Abandonment is the act of surrendering a claim to, or interest in, a particular asset, or allowing an options contract to expire unexercised.

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Expand Inaction—that is, failure to do something with the property or non-use of it—is not enough to demonstrate that the owner has relinquished rights to the property, even if such non-use has perpetuated for years. If the owner abandons an insured asset or piece of property, the insurance company may rightfully claim the item for salvage. An abandonment clause may be part of an insurance contract allowing the owner to abandon damaged property while still receiving a full settlement. Because abandonment and salvage can be lucrative for the salvager, multiple parties may try laying claim to an abandoned asset or property.

Abandonment

The adjusted exercise price is an option contract's adjusted strike price including corporate actions like stock splits and special dividends.

The adjusted exercise price is an option contract's strike price after adjustments have been made for corporate actions such as stock splits or special dividends made to its underlying security. Normally, adjusted exercise prices will exist until an affected options series expires, while new strike prices are simultaneously added post-hoc.
Options contract terms must be adjusted if the underlying stock undergoes a reorganization that directly affects the original terms of its options. The adjusted exercise price is an option contract's strike price after adjustments have been made for corporate actions such as stock splits or special dividends made to its underlying security. An adjusted exercise price accommodates technical changes in an option contract's underlying contract such as a special dividend or stock split. The adjusted strike price allows for trading continuity for holders of an options contract before the corporate action takes place that changes the underlying's price or attributes.

Adjusted Exercise Price

An aggregate exercise price is the value traded of the underlying asset if the holder exercises its options contract.

An aggregate exercise price is the total value of some underlying asset if one were to exercise all of their existing long options contracts on that asset. For a bond option, the aggregate exercise price is the bond face value, times the number of contracts, times the exercise (strike) price. For an equity option, the aggregate exercise price is the contract size, times the number of contracts, times the exercise (strike) price. Therefore, a call option on a 5-bond lot with a strike price of 90, the aggregate exercise price would be:
1 face value \* 5 bonds per contract \* (90% of $1000)
1 \* 5 \* 900 = $4,500 An aggregate exercise price is the total value of some underlying asset if one were to exercise all of their existing long options contracts on that asset.

Aggregate Exercise Price

An alligator spread is an investment position that is rendered unprofitable because of the onerous fees and transaction costs associated with it.

An alligator spread is a trading position that is destined to be unprofitable from the start because of the onerous fees and transaction costs associated with it. In that scenario, the investor faces a relatively narrow window within which to profit on the position; if the various fees associated with that position are too costly, it may be impossible for them to realize a profit on an after-fees basis, even if the security moves in a favorable direction. Although this call option allows him to profit if XYZ's share price increases, Charlie wants to position himself so that he profits on increased volatility regardless of whether the price moves up or down. If the price moves up to $30, he can exercise his call option and net a profit of $5 per share (buying for the exercise price of $25, and then selling for the market price of $30). An alligator spread is a trading position that is destined to be unprofitable from the start because of the onerous fees and transaction costs associated with it.

Alligator Spread Defined

An altiplano option is a type of "mountain range" option that pays a specific coupon payment if the underlying assets fail to reach the strike price.

Exotic Options and Hybrids: A Guide to Structuring, Pricing and Trading: Chapter 15

An altiplano option is a particularly exotic type of derivatives investment that is based on multiple underlying securities rather than on a single underlying asset. As with any options investment, the buyer of an altiplano option gets the ability to buy or sell the underlying asset at a predetermined time and price. The altiplano option offers the options investor a guaranteed payout if the investment fails to reach the expected strike price. An altiplano option is a particularly exotic type of derivatives investment that is based on multiple underlying securities rather than on a single underlying asset. If none of the securities in the Altiplano basket outperforms a specified benchmark rate of return during the life of the option, the investor will receive only the specified coupon rate for the option.

Altiplano Option

An American option is an option contract that allows holders to exercise the option at any time prior to and including its expiration date.

An American option is a version of an options contract that allows holders to exercise the option rights at any time before and including the day of expiration. An American option is a version of an options contract that allows holders to exercise the option rights at any time before and including the day of expiration. If an investor purchased a call option for a company in March with an expiration date at the end of December of the same year, they would have the right to exercise the call option at any time up until its expiration date. American options are helpful since investors don't have to wait to exercise the option when the asset's price rises above the strike price. Pros
Ability to exercise at any time
Allows exercise before an ex-dividend date
Allows profits to be put back to work
Charges a higher premium
Not available for index option contracts
May miss out on additional option appreciation

American Option

An asset-or-nothing put option provides a fixed payoff if the price of the underlying asset is below the strike price on the option's expiration date.

American vs. European vs. Bermudan Options

An asset-or-nothing put option provides a fixed payoff if the price of the underlying asset is below the strike price on the option's expiration date. Within the United States, a popular venue for trading binary options is the North American Derivatives Exchange (Nadex), a Chicago-based platform that is regulated by the Commodity Futures Trading Commission (CFTC).
Suppose you are an options trader who believes that shares in XYZ Corporation are likely to fall this Friday, due to an earnings report that you suspect will disappoint investors. Unlike regular put options, asset-or-nothing put options do not pay the difference between the strike price and market price of the underlying asset. An asset-or-nothing put option provides a fixed payoff if the price of the underlying asset is below the strike price on the option's expiration date. Searching for a way to profit from your prediction, you find an asset-or-nothing put option that expires on Friday, at the end of the trading day, with a strike price of $25.

Asset-or-Nothing Put Option

An Asian option is an option type where the payoff depends on the average price of the underlying asset over time as opposed to at maturity.

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). The arithmetic average (mean) is (21.00 + 22.00 + 24.00) / 3 = 22.33.
The profit is the average minus the strike price 22.33 - 22 = 0.33 or $33.00 per 100 share contract.
As with standard options, if the average price is below the strike price, the loss is limited to the premium paid for the call options. Typical uses include:
1.  When a business is concerned about the average exchange rate over time.
2.  When a single price at a point in time might be subject to manipulation.
3.  When the market for the underlying asset is highly volatile.
4.  When pricing becomes inefficient due to thinly traded markets (low liquidity markets).
This type of option contract is attractive because it tends to cost less than regular American options. Typically, the average price is a geometric or arithmetic average of the price of the underlying asset at discreet intervals, which are also specified in the options contract.

What Is an Asian Option?

To assign is to randomly match a buyer and a seller, concluding a transaction in the options and futures market.

Broadly speaking, to assign is to transfer the rights or property from one person or business to another. When an options contract is exercised, the owner of the contract assigns an options writer to the obligation to fulfill the requirements of the contract. For example, if one trader is looking to purchase a May futures corn contract and another trader is looking to sell a May futures corn contract, the clearinghouse would match the requests of both traders, assigning them the appropriate contracts. During an assignment of options or futures contracts, the clearinghouse assigns an option writer who will be the required buyer or seller of the underlying contract upon its exercise. It refers either to the transfer of property rights from one individual or entity to another individual or entity or when an options contract is exercised.

