- When one company purchases the majority interest in the acquired.
- Buying of stock by institutional or professional investors over an extended period of time.
- Actively Managed Mutual Funds
- Shareholders, through a mutual fund manager, buy and sell stocks and bonds, within the fund, in an attempt to beat the market.
- Advance-Decline Theory
- Also called the Breadth of Market Theory, this theory states that the market direction can be determined by the number of stocks that have increased compared to those that have decreased in value. It is considered bullish if more shares are advancing than declining.
- After hours trading (AHT)
- Trading after regular trading hours on the major exchanges.
- American Depository Receipt
- A negotiable certificate issued by a U.S. bank representing a specified number of shares (or one share) in a foreign stock that is traded on a U.S. exchange. ADRs are denominated in U.S. dollars, with the underlying security held by a U.S. financial institution overseas. ADRs help to reduce administration and duty costs that would otherwise be levied on each transaction.
- American Style Options
- An option contract that may be exercised at any time between the date of purchase and the expiration date.
- The simultaneous purchase and sale of an asset in order to profit from a difference in the price. It is a trade that profits by exploiting price differences of identical or similar financial instruments, on different markets or in different forms.
- The price a seller is willing to accept for a security. It includes both price and quantity willing to be sold.
- Asset allocation
- An investment strategy that aims to balance risk and reward by apportioning a portfolio’s assets according to an individual’s goals, risk tolerance and investment horizon. The main asset classes – equities, fixed-income, real estate and cash and equivalents – have different levels of risk and return, so each will behave differently over time.
- The receipt of an exercise notice by an option seller that obligates him to sell (in the case of a call) or purchase (in the case of a put) the underlying security at the specified strike price.|
- An option is at-the-money if the strike price of the option is equal to the market price of the underlying security.
Bar Chart: This price chart consists of session high and lows as well as the opening and closing prices. It is also referred to as the O-H-L-C bar.
- Balance sheet
- A financial statement that summarizes a company’s assets, liabilities and shareholders’ equity at a specific point in time. These three balance sheet segments give investors an idea as to what the company owns and owes, as well as the amount invested by the shareholders. The balance sheet must follow the following formula:
Assets = Liabilities + Shareholders’ Equity
- Basis is often a moving target. Generally it is what you paid for a stock or option. There are adjustments which may be necessary to report the proper capital gain. These adjustments may include special dividends, stock splits and stock dividends, and some others.
- Pessimistic investor sentiment that a particular security or market is headed downward.
- This is a measure of the volatility or systemic risk (market risk) of a security as compared to the market as a whole.
- An offer made by an investor to buy an equity. It will include price and quantity.
- BID/ASK SPREAD
- The difference in price between the highest price that a buyer is willing to pay for the option and the lowest price a seller is willing to sell it.
- Black-Scholes Option Pricing Model
- A model used to calculate the value of an option, by factoring in stock price, strike price and expiration date, risk-free return, and the standard deviation of the stock’s return.
- Blue chip
- A nationally known, well-established and financially sound company. Blue chips generally sell high-quality, widely accepted products and services. Blue chip companies are known to weather downturns and operate profitably in the face of adverse economic conditions, which help to contribute to their long record of stable and reliable growth.
- The point at which gains equal losses
- Brokerage account
- An arrangement between an investor and a licensed brokerage firm that allows the investor to deposit funds with the firm and place investment orders through the brokerage, which then carries out the transactions on the investor’s behalf.
- Optimistic investor sentiment that a particular equity or market will rise.
- Buy down price of stock
- Using the intrinsic value of an in-the-money option premium to reduce the cost of the stock purchase.
- Buy to close
- A term used by many brokerages to represent the closing of a short position in option transactions.
- Buy-write order
- See net debit order
- Calendar Spread
- Simultaneously establishing long and short options positions on the same underlying stock with different expiration dates. For example, you buy the December, 2010 $20 call and sell the April, 2010 $20 call on the same equity.
- An option contract giving the owner the right (but not the obligation) to buy a specified amount of an underlying security at a specified price within a specified time.
- Candlestick Chart
- This chart is created by displaying the high, low, open and close for a security each day over a certain time frame.
