than offset any loss from the one in-the-money option that you initially sold.
Let's say in the example; the stock moved to $26 by expiry.
You would earn $6 on the two call options for a total of $1,200 (200 multiplied by $6). Using the example above, the investor would want the stock price to rise from $15 to well above the $17 (the strike price for the call options) and earn enough to more than pay for any premium for purchasing the call options.
Call ratio back spread strategies are designed to benefit from increases in market volatility. The put ratio spread is similar to call ratio spread, but instead of buying two or more call options and selling one call option to finance the strategy, you would buy several put options and sell one put option to help finance the purchase of the two puts. A call ratio backspread is a bullish options strategy that involves buying calls and then selling calls of different strike price but same expiration, using a ratio of 1:2, 1:3, or 2:3.

Call Ratio Backspread

A caplet is a European-style call option used by traders who want to hedge against higher interest rates.

A caplet is a kind of call option based on interest rates. For example, if a company issues a bond with a variable rate of interest to take advantage of a short-term drop in rates, they run the risk of greater payouts if interest rates begin to increase and continue to do so. If LIBOR rises to 7% by the interest payment date and the investor is paying quarterly interest on a principal amount of $1,000,000, then the caplet will pay off $2,500. The typical use of a caplet is to limit the costs of rising interest rates for those corporations or governments that must pay a floating rate of interest on bonds they have issued. If a trader buys a caplet they would be paid if LIBOR rose above their strike price; they would receive nothing if LIBOR fell below their strike price, so it acts as an insurance against rising rates.

Caplet

Capping is the practice of selling large amounts of a commodity or security close to the option's expiry date to prevent a rise in market price.

Code of Ethics and Standards of Professional Conduct

Capping is the practice of selling large amounts of a commodity or security close to the expiration date of its options to prevent a rise in the underlying's price. If the underlying's price is beneath the strike price, the option is worthless and the call buyer's option has no value at expiry. Therefore, they may try to keep the price of the underlying below the strike price by selling the underlying to add more supply and keep the price down. Pegging is the opposite of capping, where the underlying is bought in an attempt to keep the underlying's price above the option's strike price. The call option buyer, on the other hand, wants the price to rise above the strike price, as that will give the option intrinsic value.

Capping

Charm is the rate at which the delta of an option or warrant will change over time.

Charm, or delta decay, is the rate at which the delta of an option or warrant changes with respect to time. Since charm makes the option delta tend toward zero over time for OTM options, the call delta falls over time and the put delta rises toward zero. Gamma, for instance, measures an option's delta change as the underlying price moves—so if an option originally has +0.50 delta and the underlying moves up by a dollar, if it had a gamma of .10, then the new delta is +0.40. As another example, say a trader places a delta-hedged call option on Friday with a charm of 1 and 15% delta; they are short 15 lots of the spot product for every 100 calls they own. Charm, or delta decay, measures the change in an option's delta as time passes, all else being equal.

Charm (Delta Decay)

A Chinese hedge is a position that looks to capitalize on mispriced conversion factors while protecting investors from risk.

A Chinese hedge is a tactical position that seeks to capitalize on mispriced conversion factors while protecting investors from risk. This would be the opposite of executing a set-up hedge, which is a convertible arbitrage strategy that involves a long position in a convertible security and shorting its underlying stock. A Chinese hedge is a strategy that involves the simultaneous selling of a convertible security, usually a convertible bond, along with buying the underlying issuer's shares. It involves establishing a short position in a convertible security and a long position in the convertible's underlying asset. A Chinese hedge is a lower-risk strategy since price changes in one position offset the other; however, shorting a convertible bond may come with its own unique set of risks.

Chinese Hedge

A chooser option allows the holder to decide whether it is a call or put after buying the option. It provides greater flexibility than a vanilla option.

A chooser option is an option contract that allows the holder to decide whether it is to be a call or put prior to the expiration date. If the holder chooses to exercise the option as a call option then the payoff is **underlying price - strike price - premium**_._ If the holder chooses to exercise their option as a put option then the payoff is **strike price – underlying price - premium**. The chooser option allows them to exercise the option as a call if the price of BAC rises, or as a put if the price falls. A chooser option is an option contract that allows the holder to decide whether it is to be a call or put prior to the expiration date.

Chooser Option

A Christmas tree is a complex options trading strategy achieved by buying and selling six call options with different strikes for a neutral to bullish forecast. 

A Christmas tree is an options trading spread strategy achieved by buying and selling six call (or six put) options with different strikes but the same expiration dates for a neutral to bullish forecast. Buy 1 put strike price 50.00
Sell 3 puts strike price 46.00
Buy 2 puts strike price 44.00
Maximum profit is at an underlying asset price of 48.00 at expiration. Sell 1 put strike price 50.00
Buy 3 puts strike price 46.00
Sell 2 puts strike price 44.00
The maximum profit is the net credit received. For example, with the underlying asset at $50.00:
Buy 1 call strike price 50.00
Sell 3 calls strike price 54.00
Buy 2 calls strike price 56.00 However, a larger move higher may also result in profit
Sell 1 call strike price 50.00
Buy 3 calls strike price 54.00
Sell 2 calls strike price 56.00

Christmas Tree Options Strategy

A cliquet is a series of at-the-money options, either puts or calls, where each successive option becomes active when the previous one expires.