Assign

An assignment is the transfer of rights or property. In financial markets, it is a notice to an options writer that the option has been exercised. 

Assignment most often refers to one of two definitions in the financial world:
1.  The transfer of an individual's rights or property to another person or business. Once assigned, the writer (seller) of the option will have the obligation to sell (if a call option) or buy (if a put option) the designated number of shares of stock at the agreed-upon price (the strike price). The corresponding seller of the option is not determined when a buyer opens an option trade, but only at the time that an option holder decides to exercise their right to buy stock. A mortgage assignment document clarifies the assignment of contract and instructs the borrower in making future mortgage payments, and potentially modifies the mortgage terms. For puts, the buyer of the option sells stock (puts stock shares) to the writer in the form of a short-sold position.

Assignment

At the money (ATM) is a situation where an option's strike price is identical to the price of the underlying security.

At the money (ATM) is a situation where an option's strike price is identical to the current market price of the underlying security. ATM options have no intrinsic value, but will still have extrinsic or time value prior to expiration, and may be contrasted with either in the money (ITM) or out of the money (OTM) options.
At the money (ATM) are calls and puts whose strike price is at or very near to the current market price of the underlying security. Meanwhile, a call option is OTM when its strike price is greater than the current underlying security's price and a put option is OTM when its strike price is less than the underlying asset's current price. At the money (ATM) is a situation where an option's strike price is identical to the current market price of the underlying security. A call option is ITM when the option's strike price is less than the underlying security's current price.

At The Money (ATM)

Automatic exercise is a procedure where the Option Clearing Corporation will automatically exercise an "in the money" option for the holder.

Understanding the Difference: European vs. American Style Options

Investor Bulletin: An Introduction to Options

Automatic exercise is a procedure implemented to protect an option holder where the Option Clearing Corporation (OCC) will automatically exercise an "in the money" option for the holder, typically at an option's expiration date and time. With automatic exercise, a trader or investor who forgets about the date, or who is otherwise unable to manually instruct their broker or clearing firm to exercise their in the money options, will have the benefit of having their profitable contracts taken care of on their behalf. Options contracts give their holders the right, but not the obligation, to buy (for a call option) or sell (for a put option) a set amount of the underlying security at a pre-determined strike price, on or before the contract's expiration date (for an American style option. For example, if you own a call option with a strike price of $50, and the stock closes at $50.01 on the day your call expires, your broker will most likely exercise your option. However, if the price of the stock rises to $60, the trader will want to exercise his right to purchase shares at $50 in order to make an immediate $10 profit per share (minus the premium paid).

Automatic Exercise

An average strike option is an option where the payoff depends on the average price of the underlying asset instead of a single price at expiration.

An average strike option is a type of option where the strike price depends on the average price of the underlying asset over a specified period of time. For a put option, if the underlying is below the average price (strike) the option is ITM, and it is OTM if the underlying's price is above the average price (strike). An average strike option is a type of option where the strike price depends on the average price of the underlying asset over a specified period of time. The strike price for an average strike option is set at expiry based on the average price over the option's life. For an average strike call option to be in the money (ITM), the underlying asset's price must be above the average price (strike) at expiration.

Average Strike Option

An average price call is a call option whose profit is determined by comparing the strike price to the average price occurring throughout its term.

An average price call is a call option whose profit is determined by comparing the strike price to the average price of the asset that occurred during the option's term. The complement of an average price call is an average price put, in which the payoff is positive if the average price of the underlying asset is less than the strike price during the option's term. Because the average price call option had a notional value of $1 million, your profit is $954,500, calculated as follows:
Profit   \=   ( Average Price   −   Strike Price ) ×   Notional Value   −   Option Premium Paid Profit   \=   ( $ 1 4 6 . 0 0   −   $ 1 4 5 . 0 0 ) ×   $ 1 , 0 0 0 , 0 0 0   −   $ 4 5 , 5 0 0 \\begin{aligned}&\\text{Profit}\\ = \\ (\\text{Average Price}\\ - \\ \\text{Strike Price})\\\\&\\qquad\\qquad \\times\\ \\text{Notional Value}\\ - \\ \\text{Option Premium Paid}\\\\&\\text{Profit}\\ = \\ (\\$146.00\\ - \\ \\$145.00)\\\\&\\qquad\\qquad \\times\\ \\$1,000,000\\ - \\ \\$45,500\\\\&\\text{Profit}\\ =\\ \\$954,500\\end{aligned} ​Profit \= (Average Price − Strike Price)× Notional Value − Option Premium PaidProfit \= ($146.00 − $145.00)× $1,000,000 − $45,500​
Alternatively, if the average price of T-bills over this period had been $144.20 instead of $146.00, then the option would have expired worthless. Therefore, for a three-month average price call, the holder of the option would receive a positive payout if the average closing price for the underlying asset traded above the strike price during the three-month term of the option. An average price call is a call option whose profit is determined by comparing the strike price to the average price of the asset that occurred during the option's term.

Average Price Call Defined

An average price put is a type of option where the payoff depends on the difference between the strike price and the average price of the underlying asset.

An average price call is a put option whose profit is determined by comparing the strike price to the average price of the asset that occurred during the option's term. The complement of an average price put is an average price call, in which the payoff is negative if the average price of the underlying asset is less than the strike price during the option's term. Otherwise, if the average price of the underlying asset remains below the strike price of such a put, the payoff to the option buyer is positive and equals the difference between the strike price and the average price. Therefore, for a three-month average price call, the holder of the option would receive a positive payout if the average closing price for the underlying asset traded above the strike price during the three-month term of the option. After one month, when the option is about to expire if the average price of crude oil is $85, the oil producer's gain would be $300,000 (i.e., the difference of $5 between the strike price and the average price less the option premium paid X 100,000 barrels).

Average Price Put

A backspread is s a type of option trading plan in which a trader buys more call or put options than they sell. 

A backspread is s a type of option trading plan in which a trader buys more call or put options than they sell. A call backspread or call ratio backspread is constructed by selling (writing) fewer call options on an underlying security than are bought. A put backspread or put ratio backspread is constructed by selling (writing) fewer put options on an underlying security than are bought. The backspread trading plan can focus on either call options or put options on a specific underlying investment. A backspread is s a type of option trading plan in which a trader buys more call or put options than they sell.

Backspread

A barrier option is a type of option where the payoff depends on whether the underlying asset reaches or exceeds a predetermined price or barrier.

A barrier option is a type of derivative where the payoff depends on whether or not the underlying asset has reached or exceeded a predetermined price. A knock-In option is a type of barrier option where the rights associated with that option only come into existence when the price of the underlying security reaches a specified barrier during the option's life. In an up-and-in barrier option, the option only comes into existence if the price of the underlying asset rises above the pre-specified barrier, which is set above the underlying's initial price. Contrary to knock-in barrier options, knock-out barrier options cease to exist if the underlying asset reaches a barrier during the life of the option. Conversely, a down-and-in barrier option only comes into existence when the underlying asset price moves below a pre-determined barrier that is set below the underlying's initial price.