- Capital Asset
- This is pretty much anything you own and use for personal, pleasure or investment purposes. The term includes such tangible assets as a boat, a coin collection, or a piece of real estate. It may also include intangible assets, such as a patent or copyright. The distinction between a capital asset and a non-capital asset is its use. Any capital asset becomes a non-capital asset if it is used in a trade or business, or is "for sale" to customers in a trade or business.
- Capital Gain (Loss)
- A capital gain or loss is simply the difference between the proceeds of the sale and your cost basis of the asset sold. If you bought a stock for $25 and sold it for $30, you have a capital gain of $5. You can’t have a capital gain or loss unless you have a sale of a capital asset. However, a sale of an asset does not necessarily mean you have a capital gain or loss. Why… because every capital gain requires two parts of the transaction, a sale AND an acquisition, or purchase.
- Cash account
- A regular brokerage account in which the customer is required by Regulation T to pay for securities within two days of when a purchase is made.
- Cash allocation
- Allotting an equivalent amount of cash to each security within a portfolio.
- Cash-secured put
- When a brokerage company requires us to have the cash in our accounts to purchase the shares we are obligated to buy after selling a put option.
- CBOE Volatility Index
- See VIX
- Closed end fund
- A closed-end fund is a publicly traded investment company that raises a fixed amount of capital through an initial public offering (IPO). The fund is then structured, listed and traded like a stock on a stock exchange.
- Collar (strategy)
- A protective options strategy that is implemented after a long position in a stock has experienced substantial gains. It is created by purchasing an out of the money put option while simultaneously writing an out of the money call option.
- Common stock
- A security that represents ownership in a corporation. Holders of common stock exercise control by electing a board of directors and voting on corporate policy. Common stockholders are on the bottom of the priority ladder for ownership structure. In the event of liquidation, common shareholders have rights to a company’s assets only after bondholders, preferred shareholders and other debt holders have been paid in full.
- Sideways Pattern (consolidation) – the horizontal price movement of an equity where the forces of supply and demand are equal. The stock simply cannot establish an uptrend or a downtrend
- Contract cycle
- The period of time starting with the first trading day after expiration Friday through the end of the following expiration Friday (4 PM EST unless there is an exchange recognized holiday).
- Contrary Exercise Notice
- If a customer instructs their clearing firm to exercise an "out-of-the-money" option or to abandon an "in-the-money" option, this is a "Contrary Instruction". Contrary Instructions are not allowed in some products.
- Convert Dead Money to Cash Profits
- An exit strategy wherein an option is bought back and the underlying equity sold. The cash is then used to buy a better performing stock which is used to sell another covered call.
- This measures the degree to which investments are related.
- Cost basis
- The original value of an asset. It is used to determine the capital gain, which is equal to the difference between the asset’s cost basis and the current market value. Also: the amount of your original investment.
- Cost to carry
- When money is borrowed from our broker in a margin account, interest is charged and needs to be calculated into our results.
- Covered call writing
- A strategy in which one sells call options while simultaneously owning the underlying security.
- Currency carry trade
- A strategy in which an investor sells a certain currency with a relatively low interest rate and uses the funds to purchase a different currency yielding a higher interest rate. A trader using this strategy attempts to capture the difference between the rates, which can often be substantial, depending on the amount of leverage the investor chooses to use.
- Custodial account
- An account created at a bank, brokerage firm or mutual fund company that is managed by an adult for a minor that is under the age of 18 to 21 (depending on state legislation).
- Cyclical stocks
- An equity whose price is affected by ups and downs in the overall economy. Cyclical stocks typically relate to companies that sell discretionary items that consumers can afford to buy more of in a bullish economy and will cut back on during a recession. Contrast cyclical stocks with counter-cyclical stocks, which tend to move in the opposite direction from the overall economy, and with consumer staples, which people continue to demand even during a downturn.
- Day order
- An order to buy or sell a security that automatically expires if not executed on the day the order was placed. A day order is an order that is good for that day only. If it is not filled it will be canceled, and it will not be filled if the limit or stop order price was not met during the trading session.
- Defensive stock
- A stock that provides a constant dividend and stable earnings regardless of the state of the overall stock market.
- This is the amount an option value will change for every $1 change in the price of a stock. The greater the chance of the strike ending up in-the-money, the higher the delta. Delta values for calls run from 0 to 1.