A cliquet, also called a "ratchet option," is a series of at-the-money (ATM) options, either puts or calls, where each successive option becomes active when the previous one expires. An Asian option is an option type where the payoff depends on the average price of the underlying asset over a certain period of time, as opposed to standard options (American and European), where the payoff depends on the price of the underlying asset at a specific point in time (maturity). If at the first settlement date the underlying security trades below the strike price of the option (for a call), then it expires worthless and resets to the price of the underlying security at the time of settlement. A cliquet is cash-settled, exotic option type that settles at predetermined dates and then resets its strike price based on the price of the underlying security at the time of settlement. Each forward start option represents the advance purchase of a put, or call, option with an at-the-money (ATM) strike price to be determined at a later date, typically when the option becomes active.

Cliquet

A collar, commonly known as a hedge wrapper, is an options strategy implemented to protect against large losses, but it also limits large gains.

A collar, also known as a hedge wrapper or risk-reversal, is an options strategy implemented to protect against large losses, but it also limits large gains. Maximum Profit = (Call option strike price - Net of Put / Call premiums) - Stock purchase price
Maximum Loss = Stock purchase price - (Put option strike price - Net of Put / Call premiums)
Assume an investor is long 1,000 shares of stock ABC at a price of $80 per share, and the stock is currently trading at $87 per share. The maximum profit of a collar is equivalent to the call option's strike price less the underlying stock's purchase price per share. An investor's best-case scenario is when the underlying stock price is equal to the strike price of the written call option at expiry. An investor's best-case scenario is when the underlying stock price is equal to the strike price of the written call option at expiry.

Collar

The commodity-product spread measures the difference between the price of a raw material and the price of a finished good using that raw material.

The commodity-product spread is the difference between the price of a raw material commodity and the price of a finished product created from that commodity. The commodity-product spread is the difference between the price of a raw material commodity and the price of a finished product created from that commodity. A commodity-product spread is the price difference between a raw material commodity and the price of a finished product made from that commodity. Three types of commodity-product spread strategies are the crack spread, the crush spread, and the spark spread. Typically, traders will create the spread by selling futures in the raw commodity while simultaneously buying futures in the finished product made from the commodity.

Commodity-Product Spread

A compound option is an option for which the underlying asset is another option, thus two strike prices and two exercise dates.

A compound option is an option for which its underlying security is another option. When the holder exercises a compound call option, called the overlying option, they must then pay the seller of the underlying option a premium based on the strike price of the compound option. Each pair has an abbreviation:
Call on a put - CoP (CaPut)
Call on a call - CoC (CaCall)
Put on a put - PoP
Put on a call - PoC
Compound options may be known as split-fee options.
A compound option is an option to receive another option as the underlying security. The compound option gives the investor some exposure to the put option now, but without the cost of paying for a long-term put option right now. A compound option is an option for which its underlying security is another option.

Compound Option

A condor spread is a non-directional options strategy that limits both gains and losses while seeking to profit from either low or high volatility.

A condor spread is a non-directional options strategy that limits both gains and losses while seeking to profit from either low or high volatility. [Condor Spread 1](data:image/gif;charset=utf-8;base64,R0lGODlhCgAGAPEAAEREReXf1url3ERERSwAAAAACgAGAEEIFQAFCBxIsKDBgQAOKlwoIIDDhxADAgA7)
Image by Julie Bang © Investopedia 2020
Buy a call with strike price A (the lowest strike):
Sell a call with strike price B (the second lowest):
Sell a call with strike price C (the second highest)
Buy a call with strike price D (the highest strike) Sell a put with strike price A (the lowest strike)
Buy a put with strike price B (the second lowest)
Buy a put with strike price C (the second highest)
Sell a put with strike price D (the highest strike) Buy a put with strike price A
Sell a put with strike price B
Sell a put with strike price C
Buy a put with strike price D Sell a call with strike price A (the lowest strike)
Buy a call with strike price B (the second lowest)

Condor Spread

Conversion arbitrage is an options trading strategy employed to exploit the inefficiencies that exist in the pricing of options.

Conversion arbitrage is an options trading strategy employed to exploit perceived inefficiencies that may exist in the pricing of certain options. Conversion arbitrage in options is an arbitrage strategy that can be undertaken for the chance of a riskless profit when options are either theoretically overpriced or underpriced relative to each other and the underlying stock—as determined by the trader's pricing model. The short stock position carries a negative 100 delta, while the synthetic long stock position using options has a positive 100 delta, making the strategy delta neutral, or insensitive to the direction of the market. Conversion arbitrage is considered to be a risk-neutral strategy, whereby a trader buys a put and writes a covered call (on a stock that the trader already owns) with identical strike prices and expiration dates. To implement the strategy, the trader will sell short the underlying stock and simultaneously offset that trade with an equivalent synthetic long stock position (long call + short put).