Barrier Option

A basket option is a type of financial derivative where the underlying asset is a group, or basket, of commodities, securities, or currencies.

A basket option is a type of financial derivative where the underlying asset is a group, or basket, of commodities, securities, or currencies. Therefore, a basket option typically refers to an option upon which a basket is created by the seller of the option, often at the request and in concert with the buyer's requirements. For example, if they own a call on a basket of currencies, but no longer want to buy those currencies, they could buy a put option on a similar basket of currencies to net out (or mostly net out) the effects of the first option. Technically, an equity index option is a basket option because the underlying asset is a weighted basket of component stocks. A basket option is an option where the underlying is a basket or group of any asset desired.

Basket Option

A bear straddle is an options strategy that involves writing a put and a call on the same security with an identical expiration date and strike price.

A bear straddle is an options strategy that involves buying (or selling) both a put and a call on the same underlying security with an identical expiration date and strike price, but where the strike price is above the security's current market price.
This is a type of "crooked" or "skewed" straddle since the put will be in the money (ITM), which gives it a naturally bearish bias (for the long). Upside BEP  \=  Strike Price  \+  Premiums Received Downside BEP  \=  Strike Price −  Premiums Received \\begin{aligned} &\\text{Upside BEP}\\ = \\ \\text{Strike Price}\\ + \\ \\text{Premiums Received}\\\\ &\\text{Downside BEP}\\ = \\ \\text{Strike Price} - \\ \\text{Premiums Received} \\end{aligned} ​Upside BEP \= Strike Price + Premiums ReceivedDownside BEP \= Strike Price− Premiums Received​
A short bear straddle position profits only if there is no movement in the price of the underlying asset. Unlike a typical straddle, the strike price of a bear straddle is above the current price of the security, which gives a bearish lean to the position. A bear straddle is a straddle that uses a strike higher than the current market price of the underlying security. The breakeven points (BEP) are defined by adding premiums received to the strike price to get the upside BEP and subtracting premiums received from the strike price for the downside BEP.

Bear Straddle

A bear call spread is a bearish options strategy used to profit from a decline in the underlying asset price but with reduced risk. 

A bear call spread, or a bear call credit spread, is a type of options strategy used when an options trader expects a decline in the price of the underlying asset. If it closes between the two strike prices there will be a reduced profit, while closing above the higher strike, $40, will result in a loss of the difference between the two strike prices reduced by the amount of the credit received at the onset.
Max profit = $200 (the credit)
Max loss = $800 (the 10 points between the spread strikes x100, minus the initial credit received)
![Image](data:image/gif;charset=utf-8;base64,R0lGODlhCQAHAPEAAOrj2+vi2+nl3Orm3SwAAAAACQAHAEEIGgAHCBxIsOBAAQgTJjQ4MACAhxAfMjyoMGFAADs=)
Image by Sabrina Jiang © Investopedia 2021 An options trader can use a bear call spread by purchasing one call option contract with a strike price of $40 and a cost/premium of $0.50 ($0.50 \100 shares/contract = $50 premium) and selling one call option contract with a strike price of $30 for $2.50 ($2.50 \* 100 shares/contract = $250). A bear call spread is achieved by purchasing call options at a specific strike price while also selling the same number of calls with the same expiration date, but at a lower strike price. A bear call spread, or a bear call credit spread, is a type of options strategy used when an options trader expects a decline in the price of the underlying asset.

Bear Call Spread

A binomial option pricing model is an options valuation method that uses an iterative procedure and allows for the node specification in a set period.

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Binomial Option Pricing In contrast to the Black-Scholes model, which provides a numerical result based on inputs, the binomial model allows for the calculation of the asset and the option for multiple periods along with the range of possible results for each period (see below).
The advantage of this multi-period view is that the user can visualize the change in asset price from period to period and evaluate the option based on decisions made at different points in time. In one month, the price of this stock will go up by $10 or go down by $10, creating this situation:
**Stock price** = $100
**Stock price in one month (up state)** = $110
**Stock price in one month (down state)** = $90
Next, assume there is a call option available on this stock that expires in one month and has a strike price of $100. The total investment today is the price of half a share less the price of the option, and the possible payoffs at the end of the month are:
**Cost today** = $50 - option price
**Portfolio value** (up state) = $55 - max ($110 - $100, 0) = $45
**Portfolio value** (down state) = $45 - max($90 - $100, 0) = $45 The binomial option pricing model uses an iterative procedure, allowing for the specification of nodes, or points in time, during the time span between the valuation date and the option's expiration date.

Binomial Option Pricing Model

The Black-Scholes model is a mathematical equation used for pricing options contracts and other derivatives, using time and other variables.

The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel 1997: Robert C. Merton Myron Scholes

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What Is the Black-Scholes Model? In mathematical notation:
C \= S t N ( d 1 ) − K e − r t N ( d 2 ) where: d 1 \= l n S t K \+ ( r \+ σ v 2 2 )   t σ s   t and d 2 \= d 1 − σ s   t where: C \= Call option price S \= Current stock (or other underlying) price K \= Strike price r \= Risk-free interest rate t \= Time to maturity N \= A normal distribution \\begin{aligned} &C = S\_t N(d \_1) - K e ^{-rt} N(d \_2)\\\\ &\\textbf{where:}\\\\ &d\_1 = \\frac{ln\\frac{S\_t}{K} + (r+ \\frac{\\sigma ^{2} \_v}{2}) \\ t}{\\sigma\_s \\ \\sqrt{t}}\\\\ &\\text{and}\\\\ &d\_2 = d \_1 - \\sigma\_s \\ \\sqrt{t}\\\\ &\\textbf{where:}\\\\ &C = \\text{Call option price}\\\\ &S = \\text{Current stock (or other underlying) price}\\\\ &K = \\text{Strike price}\\\\ &r = \\text{Risk-free interest rate}\\\\ &t = \\text{Time to maturity}\\\\ &N = \\text{A normal distribution}\\\\ \\end{aligned} ​C\=St​N(d1​)−Ke−rtN(d2​)where:d1​\=σs​ t​lnKSt​​+(r+2σv2​​) t​andd2​\=d1​−σs​ t​where:C\=Call option priceS\=Current stock (or other underlying) priceK\=Strike pricer\=Risk-free interest ratet\=Time to maturityN\=A normal distribution​
![BlackScholesMerton.png](data:image/gif;charset=utf-8;base64,R0lGODlhCwAGAPMAAAAAAAAAAQEAAAEBAQYDAJpdYbl1W7B7bdSRhAAAAAAAAAAAAAAAAAAAAAAAAAAAACwAAAAACwAGAEMIIwARAAggAAABAAgTKlwIwABDAAUBDEhYYKBFAAcSTnzIEUBAADs=)
Black, Scholes, Merton. 1:33
Developed in 1973 by Fischer Black, Robert Merton, and Myron Scholes, the Black-Scholes model was the first widely used mathematical method to calculate the theoretical value of an option contract, using current stock prices, expected dividends, the option's strike price, expected interest rates, time to expiration, and expected volatility. The inputs for the Black-Scholes equation are volatility, the price of the underlying asset, the strike price of the option, the time until expiration of the option, and the risk-free interest rate. The Black-Scholes model requires five input variables: the strike price of an option, the current stock price, the time to expiration, the risk-free rate, and the volatility.