- A security whose price is dependent upon or derived from one or more underlying assets. The derivative itself is merely a contract between two or more parties. Its value is determined by fluctuations in the underlying asset. The most common underlying assets include stocks, bonds, commodities, currencies, interest rates and market indexes. Most derivatives are characterized by high leverage.
- Diagonal Spread
- A long and short options position with different expirations AND strikes. For example, you buy the December, 2010 $20 call and sell the April, 2010 $25 call.
- A reduction in earnings per share of common stock that occurs through the issuance of additional shares. This is avoided with stock splits by reducing the current market value of a stock by a similar ratio as was the number of shares increased.
- Discount broker
- See "online discount broker"
- the selling of stock by large institutions over an extending period of time
- A risk management technique that mixes a wide variety of investments within a portfolio. The rationale behind this technique contends that a portfolio of different kinds of investments will, on average, yield higher returns and pose a lower risk than any individual investment found within the portfolio.
- A distribution of a portion of a company’s earnings, decided by the board of directors, to a class of its shareholders.
- Dollar cost averaging
- The technique of buying a fixed dollar amount of a particular investment on a regular schedule, regardless of the share price. More shares are purchased when prices are low, and fewer shares are bought when prices are high.
- Downside protection
- The intrinsic value portion of an in-the-money call option premium divided by the original cost basis. It is the percentage of your investment that can be lost without affecting the option return on your investment. The formula is as follows:
Intrinsic Value of option premium
———————————————– = % of downside protection
Original Cost of stock
- Down trending Stock
- A stock with a declining share price showing lower highs and lower lows.
- The Dow Theory
- This theory states that the market is in an upward trend if one of the averages (industrial or transportation) advances above a previous significant high and is accompanied by a similar advance in the other. A major trend is identified only when BOTH the Dow Industrial and Dow Transportation Averages reach a new high or a new low. Without this confirmation, the market will return to its previous trading pattern.
- Earnings estimate
- An analyst’s estimate for a company’s future quarterly or annual earnings.
- Earnings guidance
- Information that a company provides as an indication or estimate of their future earnings.
- Earnings per share
- The portion of a company’s profit allocated to each outstanding share of common stock. Earnings per share serves as an indicator of a company’s profitability.
Net Income – Dividends on Preferred Stock
———————————————– = Earnings per share
Average Outstanding Shares
- Earnings report
- A quarterly filing made by public companies to report their performance. Included in these reports are items such as net income, earnings per share, earnings from continuing operations, and net sales. These reports follow the end of each quarter. Most companies file in January, April, July, and October.
- Earnings surprise
- When the earnings reported in a companies quarterly or annual report are above or below analysts’ earnings estimates.
- Efficient frontier
- A line created from the risk-reward graph, comprised of optimal portfolios.
- Elite Calculator
- Expanded version of the basic Ellman Calculator (ESOC) which includes an unwind tab and a Schedule D.
- Ellman Calculator
- See ESOC.
- Emerging growth stockr
- A company in a line of business formed around a new product or idea that is in the early stages of development. An emerging company typically is often centered around a new technology.
- Ellman System Option Calculator which is an excel calculator used to compute option returns specifically for Alan Ellman’s Cashing In On Covered Calls system.
- See exchange traded funds.
- Exchange traded funds
- A security that tracks an index, a commodity, or a basket of assets like an index fund, but trades like a stock on an exchange, thus experiencing price changes throughout the day as it is bought and sold. These securities provide the diversification of an index fund.
- When you exercise your stock option, you "trade in" your options for the actual stock.
- Exercise by exception
- A procedure used by OCC as an operational convenience for its clearing members. Under these proceedings, a clearing member is deeming to have tendered exercise notices for options that are in-the-money by threshold amounts, unless specifically instructed not to do so. This procedure protects the owner from losing the intrinsic value of the option because of failure to exercise. Unless instructed not to do so, all expiring equity options that are held in customer accounts will be exercised if they are in the money by a specified amount.
- European Style Option
- An option contract that can only be exercised on the expiration date.
- Execution (of a trade)
- The completion of a buy or sell stock order.
- Exit strategy
- A plan in which a trader intends to get out of an investment position made in the past. It is a way of cashing out or closing out a position.
- Expected Return
- Possible return on a portfolio in different market conditions (bullish, bearish and neutral) weighted by the likelihood that the return will occur.