Conversion Arbitrage

A covered bear is a trading strategy in which a short sale is made on a long position involving stock the investor owns. 

A covered bear is a trading strategy in which a short sale is made against a long position, but without closing out the existing long position. However, selling short shares you own and not closing out the existing long position, or selling short against the box is also a tax avoidance technique used by traders when they do not actually want to close out their long position on a stock. An example of a covered bear could be a bear spread, which is an options strategy that gains in value as the underlying asset drops, involving the simultaneous purchase and sale of either puts or calls for the same underlying contract with the same expiration date but at different strike prices. A covered bear is a trading strategy in which a short sale is made against a long position, but without closing out the existing long position. A covered bear is a covered strategy where the investor shorts a stock that they already own.

Covered Bear

A covered straddle is an option strategy that seeks to profit from bullish price movements by writing puts and calls on a stock that is owned by the investor. 

A covered straddle is an option strategy that seeks to profit from bullish price movements by writing puts and calls on a stock that is also owned by the investor. Similar to a covered call, where an investor sells upside calls while owning the underlying asset, in the covered straddle the investor will simultaneously sell an equal number of puts at the same strike. As in any covered strategy, the covered straddle strategy involves the ownership of an underlying security for which options are being traded. A covered straddle is an options strategy involving a short straddle (selling a call and put in the same strike) while owning the underlying asset. While gains with the covered straddle strategy are limited, large losses can result if the underlying stock tumbles to levels well below the strike price at option expiration.

Covered Straddle

A credit spread option is a financial derivative contract that transfers credit risk from one party to another. 

In the financial world, a credit spread option (also known as a "credit spread") is an options contract that includes the purchase of one option and the sale of a second similar option with a different strike price. 1:19
The buyer of a credit spread option can receive cash flows if the credit spread between two specific benchmarks widens or narrows, depending upon the way the option is written. The buyer of the credit spread option (call) assumes all or a portion of the risk of default and will pay the option seller if the spread between the company's debt and a benchmark level (such as LIBOR) grows. A credit spread option is a type of strategy involving the purchase of one option and the sale of a second option. In this scenario, there is a risk that the particular credit will increase, causing the spread to widen, which then reduces the price of the credit.

Credit Spread Option

A down-and-in option is a type of knock-in barrier option that becomes active when the price of the underlying security falls to a specific price level.

A down-and-in option is a type of knock-in barrier option that only becomes viable when the price of the underlying security falls to a specific price level, called the barrier price. If the price reaches the barrier, the option becomes active and acts like any other option by giving the holder the right but not the obligation to exercise their call or put option at the strike price on or before the expiration date specified in the contract.
Considered an exotic option, a down-and-in option is one of two types of knock-in barrier options, the other being an up-and-in option. A down-and-in option is a type of knock-in barrier option that only becomes viable when the price of the underlying security falls to a specific price level, called the barrier price. A barrier option is a type of option where the payoff and the option's very existence depend on whether or not the underlying asset reaches a predetermined price. The critical concept is if the underlying asset reaches the barrier at any time during the option's life, the option is knocked in, or brought into active existence, and will remain that way until expiration.

Down-and-In Option

A down-and-out option is a type of knock-out barrier option that expires when the price of the underlying security falls to a specific price level.

A down-and-out option is a type of exotic option known as a barrier option. A barrier option is a type of option where the payoff and the very existence of the option depend on whether or not the underlying asset reaches a predetermined price. Considered an exotic option, a down-and-out option is one of two types of knock-out barrier options, the other being an up-and-out option. What happens at the barrier price depends on what kind of barrier option it is, either knock-in or knock-out. These options define the payout conditions based on whether the price falls enough from the strike price to reach a designated barrier price.

Down-and-Out Option

A debit spread is a strategy of simultaneously buying and selling options of the same class, different prices, and resulting in a net outflow of cash.

A debit spread, or a net debit spread, is an options strategy involving the simultaneous buying and selling of options of the same class with different strike prices requiring a net outflow of cash, or a "debit," for the investor. The breakeven point for bullish (call) debit spreads using only two options of the same class and expiration is the lower strike (purchased) plus the net debit (total paid for the spread). If the income collected from all options sold results in a lower monetary value than the cost of all options purchased, the result is a net debit to the account, hence the name debit spread. For bearish (put) debit spreads, the breakeven point is calculated by taking the higher strike (purchased) and subtracting the net debit (total for the spread). A debit spread is an options strategy of buying and selling options of the same class and different strike prices at the same time.

Debit Spread

A deferred payment option is an option that operationally defers payment on the investment until a later date. 

A deferred payment option is a right to operationally defer (delay) payment on an investment until a later date. A deferred payment option will usually be structured as an American option that defers the option’s payout until the expiration date. In the options market, deferred payment options are a type of exotic option due to the more complex structuring and greater illiquidity than their plain vanilla counterparts. A deferred payment option holder can exercise their option at any time during the life of the option, up until the expiration date. Deferred payment options in the options market are generally considered to be a type of exotic option due to their complex structuring and alternative market trading.