Black-Scholes Model

A bond option is an option contract in which the underlying asset is a bond. In general, options are a derivative product allowing investors to speculate.

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What Is a Bond Option? Individuals can buy or sell some bond call or bond put options in the secondary market though bond option derivatives are much more limited in scope than stock or other types of options contracts. With a put option, the buyer could gain the full value of the underlying asset if its value falls to zero, making the full value at risk to the seller (excluding fees).
Selling a bond call or bond put option can have unlimited risks of loss. (Remember there is an inverse relationship between bond prices and interest rates—prices increase when interest rates decline and vice versa.)
For one example, consider an investor who buys a bond call option with a strike price of $950. If over the term of the contract, interest rates decrease, pushing the value of the bond up to $1,050, the option holder will exercise his right to purchase the bond for $950.

Bond Option

Boundary conditions are the maximum and minimum values used to indicate where the price of an option must lie.

Boundary conditions are the maximum and minimum values used to indicate where the price of an option must lie. If the price of the underlying asset is greater than the price indicated in the call option, then the investor would not exercise the option, since exercising the option would result in the investor paying more than the market price. Meanwhile, maximum boundary values will differ depending on the whether the option is a call or put, and if it is an American option or European option. Boundary conditions are used to estimate what an option may be priced at, but the actual price of the option may be higher or lower than what is set as the boundary condition. For a European put option, the maximum value computed as is the present value of the exercise price.

Boundary Conditions

Established in 2002, the Boston Options Exchange is an options exchange that is operated by the TMX Group.

The exchange sends out the five best bids and offers on each option, providing participants with anonymity and transparency.
The BOX Exchange is an automated exchange that offers investors trading on more than 2.000 option classes.﻿﻿ It was created as the Bostons Options Exchange in 2002—a result of the partnership between the Montreal Exchange, the Boston Stock Exchange, and Interactive Brokers Group. BOX was the first options exchange to offer price improvement to traders through a process called price improvement period or PIP. BOX was the first options exchange to offer price improvement to traders through a process called price improvement period. The exchange started as a joint effort by the Montreal Exchange, Boston Stock Exchange, and Interactive Brokers Group to provide an alternative to existing options markets.

Boston Options Exchange (BOX)

A box spread is an options arbitrage strategy that combines buying a bull call spread with a matching bear put spread.

A box spread, or long box, is an options arbitrage strategy that combines buying a bull call spread with a matching bear put spread. BVE \=  HSP  −  LSP MP \=  BVE  −  (NPP \+  Commissions) ML  \=  NPP  \+  Commissions where: BVE \=  Box value at expiration HSP \=  Higher strike price LSP \=  Lower strike price MP \=  Max profit NPP \=  Net premium paid ML \=  Max Loss \\begin{aligned} &\\text{BVE}=\\text{ HSP }-\\text{ LSP}\\\\ &\\text{MP}=\\text{ BVE }-\\text{ (NPP} + \\text{ Commissions)}\\\\ &\\text{ML }= \\text{ NPP }+ \\text{ Commissions}\\\\ &\\textbf{where:}\\\\ &\\text{BVE}=\\text{ Box value at expiration}\\\\ &\\text{HSP}=\\text{ Higher strike price}\\\\ &\\text{LSP}=\\text{ Lower strike price}\\\\ &\\text{MP}=\\text{ Max profit}\\\\ &\\text{NPP}=\\text{ Net premium paid}\\\\ &\\text{ML}=\\text{ Max Loss} \\end{aligned} ​BVE\= HSP − LSPMP\= BVE − (NPP+ Commissions)ML \= NPP + Commissionswhere:BVE\= Box value at expirationHSP\= Higher strike priceLSP\= Lower strike priceMP\= Max profitNPP\= Net premium paidML\= Max Loss​
To construct a box spread, a trader buys an in-the-money (ITM) call, sells an out-of-the-money(OTM) call, buys an ITM put, and sells an OTM put. A box spread, or long box, is an options arbitrage strategy that combines buying a bull call spread with a matching bear put spread. Because the price of a box at its expiration will always be the distance between the strikes involved (e.g., a 100-pt box might utilize the 25 and 125 strikes and would be worth $100 at expiration), the price paid for today can be thought of as that of a zero-coupon bond. A box spread is an options arbitrage strategy that combines buying a bull call spread with a matching bear put spread.

Box Spread

A bull call spread is an options strategy designed to benefit from a stock's limited increase in price.

A bull call spread is an options trading strategy designed to benefit from a stock's limited increase in price. Pros
Investors can realize limited gains from an upward move in a stock's price
A bull call spread is cheaper than buying an individual call option by itself
The bullish call spread limits the maximum loss of owning a stock to the net cost of the strategy
The investor forfeits any gains in the stock's price above the strike of the sold call option
Gains are limited given the net cost of the premiums for the two call options
Commodities, bonds, stocks, currencies and other assets If at expiry, the stock price has risen and is trading above the upper strike price—the second, sold call option—the investor exercises their first option with the lower strike price. The next step is to buy a call option for a strike price above the current market with a specific expiration date while simultaneously selling a call option at a higher strike price that has the same expiration date as the first call option. The profit is the difference between the lower strike price and upper strike price minus, of course, the net cost or premium paid at the onset.

Bull Call Spread : Pros & Cons Explained

A bullet trade allows an investor to participate in a stock's bearish move, without actually selling the stock, by buying that stock's ITM put option.

A bullet trade allows an investor to participate in a stock's bearish move, without actually selling the stock, by buying that stock's in-the-money (ITM) put option. A bullet trade is a secondary market trade that involves the act of purchasing an in-the-money option on a security so that the option buyer can effectively capitalize on the move in the underlying security without, in some instances, waiting for the exchange mandated price change.
Bullet trades are predominantly associated with bearish markets. A bullet trade is a secondary market trade that involves the act of purchasing an in-the-money option on a security so that the option buyer can effectively capitalize on the move in the underlying security without, in some instances, waiting for the exchange mandated price change. In an in-the-money call option bullet trade, the call option owner would need to exercise the option, obtain the security, and immediately sell it in the secondary market. To exercise the option the put owner would need to buy the security at its market price and then sell it to its option counterpart at the strike price.

Bullet Trade

A bull spread is a bullish options strategy using either two puts or two calls with the same underlying asset and expiration. 

A bull spread is an optimistic options strategy designed to profit from a moderate rise in the price of a security or asset. The maximum loss is only limited to the net premium (debit) paid for the options.
A bull call spread's profit increases as the underlying security's price increases up to the strike price of the short call option. By purchasing the bull call spread the investor is saying that by the expiration he anticipates the SPX index to have risen moderately to a level above the break-even point: $1,400 strike price + $2.75 (the net debit paid), or an SPX level of 1402.75. Since a bull put spread involves writing a put option that has a higher strike price than that of the long call options, the trade typically generates a credit at the start. Conversely, the position would have losses as the underlying security's price falls, but the losses remain stagnant if the underlying security's price falls below the long call option's strike price.