- Expense ratio
- A measure of what it costs an investment company to operate a mutual fund. It is determined through an annual calculation, where a fund’s operating expenses are divided by the average dollar value of its managed assets Operating expenses are taken out of a fund’s assets and lower the return to a fund’s investors. Some funds have a marketing cost referred to as a 12b-1 fee, which would also be included in operating expenses. It is interesting that a fund’s trading activity – the buying and selling of stock – is NOT included in the calculation of expense ratio.
- Expiration date
- The last day (in the case of an American- style) or the only day (in the case of European-style) on which an option may be exercised. For stock option, this date is the third Friday of the expiration month. If Friday is a holiday, the last trading day is the preceding Thursday.
- Exponential moving average or EMA
- A type of moving average that is similar to a simple moving average, except that more weight is given to the most recent data. It reacts faster to recent price changes than does a simple moving average. The 12- and 26-day EMA’s are the most popular short-term averages, and they are used to create indicators like the MACD.
- Fair value
- Refers to the relationship between the futures contract on a market index like the S&P 500 and the actual value of the index. If the futures are above fair value then traders are betting the market index will go higher, the opposite is true if futures are below fair value.
- First call
- A company that gathers research notes and earnings estimates from brokerage analysts and forms a consensus estimate. The estimate is compared to the actual earnings reports, and then the difference between the two is the earnings surprise. The other major player in this estimate game is Zachs.
- Fundamental analysis
- A method of analyzing the prospects of a security by observing the accepted accounting measures such as earnings, sales, and assets and so on.
- Full service broker
- A broker that provides a large variety of services to its clients, including research and advice, retirement planning, tax tips, and more. Commissions at full-service brokerages are much higher than those at discount brokers.
- The rate of change for delta with respect to the price of the underlying security. It is an estimate of how much the delta of an option changes when the price of the stock moves $1.
- A gap is a break between prices on a chart that occurs when the price of a stock makes a sharp move up or down with no trading occurring in between.
- The tendency of investment funds and businesses to move beyond domestic and national markets to other markets around the globe, thereby increasing the interconnectedness of different markets. It has had the effect of increasing international trade and cultural exchange.
- Growth stock
- Shares in a company whose earnings are expected to grow at an above-average rate relative to the market.
- A mathematical means of estimating the risk of stock options. Delta measures the change in the option price due to a change in the stock price, gamma measures the change in the option delta due to a change in the stock price, theta measures the change in the option price due to time passing, vega measures the change in the option price due to volatility changing, and rho measures the change in the option price due to a change in interest rates.
- GTC order
- An order to buy or sell a security at a set price that is active until the investor decides to cancel it or the trade is executed. If an order does not have a "good-’til-canceled" instruction then the order will expire at the end of the trading day the order was placed. In most cases, GTC orders are canceled by brokerage firms after 30-90 days.
- Historical volatility
- This is the actual price fluctuation as observed over a period of time.
- Hit a Double
- An exit strategy wherein an option is bought back and then resold at a higher premium in the same contract period.
- Hit a Triple
- An exit strategy wherein an option is bought back and resold twice in the same contract period.
- Horizontal Spread
- A spread where both options have the same strike price as in the above example but different expiration dates. The terms calendar and horizontal spreads are interchangeable.
- Hypothecation agreement
- When a person pledges securities in a margin account used as collateral for money loaned from a brokerage.
- IBD 50
- The Investor’s Business Daily 50 is a computer-generated ranking of the leading companies trading in America. Rankings are based on a combination of each company’s profit growth; IBD’s Composite Rating, which includes key measures such as return on equity, sales growth and profit margins; and relative price strength in the past 12 months.
- Implied Volatility
- This is a forecast of the underlying stock’s volatility as implied by the option’s price in the marketplace.
- Income stock
- Stocks that have lower levels of volatility than the overall stock market and offer higher-than-market dividend yields. Income stocks may have limited future growth options, thereby requiring a lower level of ongoing capital investment. The excess cash flow from profits can therefore be directed back toward investors on a regular basis. They are most commonly found as companies operating within real estate, energy sectors, utilities, natural resources and financial institutions.