Deferred Payment Option

Delta-gamma hedging is an options strategy combining delta and gamma hedges to reduce the risk of changes in the underlying asset and in delta itself.

Delta-gamma hedging is an options strategy that combines both delta and gamma hedges to mitigate the risk of changes in the underlying asset and in the delta itself. Large hedges that involve buying or selling significant quantities of shares and options may have the effect of changing the price of the underlying asset on the market, requiring the investor to constantly and dynamically create hedges for a portfolio to take into account greater fluctuations in prices.
Gamma hedging essentially involves constantly readjusting the delta hedge as delta changes (i.e., making the position gamma-neutral).
Assume a trader is long one call of a stock, and the option has a delta of 0.6. delta-gamma hedge is often one that is market-neutral (i.e., zero delta and zero gamma); however, a delta-gamma hedge can, in theory, adopt any static level of delta and/or gamma. Delta-gamma hedging is an options strategy that combines both delta and gamma hedges to mitigate the risk of changes in the underlying asset and in the delta itself. Traders hedge delta to limit the risk of small price movements in the underlying security, and hedge gamma to protect themselves from the remaining exposure created through the use of a delta hedge.

Delta-Gamma Hedging

A detachable warrant is a derivative that gives the holder the right to buy an underlying security at a specific price within a certain time.

A detachable warrant is a derivative that is attached to a security, which gives the holder the right to purchase the underlying asset at a specific price within a certain time frame. Investors who hold detachable warrants can sell them while keeping the underlying security, or sell the underlying securities while holding on to the warrants.
Because they are attached to preferred stock, investors must sell warrants if they want to receive dividends.
Often combined with various forms of debt offerings, detachable warrants can be removed by the holder and sold separately in the secondary market. In effect, a bond issuer includes detachable warrants in its sale of debt securities in order to obtain a lower interest rate and cost of borrowing than would be possible without the warrants, while a bond buyer is interested in the profit they could earn by converting the warrants to stock if the issuer’s stock price rises. So an investor who holds detachable warrants can sell them while keeping the underlying security, or they can sell the underlying securities while holding on to the warrants. A detachable warrant is a derivative contract attached to a security, which gives the holder the right to purchase the underlying asset at a specific price within a certain time.

Detachable Warrant

A diagonal spread is an options strategy using a long and short position in either calls or puts with different strike prices and expiration dates.

A diagonal spread is a modified calendar spread involving different strike prices. The table below outlines the possibilities:
Diagonal Calendar Spread Configurations
**Diagonal Spreads**
**Diagonal Spreads**
**Nearer Expiration Option**
**Longer Expiration Option**
**Strike Price 1**
**Strike Price 2**
**Underlying Assumption**
Sell Higher
Sell Higher
Diagonal Calendar Spread Configurations This strategy is called a diagonal spread because it combines a horizontal spread (also called a time spread or calendar spread), which involves a difference in expiration dates, and a vertical spread (price spread), which involves a difference in strike prices. A diagonal spread is an options strategy that involves buying (selling) a call (put) option at one strike price and one expiration and selling (buying) a second call (put) at a different strike price and expiration.
Diagonal spreads allow traders to construct a trade that minimizes the effects of time, while also taking a bullish or bearish position. For example, in a bullish long call diagonal spread, buy the option with the longer expiration date and with a lower strike price and sell the option with the near expiration date and the higher strike price.

Diagonal Spread

A double barrier option is a class of option that either comes into existence or ceases to exist if the underlying reaches a high or a low trigger level.

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What Is a Double Barrier Option? Considered an exotic option, a double barrier option is a combination of two single barrier options, with one barrier above and one barrier below the current price of the underlying. It is a bet by the holder that the underlying asset will move significantly, in the case of a knock-in barrier option, or will move by a very small amount, in the case of a knock-out barrier option, over the life of the contract. Depending on whether the option is a knock-in or knock-out, if the underlying price touches either barrier before its expiration the option will either become active or worthless, respectively. A barrier option is a type of option where the payoff and the very existence of the option depend on whether or not the underlying asset reaches a predetermined price.

Double Barrier Option

A double no-touch option gives the holder a specified payout as long as the price of the underlying asset remains in a specified range until expiration.

A double no-touch option is a type of exotic option that gives the holder a specified payout only if the underlying asset price remains within a specified range until expiration. A double no-touch option is a binary option where the buyer receives a fixed payout if the underlying price remains within specified price boundaries until expiration. This keeps the structure of double no-touch options quite simple.
Double no-touch and its converse, double one-touch options, both fall in the binary options category. A double no-touch option is a type of exotic option that gives the holder a specified payout only if the underlying asset price remains within a specified range until expiration. The holder of the one-touch option receives the payout if the price of the underlying asset touches or moves through either of the barrier levels.

Double No-Touch Option

The credit default swap index (CDX) is a financial instrument composed of a set of credit securities issued by North American or emerging market companies.