Bull Spread

Butterfly spread is an options strategy combining bull and bear spreads, involving either four calls and/or puts, with fixed risk and capped profit.

Table of Contents
What Is a Butterfly Spread?
Understanding Butterfly Spread The iron butterfly spread is created by buying an out-of-the-money put option with a lower strike price, writing an at-the-money put option, writing an at-the-money call option, and buying an out-of-the-money call option with a higher strike price. This is a neutral strategy that uses four options contracts with the same expiration but three different strike prices:
a higher strike price
an at-the-money strike price
a lower strike price The long call butterfly spread is created by buying a one in-the-money call option with a low strike price, writing (selling) two at-the-money call options, and buying one out-of-the-money call option with a higher strike price. The long put butterfly spread is created by buying one out-of-the-money put option with a low strike price, selling (writing) two at-the-money put options, and buying one in-the-money put option with a higher strike price.

Butterfly Spread

Buy-write is an options trading strategy where an investor buys an asset and simultaneously writes (sells) a call option on that asset.

A buy-write is an options trading strategy where an investor buys a security, usually a stock, with options available on it and simultaneously writes (sells) a call option on that security. Should the underlying asset price rise above the strike price then the option will be exercised at maturity (or before), resulting in the investor selling the asset at the strike price. Because the investor does not expect the price to rally soon, they also decide to write a call option for XYZ stock at an exercise price of $12.50, selling it for a small premium. If the security declines in price or at least does not rise a great deal, then the investor writing the call option gets to keep the premium received from the options sale. To execute this strategy well, the strike price of the option should be higher than the price paid for the underlying.

Buy-Write

A buyer's option is an agreement between a vendor and buyer that defines the price and specifications for a sale over a specified period.

The 'Buyers' Option' Contract in Illinois

"Uniform Commercial Code - § 2-205. Firm Offers

A buyer's option, in commercial contracts, is an agreement between a vendor and a buyer that defines price and specifications over a specified period for a product. In the auction industry, when multiple units of a product are being auctioned off, the buyer's option refers to the right given to the winner of the auction of the first unit to purchase any or all additional units at the winning bid price. The buyer's option is advantageous to the buyer, who can choose to buy a greater or smaller quantity of product at a fixed price depending on market conditions. In commercial contracts, a buyer's option is an agreement between a vendor and a buyer concerning the price and specifications of a product over a specified period. A buyer's option, in commercial contracts, is an agreement between a vendor and a buyer that defines price and specifications over a specified period for a product.

Buyer's Option

A buyer's call is an agreement in which a commodity purchase occurs at a specific price above a futures contract for an identical grade and quantity.

A buyer's call is an agreement between a buyer and seller in which the purchase of a commodity is at a specific price above a futures contract that is for the same grade and quantity. The agreement gives the buyer the option to fix the commodity price by either purchasing a futures contract from the seller or indicating to the seller the price and date at which the transaction could occur in the future. By entering into the call, the buyer would either offer to buy a six-month future contract from the oil company in exchange for the barrels of oil, or offer to buy 10 barrels of oil at some point in the future at a fixed market price. However, if that same buyer does not require the oil for another six months, a buyer’s call would allow them to enter into a contract with an oil company that has the oil for a specific price and a future delivery date. A buyer's call is an agreement between a buyer and seller in which the purchase of a commodity is at a specific price above a futures contract that is for the same grade and quantity.

Buyer's Call

Buy to close refers to terminology that traders, primarily option traders, use to exit an existing short position.

'Buy to close' refers to terminology that traders, primarily option traders, use to exit an existing short position. The term 'buy to close' is used when a trader is net short an option position and wants to exit that open position. 'Buy to close' is used when a trader is net short an option position and wants to exit that open position. Traders normally use a 'sell to open' order to establish this open short option position which the 'buy to close' order offsets. In a futures transaction, the trade ends at maturity or when the seller buys back the position in the open market to cover their short position.

Buy To Close

"Buy to open" is a term used by many brokerages to represent the opening of a long call or put position in options transactions.

"Buy to open" is a term used by brokerages to represent the establishment of a new (opening) long call or put position in options. When an investor decides to establish a new position in a particular stock, the first buy transaction is considered buy to open because it opens the position. A buy-to-open order indicates to market participants that the trader is establishing a new position rather than closing out an existing position. Establishing a new short position is called sell to open, which would be closed out with a buy-to-close order. If a new options investor wants to buy a call or put, that investor should buy to open.

Buy to Open

A call is an option contract and it is also the term for the establishment of prices through a call auction. The term also has several other meanings in business and finance. 

Table of Contents
What Is a Call? When the strike price on the call is less than the market price on the exercise date, the holder of the option can use their call option to buy the instrument at the lower strike price. If the market price is less than the strike price, the call expires unused and worthless. If the market price of the stock rises above the option’s strike price, the option holder can exercise their option, buying at the strike price and selling at the higher market price in order to lock in a profit. Call options are a type of derivative contract that gives the holder the right, but not the obligation, to purchase a specified number of shares at a predetermined price, known as the “strike price” of the option. But a price point above $100 will give the option buyer a chance to buy shares of the company for a price cheaper than the market price.

Call

Called away is a term for the elimination of a contract before its planned maturity or conclusion date, due to the obligation of delivery. 

For example, if an investor has written a short position call option and the holder of the option exercises it, then the option has been called away, and the writer has to complete their obligation to the contract. If the share price of the stock closes above the strike price of the option, then the investor's shares will be called away and sold to the individual that bought and exercised the option. With called away options, the investor is aware that the option may be called depending on the movement of the share price, as they wrote the options, so they can plan accordingly if this situation were to arise. This action may occur on option exercising when the stocks that an investor holds are sold because of a short call option or a long put option.

Called Away

A call option is a contract that gives the option buyer the right to buy an underlying asset at a specified price within a specific time period.

Table of Contents
What Is a Call Option?
Understanding Call Options
Purposes of Call Options
Example of a Call Option If the market price of the stock rises above the option’s strike price, the option holder can exercise their option, buying at the strike price and selling at the higher market price in order to lock in a profit. How Do Call Options Work?
Why Would You Buy a Call Option?
Is Buying a Call Bullish or Bearish?
Call options are financial contracts that give the option buyer the right, but not the obligation, to buy a stock, bond, commodity, or other asset or instrument at a specified price within a specific time period. The call option buyer may hold the contract until the expiration date, at which point they can take delivery of the 100 shares of stock or sell the options contract at any point before the expiration date at the market price of the contract at that time. Call options are a type of derivative contract that gives the holder the right, but not the obligation, to purchase a specified number of shares at a predetermined price, known as the “strike price” of the option.

Call Option

Call premium is the dollar amount over the par value of a callable debt security that is given to holders when the security is redeemed early.