- Income statement
- A financial statement that measures a company’s financial performance over a specific accounting period. Financial performance is assessed by giving a summary of how the business incurs its revenues and expenses through both operating and non-operating activities. It also shows the net profit or loss incurred over a specific accounting period, typically over a fiscal quarter or year. Also known as the "profit and loss statement"
- Index fund
- A type of mutual fund with a portfolio constructed to mirror, or track, the components of a market index such as the S&P 500 Index. An index mutual fund is said to provide broad market exposure, low operating expenses and low portfolio turnover. Indexing is a passive form of fund management that has been successful in out-performing most actively managed mutual funds.
- Index futures
- A futures contract on a stock or financial index. For each index there may be a different multiple for determining the price of the futures contract.
Industry: A classification that refers to a group of companies that are related in terms of their primary business activities. In modern economies, there are dozens of different industry classifications, which are typically grouped into larger categories called sectors.
- Internal rate of return
- IRR is a way to analyze an investment considering the time value of money. It basically calculates the interest rate which is the equivalent of the dollar amount your investment will return
- A term describing any option that has intrinsic value. A call option is in-the-money if the underlying security is higher than the strike price of the call.
- Intrinsic value
- The value of an option if it were to expire immediately with the underlying stock at its current price; the amount by which the stock is in-the-money. For call options, this is the positive difference between the stock price and the strike price.
- The act of committing money to an endeavor (a business, project, real estate, stock market etc.) with the expectation of generating an additional income or profit.
- Investor Fear Gauge
- See VIX.
- IPO (initial public offering)
- The first sale of stock by a private company to the public.
Joint account: A brokerage account that is shared between two or more individuals. Joint accounts are most likely to be used between relatives, couples or business partners who have a level of familiarity and trust for each other, as this type of account typically allows anyone named on the account to access funds within it.
- Joint tenants and the right of survivorship (JTWROS)
- A type of brokerage account which is owned by at least two people, where all tenants have an equal right to the account’s assets and are afforded survivorship rights in the event of the death of another account holder.
- Joint tenants in common (JTIC)
- A type of brokerage account which is owned by at least two people with no rights of survivorship afforded to any of the account holders.
- Key economic indicator
- Macroeconomic data that is used by investors to interpret current or future investment possibilities and judge the overall health of an economy. These are specific pieces of data released by the government and non-profit organizations. These include:
The Consumer Price Index (CPI)
Gross Domestic Product (GDP)
The price of crude oil
- This is an investment technique whereby investors purchase multiple financial products with different maturity dates. I have borrowed this term and used it to describe a covered call t5echnique where different strike prices are used for the same equity.
- Lagging indicator
- A technical indicator that trails the price action of an underlying asset. It is used by traders to generate transaction signals or to confirm the strength of a given trend. Since these indicators lag the price of the asset, a significant move will generally occur before the indicator is able to provide a signal. It confirms long-term trends but does not predict them.
- Large cap
- An abbreviation for the term large market capitalization. Market capitalization is calculated by multiplying the number of a company’s outstanding shares by its stock price per share. The expression large cap is used by the investment community as an indicator of a company’s size. A large cap stock has a market-capitalization dollar value of over 10 billion.
- These are option contracts with expiration dates longer than one year. Only the more heavily traded stocks and ETFs have these types of options associated with them.
- LEAPS- Long-Term Equity Anticipation Securities
- These are option contracts with expiration dates longer than one year. Only the more heavily traded stocks and ETFs have these types of options associated with them.
- Legging in
- A way of executing a covered call trade wherein we first buy the stock and, once owned, sell the corresponding call option.
- Limit Order
- An order placed by a brokerage to buy or sell a specified number of shares at a specific price or better. The length of time an order remains outstanding can also be specified.
- Line Chart
- This is a very basic chart created by connecting a series of closing prices of a particular security with a line.
- Long (position)
- The buying of a security, such as a stock or options contract, with the expectation that the asset will rise in value.
- MACD (Moving average convergence divergence)
- A trend-following momentum indicator that shows the relationship between two moving averages of prices. The MACD is calculated by subtracting the 26-day exponential moving average (EMA) from the 12-day EMA. A 9-day EMA of the MACD, called the signal line, is then plotted on top of the MACD, functioning as a trigger for buy and sell signals.
- MACD Histogram
- A common technical indicator that illustrates the difference between the MACD and the trigger line. This difference is then plotted on a chart in the form of a histogram to make it easy for a trader to determine a specific asset’s momentum.