The credit default swap index (CDX), formerly the Dow Jones CDX, is a benchmark financial instrument made up of credit default swaps (CDS) that have been issued by North American or emerging market companies. The Credit Default Swap Index (CDX) is a benchmark index that tracks a basket of U.S. and emerging market single-issuer credit default swaps.
Credit default swaps act like insurance policies in the financial world, offering a buyer protection in the case of a borrower's default. The credit default swap index (CDX), formerly the Dow Jones CDX, is a benchmark financial instrument made up of credit default swaps (CDS) that have been issued by North American or emerging market companies. The CDX is completely standardized and exchange-traded, unlike single CDSs, which trade over the counter (OTC). As such, the CDX index has a high level of liquidity and transparency.
CDX indexes also may trade at smaller spreads than CDSs. The credit default swap index (CDX) tracks and measures total returns for the various segments of the bond issuer market so that the overall return of the index can be benchmarked against funds that invest in similar products.

Credit Default Swap Index (CDX)

A fence is a defensive options strategy that an investor deploys to protect an owned holding from a price decline, at the cost of potential profits.

A fence is a defensive options strategy involving three different options that an investor deploys to protect an owned holding from a price decline, while also sacrificing potential profits. An investor holding a long position in the underlying asset constructs a fence by selling a call option with a strike price above the current asset price, buying a put with a strike price at or just below the current asset price, and selling a put with a strike below the first put's strike. Typically, an investor holding a long position in the underlying asset sells a call option with a strike price above the current asset price, buys a put with a strike price at or just below the current asset price, and sells a put with a strike below the first put's strike. The trades on the options, all having the same expiry, include:
Long the underlying asset
Short a call with a strike price higher than the current price of the underlying.
Long a put with a strike price at the current price of the underlying or slightly below it. A fence is a defensive options strategy involving three different options that an investor deploys to protect an owned holding from a price decline, while also sacrificing potential profits.

Fence (Options)

A fiduciary call is a trading strategy that an investor can use to reduce the costs inherent in exercising a call option.

A fiduciary call is very similar to buying a normal call option, with the only variation being that the present value of the strike price (total amount due at exercise) would be invested in a risk-free interest-bearing account. When the option expires, the value of the interest-bearing account should be enough to cover, or partially defray, the costs of exercising that option (purchasing the shares plus premiums paid), if the option holder chooses to do so. A fiduciary call is very similar to buying a normal call option, with the only variation being that the present value of the strike price (total amount due at exercise) would be invested in a risk-free interest-bearing account. However, a fiduciary call is an option purchased by the investor while a covered call is an option sold, or written, by the investor. Of course, a fiduciary call requires the investor have the spare cash available to tie up in the risk-free account until the expiration of the option.

Fiduciary Call

Flexible exchange options allow both the writer and purchaser to negotiate various terms, such as exercise style, strike price, and expiration.

Flexible exchange options, or FLEX options, are nonstandard options that allow both the writer and purchaser to negotiate various terms. A significant difference between FLEX options and traditional options is that FLEX options do not have a continuous quote stream. Flexible exchange options, or FLEX options, are nonstandard options that allow both the writer and purchaser to negotiate various terms. There are no position limits for FLEX options on major market indexes, including the Dow Jones Industrial Average, Nasdaq-100, Russell 2000, S&P 500, and S&P 100. The options target the over-the-counter (OTC) market of index options and provide customers with more flexibility.

Flexible Exchange Option (FLEX)

A forward start option is an exotic option that is bought and paid for now but becomes active later with a strike price determined at that time.

A forward start option is an exotic option that is purchased and paid for now but becomes active later with a strike price determined at that time. A forward strike option is an exotic option similar to a vanilla option, except the forward start option doesn't activate until some time in the future and the strike price is unknown when the option is bought. A forward start option is valued like a vanilla option once it becomes active (strike price is set).
A group of consecutive forward start options is called a ratchet option or cliquet option. If at the end of the next settlement the underlying trades above the new strike (for a call), the holder may elect to receive the difference between the price of the underlying and the strike, or exercise the option and receive the underlying. A forward start option is an exotic option that is purchased and paid for now but becomes active later with a strike price determined at that time.

Forward Start Option

A fraption is a type of option that gives the option holder the opportunity to enter into a forward rate agreement.

A fraption is a type of option that gives the holder the opportunity to enter into a forward rate agreement (FRA) with predetermined conditions and within a certain amount of time. If the fraption is not exercised (turned into a forward rate agreement) because interest rates remain relatively stable or even drop, the buyer loses the premium but is not obligated to enter into the forward rate agreement. A fraption is the right but not the obligation to enter into a forward rate agreement (FRA) at some point in the future, effectively establishing an interest rate guarantee. The buyer of the fraption and forward rate agreement typically wants to protect against a rise in interest rates. Terms include the notional amount of the forward, the expiry of the options portion of the fraption, the premium on the option, the settlement date, maturity date, and rates of the forward.

Fraption

The front fee is the option premium paid by an investor upon the initial purchase of a compound option. A compound option is an option on an option.