Call premium is the dollar amount over the par value of a callable debt security that is given to holders when the security is redeemed early by the issuer. Call premium is the dollar amount over the par value of a callable debt security that is given to holders when the security is redeemed early by the issuer. The call premium is an amount over the face value of the security and is paid in the event that the security is redeemed before the scheduled maturity date. For noncallable bonds or for a bond redeemed during its call protection period, the call premium is a penalty paid by the issuer to the bondholders. To compensate callable security holders for the reinvestment risk they are exposed to and for depriving them of future interest income, issuers will typically pay a call premium.

Call Premium

A call warrant is a financial instrument that gives the holder the right to buy underlying shares at a specific price on or before a specified date.

Berkshire Hathaway to Invest $5 Billion in Bank of America

Berkshire Hathaway News Release, June 30, 2017

A call warrant is a financial instrument that gives the holder the right to buy the underlying stock shares at a specific price on or before a specified date. Like call options, call warrants enable speculators and investors to make enormous profits if the company's stock price increases. Like call options, call warrants enable speculators and investors to make enormous profits if the company's stock price increases. The price at which the warrant holder can buy the underlying stock is called the exercise price or strike price. A call warrant is a financial instrument that gives the holder the right to buy the underlying stock shares at a specific price on or before a specified date.

Call Warrant

A capped option limits, or caps, the maximum profit for the holder by automatically exercising when the underlying asset reaches a specified price.

A capped option limits, or caps, the maximum possible profit for its holder. This is a protective options strategy for the holder of an underlying asset through the purchase of an out-of-the-money put option while simultaneously selling an out-of-the-money call option. Conceptually, capped options are similar to vertical spreads where the investor sells a lower priced option to partially offset the purchase of a higher priced option. Capped options limit the amount of payout for the option holder, but also reduce the price the option buyer will pay. For example, in a bull call spread, the investor buys call options with one strike price while also selling the same number of calls of the same asset and expiration date but at a higher strike.

Capped Option

Cash-settled options pay out in cash upon expiration or exercise, rather than delivering the underlying asset or security.

A cash-settled option is a type of option for which actual physical delivery of the underlying asset or security is not required. Cash-settled options include digital options, binary options, cash-or-nothing options, as well as plain-vanilla index options that settle to the cash value of an index. Cash-settled options typically are of the European style, where the holder may only exercise the option contract at expiration (unlike American options, which can be exercised early).
Many options contracts today are cash-settled. Cash-settled options typically include index options and binary/digital options. The real difference is between cash-settled options with the European style exercise and those options with the American execution-style.

Cash-Settled Options

Cash-based options are options where the net value to the involved parties is calculated and a cash payment is made to settle the difference.

A cash-based option is an option that is always settled in cash. A cash-based option is advantageous to investors who want to capture movements in stock prices only but don’t want to be required to enter a position after the exercise of an option. To discourage this from happening, cash-based option exercise notices are only accepted until five minutes after the options close trading on that particular exchange, on any given trading day, in an effort to put holders and writers on equal footing. When a cash-based option is exercised, the net value to the parties that undertook the trade is determined and a cash payment is made. A cash-based option is an option that is always settled in cash.

Cash-Based Option

CFLEX is an electronic system for trading flex options, or options that do not possess standard conditions.

CFLEX is an electronic trading platform for customized options, run by the Chicago Board Options Exchange (CBOE) since 2007. CFLEX is an extension of CBOE's flexible options exchange (FLEX) system for entering into and reporting non-standard options positions on the exchange floor. CFLEX is operated by the CBOE, a premier options exchange that began in 1973 and was the first marketplace for traders and investors to trade derivative securities that were listed on the exchange. In 1993, CBOE created its FLexible EXchange (FLEX) options product, with the ability to choose one's own particular terms in an options trade. However, technology and the imaginations of options traders didn't catch up with the possibility of using electronic trading to trade customized options until 2007.

CFLEX

A chameleon option provides the flexibility of changing its structure if specific terms of the contract are met.

A chameleon option has the ability to change its structure should predetermined terms of the contract be met, such as a specified increase or decrease in the price of the underlying asset. The disadvantages of a chameleon option include a higher premium than a vanilla option, primarily because the chameleon offers a greater chance of the option finishing in the money (depending on the terms). If the underlying asset is priced above the strike price it could be a call option, and if the underlying asset's price is below the strike price, then it could be a put option. A chameleon option gives an investor greater flexibility in that they can trade a chameleon option instead of trading multiple vanilla options to attain the same result. Assuming a $45 strike vanilla option that expires in one month is trading for $1, and the $40 put is trading at $0.08, then the price of the chameleon will likely be around $1.08, and possibly slightly less since both parties save on transaction fees and the seller may wish to induce the buyer to trade the chameleon instead of simply buying a call and put if it is cheaper to do so.

Chameleon Option

Color is the rate at which the gamma of an option will change over time and is the third-order derivative of an option's value.

Color is an option's "greek" that measures the rate at which gamma will change over time. Color measures gamma, which measures changes in delta, which measures the sensitivity of the price of an option to changes in the underlying asset's price. Gamma measures the change in delta in response to a one-unit price move in the underlying asset, and delta measures how a derivative moves in response to a price change in the underlying. Options greeks measure many characteristics of options pricing, from how fast the options price changes with respect to the price changes in the underlying asset, called delta, to the rate of decay of the option's time value, called theta. Note though, gamma will start to decrease the closer delta gets to one because once delta is at 0.90 it can only increase by 0.10, which is less than what it was increasing before.
Color is an extension of gamma, measuring how much it moves over time.

Color

A combination generally refers to an options trading strategy that involves the purchase or sale of multiple calls and puts on the same asset.

In options trading, a combination is a blanket term for any options trade that is constructed with more than one option type, strike price, or expiration date on the same underlying asset. In options trading, a combination is a blanket term for any options trade that is constructed with more than one option type, strike price, or expiration date on the same underlying asset. Depending on the individual's needs, option combinations can create risk and reward profiles which either limit risk or take advantage of specific options characteristics such as volatility and time decay. Traders and investors use combinations for a wide variety of trading strategies because they can be constructed to provide specific risk-reward payoffs that suit the individual's risk tolerance and preferences and expectations for the current market environment. Some combinations are regularly used by options market makers and other professional traders because the trades can be constructed to capture risk premiums while protecting their own capital from extensive risk.

Combination

A cash-or-nothing call is an option that has only two payoffs; zero and one fixed level, no matter how high the price of the underlying asset moves.

A cash-or-nothing call (CONC) is an option that has a binary outcome: it pays out either a fixed amount, if the underlying stock exceeds a predetermined threshold or strike price, or pays out nothing.
Cash-or-nothing calls are a type of digital or binary option used in forex trading that either pays off or expires worthless. Standard options pay on a sliding scale so the deeper in the money they move, the higher the payout, and this gives them more of a sense of being an investment or trading vehicle, rather than a betting vehicle, though the distinction is largely more perceived than real.
Binary options are either American Style or European Style depending on the individual market and the underlying asset. A cash-or-nothing call (CONC) is an option that has a binary outcome: it pays out either a fixed amount, if the underlying stock exceeds a predetermined threshold or strike price, or pays out nothing.
Cash-or-nothing calls are a type of digital or binary option used in forex trading that either pays off or expires worthless. The difference is that cash-or-nothing options are cash-settled while AONC options take physical delivery of the underlying shares or assets. And it is digital, i.e. all or none, so if the underlying price is above the strike price, it pays the underlying price.