The front fee is the option premium paid by an investor upon the initial purchase of a compound option. A compound option is one where the underlying asset is also an option; it is an option on an option. They purchase an option to buy a foreign currency option, and then they only need to use the initial option (to receive the underlying one) if needed and worthwhile to do so. Compound options come in four configurations:
Call on a put, called a CoP (CaPut), is the right to buy a particular put option.
Call on a call, called a CoC (CaCall), is the right to buy a particular call option. A compound option is effectively an option to buy or sell another option, such as a call on a put or a put on a put.

Front Fee  and Example

Full ratchet is an anti-dilution provision, applying the lowest sale price as the adjusted option price or conversion ratio for existing shareholders.

A full ratchet is a contractual provision designed to protect the interests of early investors. This dynamic can lead to a series of adjustments in which new shares need to be created to satisfy the demands both of the original preferred shareholders (who benefit from the full ratchet provision) and of new investors who wish to purchase a fixed percentage of the company. Specifically, it is an anti-dilution provision that applies, for any shares of common stock sold by a company after the issuing of an option (or convertible security), the lowest sale price as the adjusted option price or conversion ratio for existing shareholders. A full ratchet is an anti-dilution provision that applies the lowest sale price as the adjusted option price or conversion ratio for existing shareholders. Effectively, this means that the preferred shareholders would need to be given new shares (at no additional cost) in order to ensure that their overall ownership is not diminished by the sale of the new common shares.

Full Ratchet

Gamma hedging is an options hedging strategy designed to reduce or eliminate the risk created by changes in an option's delta.

Gamma hedging is a trading strategy that tries to maintain a constant delta in an options position, often one that is delta-neutral, as the underlying asset changes price. While many times a trader will seek a delta-gamma hedge that is delta-neutral; alternatively, a trader may want to maintain a specific delta position, which could be delta positive (or negative) but at the same time gamma neutral. Delta-gamma hedging is an options strategy that combines both delta and gamma hedges to mitigate the risk of changes in the underlying asset—and also in the delta itself—as the underlying asset moves. Gamma hedging is a trading strategy that tries to maintain a constant delta in an options position, often one that is delta-neutral, as the underlying asset changes price. Gamma refers to the rate of change of an option's delta with respect to the change in price of an underlying stock or other asset's price.

Gamma Hedging

The gamma pricing model calculates the fair market value of a European-style option when the price of the underlying asset does not follow a normal distribution.

The gamma pricing model is an equation for determining the fair market value of a European\-style options contract when the price movement on the underlying asset does not follow a normal distribution. Generally speaking, the Gamma Pricing Model employs the option's gamma, which is how much fast the delta changes with respect to small changes in the underlying asset's price (where the delta is the change in option price given a change in the price of the underlying asset). The gamma pricing model is an equation for determining the fair market value of a European\-style options contract when the price movement on the underlying asset does not follow a normal distribution. The gamma model is one alternative for pricing options other than the original Black-Scholes model, which requires the assumption of a normal distribution. The gamma model for pricing options is used to more accurately represent the distribution of asset prices that are asymmetric and is thus a better reflection of an option's fair value.

Gamma Pricing Model

Gamma is the rate of change of delta with respect to an option's underlying asset price.

Gamma is the rate of change in an option's delta per 1-point move in the underlying asset's price. Since an option's delta measure is only valid for short period of time, gamma gives traders a more precise picture of how the option's delta will change over time as the underlying price changes. Gamma is the rate of change for an option’s delta based on a single-point move in the delta’s price. Gamma is the rate of change in an option's delta per 1-point move in the underlying asset's price. 1:33
Gamma is the first derivative of delta and is used when trying to gauge the price movement of an option, relative to the amount it is in or out of the money.

Gamma

The Heston Model, named after Steve Heston, is a type of stochastic volatility model used by financial professionals to price European options.

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What Is the Heston Model?
Understanding the Heston Model d S t \= r S t d t \+ V t S t d W 1 t d V t \= k ( θ − V t ) d t \+ σ V t d W 2 t where: S t \= asset price at time  t r \= risk-free interest rate – theoretical rate on an asset carrying no risk V t \= volatility (standard deviation) of the asset price σ \= volatility of the  V t θ \= long-term price variance k \= rate of reversion to  θ d t \= indefinitely small positive time increment W 1 t \= Brownian motion of the asset price W 2 t \= Brownian motion of the asset’s price variance \\begin{aligned} &dS\_t = rS\_tdt + \\sqrt{ V\_t } S\_tdW\_{1t} \\\\ &dV\_t = k ( \\theta - V\_t ) dt+ \\sigma \\sqrt{ V\_t } dW\_{2t} \\\\ &\\textbf{where:} \\\\ &S\_t = \\text{asset price at time } t \\\\ &r = \\text{risk-free interest rate -- theoretical rate on an} \\\\ &\\text{asset carrying no risk} \\\\ &\\sqrt{ V\_t } = \\text{volatility (standard deviation) of the asset price} \\\\ &\\sigma = \\text{volatility of the } \\sqrt{ V\_t } \\\\ &\\theta = \\text{long-term price variance} \\\\ &k = \\text{rate of reversion to } \\theta \\\\ &dt = \\text{indefinitely small positive time increment} \\\\ &W\_{1t} = \\text{Brownian motion of the asset price} \\\\ &W\_{2t} = \\text{Brownian motion of the asset's price variance} \\\\ \\end{aligned} ​dSt​\=rSt​dt+Vt​​St​dW1t​dVt​\=k(θ−Vt​)dt+σVt​​dW2t​where:St​\=asset price at time tr\=risk-free interest rate – theoretical rate on anasset carrying no riskVt​​\=volatility (standard deviation) of the asset priceσ\=volatility of the Vt​​θ\=long-term price variancek\=rate of reversion to θdt\=indefinitely small positive time incrementW1t​\=Brownian motion of the asset priceW2t​\=Brownian motion of the asset’s price variance​
The Black-Scholes model for option pricing was introduced in the 1970s and served as one of the first models for helping investors derive a price associated with an option on a security. In mathematical notation,
> Call = S \N(d1) – Ke(-r \* T) \* N(d2)
Conversely, the value of a put option could be calculated using the formula:
> Put = Ke(-r \T) \* N(-d2) – S \* N(-d1)
In both formulas, S is the stock price, K is the strike price, r is the risk-free interest rate, and T is the time to maturity.
The formula for d1 is:
> (ln(S/K) + (r + (Annualized Volatility)2/2) \T)/(Annualized Volatility \* (T0.5))
The formula for d2 is:
> d1 – (Annualized Volatility) \(T0.5) Both the basic Black-Scholes model and the Heston Model still only provide option pricing estimates for a European option, which is an option that can only be exercised on its expiration date. The Heston Model has characteristics that distinguish it from other stochastic volatility models, namely:
It factors in a possible correlation between a stock's price and its volatility.
It conveys volatility as reverting to the mean.

Heston Model

A hybrid security is an asset that has features of two different financial instruments, like a bond that can be converted into shares of a company.

A hybrid security is a single financial security that combines two or more different financial instruments. Pay-in-kind toggle notes are another type of hybrid security where the issuing company can toggle the payment from interest rates to the additional debt owing to the investor, meaning the company owes the investor more debt but doesn't actually pay interest on it immediately. In addition to convertible bonds, another popular type of hybrid security is convertible preference shares, which pay dividends at a fixed or floating rate before common stock dividends are paid, and can be exchanged for shares of the underlying company's stock. Hybrid securities are not marketed toward retail investors, but even institutional investors sometimes fail to fully understand the terms of the deal they are entering when buying a hybrid security. Convertible bonds offer greater potential for appreciation than regular bonds, but pay less interest than conventional bonds, while still facing the risk that the underlying company could perform poorly.

Hybrid Security

An intercommodity spread is an options trade that takes advantage of the price differential between two or more related commodities.

An intercommodity spread is a sophisticated options trade that attempts to take advantage of the value differential between two or more related commodities, such as crude oil and heating oil, or corn and wheat. A trader might execute what's known as a 3-2-1 crack spread, meaning three long options on crude oil against two short options on gasoline and one short option on heating oil. An intercommodity spread trader will know that when the spread between wheat and corn rises to around $1.50, the range will tend to contract, and the price of wheat will drop relative to corn. An intercommodity spread is a sophisticated options trade that attempts to take advantage of the value differential between two or more related commodities, such as crude oil and heating oil, or corn and wheat. The trader could also execute a reverse spread, going long on gas and heating oil, and short on crude oil.

Intercommodity Spread

An interest rate collar is an options strategy that limits one's interest rate risk exposure.

An interest rate collar is a relatively low-cost interest rate risk management strategy that uses derivatives to hedge an investor's exposure to interest rate fluctuations. An interest rate collar uses interest rate options contracts to protect a borrower against rising interest rates while also setting a floor on declining interest rates. Clearly, the interest rate collar strategy protects the investor by capping the maximum interest rate paid at the collar's ceiling but sacrifices the profitability of interest rate drops. With an interest rate collar, the investor purchases an interest rate ceiling, which is funded by the premium received from selling an interest rate floor. Essentially, an interest rate collar involves the simultaneous purchase of an interest rate cap and sale of an interest rate floor on the same index for the same maturity and notional principal amount.

Interest Rate Collar

An iron butterfly is an options strategy created with four options designed to profit from the lack of movement in the underlying asset.

An iron butterfly is an options trade that uses four different contracts as part of a strategy to benefit from stocks or futures prices that move within a defined range. For example, if the trader thinks that, over the next two weeks, the underlying could land at the price of $50, and be within a range of five dollars higher or five dollars lower from that target price, then that trader should sell a call and a put option with a strike price of $50, and should purchase a call option at least five dollars higher, and a put option at least five dollars lower, than the $50 target price. The trade diminishes in value as the price drifts away from the center strike, either higher or lower, and reaches a point of maximum loss as the price moves either below the lower strike price or above the higher strike price. It will protect against a significant upward move in the underlying asset and cap any potential loss at a defined amount should the trade not go as forecast.
4.  The trader sells both a call and a put option using the strike price nearest the target price. The Iron butterfly trade profits as expiration day approaches if the price lands within a range near the center strike price.