Cash-Or-Nothing Call

A conditional call option requires an issuer that calls a bond before maturity to replace it with a non-callable bond of similar value.

A conditional call option is a clause attached to some callable bonds stating that if the bond issuer calls the bonds away before they mature, they must provide the bondholder with a replacement, non-callable bond, of similar maturity and yield. A conditional call option is a clause attached to some callable bonds stating that if the bond issuer calls the bonds away before they mature, they must provide the bondholder with a replacement, non-callable bond, of similar maturity and yield. However, an investor who has had their bonds replaced with non-callable bonds through a conditional call option will continue to hold bonds from this issuer beyond the call date. Rather than facing reinvestment risk when interest rates have dropped, investors whose bonds come with a conditional call option are guaranteed to keep their money in bonds. The clause states that if the bond issuer calls the bonds away before they mature, they must provide the bondholder with a replacement, non-callable bond, of similar maturity and yield.

Conditional Call Option

Contract market, or designated contract market, is a registered exchange where commodities and option contracts are traded.

Contract market, or designated contract market, is a registered exchange where commodities and options contracts are traded. A contract market, or designated contract market (DCM) is any board of trade (exchange) designated to trade a specific options or futures contracts. A contract market, otherwise known as an exchange, provides the environment, whether it be a physical market floor or virtual electronic platforms, where futures and options contracts are bought and sold. In the interest of maintaining liquidity, contracts trading on a contract market have standardized sizes, expiration dates, and, for options, strike prices, which contrasts with over-the-counter (OTC) contracts. Contract market, or designated contract market, is a registered exchange where commodities and options contracts are traded.

Contract Market

A covered combination is an options strategy that involves the simultaneous sale of an out-of-the-money call and put.

The term covered combination refers to an options strategy that involves the simultaneous sale of an out-of-the-money (OTM) call and put with the same expiration dates on a security owned by the investor. An OTM call option has a strike price higher than the underlying asset's market price, while an OTM put's strike price is the opposite—it's lower than the asset's price. But if the price of Company XYZ's stock rises above $33, the investor is forced to sell their stock at $33, since the person who bought the call option will likely exercise the option. Although they may earn more premium income, investors do assume a greater risk of increasing their position in the stock should its price decline below the strike price. They sell a call option on Company XYZ with a strike price of $33 per share, while simultaneously selling a put option with a strike price of $27 per share.

Covered Combination

Covered writers are investors that limit risk by owning the underlying security they are selling. 

A covered writer is an investor or trader who holds the underlying security as a hedge against the options contract they are selling. Because the covered writer holds the underlying security, if and when the option contract is exercised, the covered writer can “cover” the agreement without the need to go into the open marketplace. A covered writer is an options seller who owns the underlying asset represented by the options contract to limit risk. A covered writer is an options seller who owns the underlying asset represented by the options contract. Because that stock could be worth more than $105 at the end of the six months, the buyer of the option will pay $5 per share for the opportunity to buy the ZXY stock at a potential discounted rate later.

Covered Writer

A covered call refers to a financial transaction in which the investor selling call options owns the equivalent amount of the underlying security.

Options Strategies: Covered Calls & Covered Puts

Table of Contents
What Is a Covered Call?
Understanding Covered Calls
Special Considerations
Example of a Covered Call
Are Covered Calls Profitable?
Are Covered Calls Risky?
Can I Use Covered Calls in My IRA?
Is There a Covered Put?
 Instead, traders may employ a married put, where an investor, holding a long position in a stock, purchases a put option on the same stock to protect against depreciation in the stock's price. The maximum profit of a covered call is equivalent to the strike price of the short call option, less the purchase price of the underlying stock, plus the premium received. Similarly, if an investor is very bearish, they may be better off simply selling the stock, since the premium received for writing a call option will do little to offset the loss on the stock if the stock plummets. If they sell a call option on TSJ with a strike price of $27, they earn the premium from the option sale but, for the duration of the option, cap their upside on the stock to $27.

Covered Call

Covered warrant is a security that offers the right, but not obligation, to buy or sell an asset at a specified price on or before a specified date.

A covered warrant is a type of warrant where the issuer is a financial institution rather than an individual company and offers the right, but not obligation, to buy or sell an asset at a specified price on or before a specified date. A covered warrant is a type of warrant where the issuer is a financial institution rather than an individual company and offers the right, but not obligation, to buy or sell an asset at a specified price on or before a specified date. A covered warrant is a type of warrant where the issuer is a financial institution rather than an individual company and offers the right, but not obligation, to buy or sell an asset at a specified price on or before a specified date. A covered warrant can be either European style or American style, the former indicating that exercise of the right can only occur on the expiration date, and the latter signifying that an investor can exercise the right anytime between purchase date and expiration date. A warrant is a type of investment security that gives the holder the right, but not obligation, to buy or sell an underlying asset at a specified price on or before a specified date.

Covered Warrant

A credit spread reflects the difference in yield between a treasury and corporate bond of the same maturity. It also refers to an options strategy.

A credit spread is the difference in yield between a U.S. Treasury bond and another debt security of the same maturity but different credit quality. A credit spread is the difference in yield between a U.S. Treasury bond and another debt security of the same maturity but different credit quality. To illustrate, if a 10-year Treasury note has a yield of 2.54% while a 10-year corporate bond has a yield of 4.60%, then the corporate bond offers a spread of 206 basis points over the Treasury note. As an example, a 10-year Treasury note with a yield of 5% and a 10-year corporate bond with a yield of 7% are said to have a credit spread of 200 basis points. **Credit Spread (bond) = (1 – Recovery Rate) \(Default Probability)**
Credit spreads vary from one security to another based on the credit rating of the issuer of the bond.

Credit Spread , Formula, & Examples

A currency warrant is a financial instrument used to hedge currency risk or speculate on currency fluctuations in foreign exchange markets.

A currency warrant is a financial instrument used to hedge currency risk or speculate on currency fluctuations in foreign exchange (forex) markets. Currency warrants are priced the same way as shorter-term currency options and allow holders the right, but not the obligation, to exchange a set amount of one currency into another currency at a specified exchange rate on or before a specified date. Currency warrants are priced the same way as shorter-term currency options and are used to hedge currency risk or to speculate on currency moves that will occur over a time period longer than one year. A currency warrant is a financial instrument used to hedge currency risk or speculate on currency fluctuations in foreign exchange (forex) markets. A currency warrant, like other options contracts, derives its value from the underlying exchange rate, where a warrant's value goes up as the underlying rises and a put warrant's value goes up when the underlying price falls, similar to a call option.

Currency Warrants

A contract that grants the holder the right, but not the obligation, to buy or sell currency at a specified exchange rate during a particular period of time. For this right, a premium is paid to the broker, which will vary depending on the number of contracts purchased.