Iron Butterfly

A knock-in option begins to function as a normal option ("knocks in") only once a certain price level is reached prior to expiration. 

A knock-in option is a latent option contract that begins to function as a normal option ("knocks in") only once a certain price level is reached before expiration. The difference between a knock-in and knock-out option is that a knock-in option comes into existence only when the underlying security reaches a barrier, while a knock-out option ceases to exist when the underlying security reaches a barrier. A knock-in option is a type of barrier option which is triggered only after the underlying asset's price reaches a certain specified barrier. Contrary to a down-and-in option, an up-and-in option comes into existence only if the underlying reaches a barrier price that is above the current underlying's price. If the price of the underlying security reaches $90, the option comes into existence and becomes a vanilla option with a strike price of $100.

Knock-In Option

Kurtosis is a statistical measure used to describe the distribution of observed data around the mean. It is sometimes referred to as the "volatility of volatility." 

Like skewness, kurtosis is a statistical measure that is used to describe distribution. This distribution has a kurtosis statistic similar to that of the normal distribution, meaning the extreme value characteristic of the distribution is similar to that of a normal distribution. For investors, high kurtosis of the return distribution implies the investor will experience occasional extreme returns (either positive or negative), more extreme than the usual + or - three standard deviations from the mean that is predicted by the normal distribution of returns. A distribution can be infinitely peaked with low kurtosis, and a distribution can be perfectly flat-topped with infinite kurtosis. This phenomenon is known as _kurtosis risk_.
Kurtosis is a measure of the combined weight of a distribution's tails relative to the center of the distribution.

Kurtosis

A ladder option locks in partial gains once the underlying asset reaches predetermined price levels, even if it falls back down below these levels.

A ladder option is an exotic option that locks in partial profits once the underlying asset reaches predetermined price levels or "rungs." Do not confuse ladder options, which are specific types of options contracts, with long call ladders, long put ladders, and their short counterparts, which are options strategies that involve buying and selling multiple options contracts simultaneously. Ladder options are similar to traditional option contracts that give the holder the right, but not the obligation to buy or sell the underlying asset at a predetermined price at or by a predetermined date. The holder keeps profits based on the highest rung achieved (for calls) or the lowest rung achieved (for puts) regardless if the price of the underlying crosses back below (for calls) or above (for puts) those rungs before expiration. If the price of the underlying falls below any of the triggered rungs, again for calls, it almost does not matter to the price of the option because the partial profit is guaranteed.

Ladder Option

A load spread option is a way to collect annual fees from investors in load funds through periodic deductions.

A load spread option is a method of collecting the annual fees from investors in load funds through periodic deductions. Load charges can be categorized as:
Front-end: Charged at the time of initial purchase
Back-end: Charged when investors sell shares
Level-load: Ongoing fees charged as long as the investor continues to maintain an interest in the fund
Front-end and back-end charges are not considered part of the fund's normal expense ratio, but level-load charges are. Investors can dramatically reduce load fees by investing in no-load funds, which must maintain level-load charges below 0.25%. A load spread option is a fee-collecting process related to charges imposed by load funds, which are mutual funds that impose sales charges or commissions. A load spread option involves taking periodic deductions from mutual fund holders rather than imposing a larger one-time front-end or back-end load.

Load Spread Option

A lock-up option is a stock option offered by a target company in a takeover battle to a white knight for some of the company's shares or best assets.

A lock-up option is a stock option offered by a target company to a white knight for additional equity or the purchase of a portion of the company. The favorable conditions of the stock or asset sale made available through the lock-up option only happen if the white knight does not win the merger bid.
Lock-up options are contractual, but they are not in the same category as derivative financial options, so they are not subject to the same rules and regulations as the trading instruments.
A lock-up option or defense should not be confused with a lock-up provision, which prevents a firm's shareholders from selling or transferring their shares during a defined period after acquiring them. A lock-up option is a stock option offered by a target company to a white knight for additional equity or the purchase of a portion of the company. The purpose of a lock-up option is to ward off a hostile takeover attempt, and the holder of the option is not free to sell the stock to any party other than those designated by the target company. A lock-up option is a contract that favors a friendly company in a takeover battle by promising it some of the target company's shares or best assets.

Lock-Up Option

Long straddle is an options strategy consisting of the purchase of both a call and put having the same expiration date and a nearby strike price.

A long straddle is an options strategy where the trader purchases both a long call and a long put on the same underlying asset with the same expiration date and strike price. The profit when the price of the underlying asset is decreasing is given by:
Profit (down) = Strike price of put option - the price of the underlying asset - net premium paid A long straddle is an options strategy where the trader purchases both a long call and a long put on the same underlying asset with the same expiration date and strike price. A long straddle is an options strategy that involves purchasing both a long call and a long put on the same underlying asset with the same expiration date and strike price. The profit when the price of the underlying asset is increasing is given by:
Profit (up) = Price of the underlying asset - the strike price of the call option - net premium paid

Advanced Options Trading Concepts

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