Table of Contents
What Is a Currency Option? Risk include interest rate differentials (IRD), market volatility, the time horizon for expiration, and the current price of the currency pair.
There are two main types of options, calls and puts.
Call options provide the holder the right (but not the obligation) to purchase an underlying asset at a specified price (the strike price), for a certain period of time. Additional types of exotic options may attach the payoff to more than the value of the underlying instrument at maturity, including but not limited to characteristics such as at its value on specific moments in time such as an Asian option, a barrier option, a binary option, a digital option, or a lookback option.
Let's say an investor is bullish on the euro and believes it will increase against the U.S. dollar. A currency option (also known as a forex option) is a contract that gives the buyer the right, but not the obligation, to buy or sell a certain currency at a specified exchange rate on or before a specified date. Currency options give investors the right, but not the obligation, to buy or sell a particular currency at a pre-specific exchange rate before the option expires.

Currency Option

De-hedge refers to the process of taking off positions that were put in place as a hedge.

De-hedging refers to the process of closing out positions that were originally put in place to act as a hedge in a trade or portfolio. The de-hedging process may occur all at once, where the full hedge is removed in a single trade; or incrementally, leaving the position partially hedged.
To de-hedge is to remove an existing position that acts as a hedge against a primary position in the market. De-hedging can occur for several reasons including a change in outlook, a hedge that has paid off, removal of the primary position, or to reduce costs related to hedging. De-hedging involves going back into the market and closing out hedged positions, which were taken to limit an investor's risk of price fluctuations in relation to the underlying asset. A hedge is a risk-reducing position taken to limit the potential losses in an existing position or investment.

De-hedge

A dealer option is a contract issued on a physical commodity, where the dealer has the physical goods to deliver or cash to buy the underlying commodity.

A dealer option is a contract issued on the physical inventory of a commodity. Since dealer options are traded over the counter, typically by people involved with the physical commodity, the options can be used to take physical possession of a commodity, or transfer that commodity to another party via the contract. If the price doesn't rise above $1,550, then there is no need for the option buyer to exercise the contract and buy the gold at $1,550, since it is cheaper to buy the gold on the open market where it is trading below $1,550. The seller will provide the 150 ounces of gold, potentially via a vault receipt, and the option buyer will pay the option seller $1,550 x 150 ounces. In exchange for the right to buy the gold at $1,550 per ounce, even if it goes much higher in the next three months, the option buyer agrees to pay the option seller a premium.

Dealer Option

An option is deep out of the money if its strike price is significantly above (call) or below (put) the current price of the underlying asset.

An option is considered deep out of the money if its strike price is significantly above (for a call) or significantly below (for a put) the current price of the underlying asset. In order for a call option to have value at maturity or expiration, the price of the underlying asset must be above the option's strike price. An option is considered deep out of the money if its strike price is significantly above (for a call) or significantly below (for a put) the current price of the underlying asset. An option is deep out of the money if its strike price is significantly above (call) or below (put) the current price of the underlying asset. For example, if the current price of the underlying stock is $60, a put option with a strike price of $45 would be considered deep out of the money.

Deep Out of the Money

A deep in the money option has a strike price significantly below or above the market price of the underlying asset.

Publication 550: (2019), Investment Income and Expenses

Deep in the money is an option that has an exercise or strike price significantly below (for a call option) or above (for a put option) the market price of the underlying asset. Traders will often exercise deep in the money options early (if they are American style).
The Internal Revenue Service (IRS) defines deep in the money options as either:
Any option with a term of fewer than 90 days that has a strike price that is one strike less than the highest available stock price. Deep in the money is an option that has an exercise or strike price significantly below (for a call option) or above (for a put option) the market price of the underlying asset. Because the option term is more than 90 days, the call option with a strike price of $150 (two strikes less than $210) is a deep in the money option. So, if a call option is deep in the money, it means that the strike price is at least $10 less than the underlying asset, or $10 higher for a put option.

Deep In The Money

Delta is the ratio comparing the change in the price of the underlying asset to the corresponding change in the price of a derivative.

Delta is the ratio that compares the change in the price of an asset, usually marketable securities, to the corresponding change in the price of its derivative. Delta spread is an options trading strategy in which the trader initially establishes a delta neutral position by simultaneously buying and selling options in proportion to the neutral ratio (that is, the positive and negative deltas offset each other so that the overall delta of the assets in question totals zero). If the put option on BigCorp shares has a delta of -$0.65, then a $1 increase in BigCorp's share price generates a $.65 decrease in the price of BigCorp's put options. Thus, if BigCorp’s shares trade at $20 and the call option trades at $2, a change in the price of BigCorp’s shares to $21 means the call option will increase to a price of $2.35. For example, if a stock option has a delta value of 0.65, this means that if the underlying stock increases in price by $1 per share, the option on it will rise by $0.65 per share, all else being equal.

Delta  & Examples

Delta hedging attempts is an options-based strategy that seeks to be directionally neutral.

Delta hedging is an options trading strategy that aims to reduce, or hedge, the directional risk associated with price movements in the underlying asset. For example, the price of a call option with a hedge ratio of 0.40 will rise 40% of the stock-price move if the price of the underlying stock increases by $1.
The behavior of delta is dependent on if it is:
In-the-money or currently profitable
At-the-money at the same price as the strike
Out-of-the-money not currently profitable
A put option with a delta of -0.50 is considered at-the-money meaning the strike price of the option is equal to the underlying stock's price. For example, if a stock option for XYZ shares has a delta of 0.45, if the underlying stock increases in market price by $1 per share, the option value on it will rise by $0.45 per share, all else being equivalent. Closely related is delta-gamma hedging, which 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. For example, assume an investor holds one call option with a delta of 0.50, which indicates the option is at-the-money and wishes to maintain a delta neutral position.

Delta Hedging

Dividend arbitrage is an options trading strategy that involves purchasing puts and stock before the ex-dividend date and then exercising the put.

Dividend arbitrage is an options trading strategy that involves purchasing put options and an equivalent amount of underlying stock before its ex-dividend date and then exercising the put after collecting the dividend. Dividend arbitrage is an options trading strategy that involves purchasing put options and an equivalent amount of underlying stock before its ex-dividend date and then exercising the put after collecting the dividend.
When used on a security with low volatility (causing lower options premiums) and a high dividend, dividend arbitrage can result in an investor realizing profits while assuming very low to no risk.
Dividend arbitrage is intended to create a risk-free (or low-risk) profit by hedging the downside of a dividend-paying stock while waiting for upcoming dividends to be issued.
First, some basics on arbitrage and dividend payouts. A stock's ex-dividend date (or ex-date for short), is a key date for determining which shareholders will be entitled to receive the dividend that's shortly to be paid out. So, in a dividend arbitrage play, a trader buys the dividend-paying stock and put options in an equal amount before the ex-dividend date. Dividend arbitrage is an options trading strategy that involves purchasing put options and an equivalent amount of underlying stock before its ex-dividend date and then exercising the put after collecting the dividend.

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