- Margin account
- This is a brokerage account where the client has the ability to borrow money from the broker to purchase securities. This loan is then collateralized by the cash and securities in that specific account.
- Margin call
- When the value of the securities in a margin account drop to a certain level, the investor will be required to put additional cash in the account or sell certain securities
- Market capitalization
- The total dollar market value of all of a company’s outstanding shares. It is calculated by multiplying a company’s shares outstanding by the current market price of one share. The investment community uses this figure to determine a company’s size, as opposed to sales or total asset figures. Also referred to as market cap.
- Market consensus
- The average earnings estimates made by brokers and security analysts. Also known as earnings expectations.
- Market Order
- An order to buy or sell a stock at the current best available price.
- Market psychology
- The overall sentiment or feeling that the market is experiencing at any particular time. Greed, fear, expectations and circumstances are all factors that contribute to the group’s overall investing mentality or sentiment.
- Market sector
- An industry or market sharing common characteristics. Investors use sectors to place stocks and other investments into categories like technology, health care, energy, utilities and telecommunications. Each sector has unique characteristics and a different risk profile.
- Market Tone
- The feeling of a market (general psychology) as demonstrated by the price activity of stocks. We use the VIX and S&P 500 chart patterns to help assess this sentiment.
- Married put
- When the protective put is purchased on the same day as the stock, it is referred to as a married put for tax purposes.
- A general term used to refer to the consolidation of companies. It is a combination of two companies to form a new company.
- Modern portfolio theory
- A portfolio optimization methodology that utilizes the mean variance of investment returns. It uses the standard deviation of all returns as a measure of risk.
- Momentum indicator
- Designed to track momentum in the price of a security to help identify the enthusiasm of buyers and sellers involved in the price trend development. Some indicators compare the closing price with some historical price so many periods before; others construct trend lines like the MACD. Others, like Stochastics, is a ratio using the high, low, and close values on various days.
- Momentum Oscillator
- A technical analysis tool that is banded between two extreme values and built with the results from a trend indicator for discovering short-term overbought or oversold conditions. As the value of the oscillator approaches the upper extreme value the asset is deemed to be overbought, and as it approaches the lower extreme it is deemed to be oversold. This oscillator is most advantageous when a stock price is in a trading range (sideways). An example is the stochastic oscillator
- Money market securities
- The securities market dealing in short-term debt and monetary instruments. These forms of debt mature in less than one year and are quite liquid. Treasury bills make up the bulk of the money market instruments. These securities are relatively risk-free.
- Moving average
- An indicator frequently used in technical analysis showing the average value of a securities price over a set period. Moving averages are generally used to measure momentum and define areas of possible support and resistance.
- Multiple Tab of the ESOC
- Compare returns, upside potential, and downside protection for many stocks, all on the same page.
- Mutual fund
- An investment vehicle that is made up of a pool of funds collected from many investors for the purpose of investing in securities such as stocks, bonds, money market instruments and similar assets. Mutual funds are operated by money managers, who invest the fund’s capital and attempt to produce capital gains and income for the fund’s investors. A mutual fund’s portfolio is structured and maintained to match the investment objectives stated in its prospectus.
- Nasdaq 100 index
- An index composed of the 100 largest, most actively traded U.S. companies listed on the Nasdaq stock exchange. This index includes companies from a broad range of industries with the exception of those that operate in the financial industry, such as banks and investment companies.
- NAV (net asset value)
- A mutual fund’s price per share or exchange-traded fund’s (ETF) per-share value. In both cases, the per-share dollar amount of the fund is calculated by dividing the total value of all the securities in its portfolio, less any liabilities, by the number of fund shares outstanding.
- Net debit order
- This is where you buy the stock and sell the option at the exact same time, not for specific corresponding prices but for a limit net debit. Also called a buy-write.
- Non Standard Options
- These are options that don’t have the standard terms of an options contract, namely 100 shares as the underlying asset.
- OCO order (one cancels other)
- A pair of orders stipulating that if one order is executed, then the other order is automatically canceled. A one-cancels-the-other order (OCO) combines a stop order with a limit order on an automated trading platform. When either the stop or limit level is reached and the order executed, the other order will be automatically canceled.
- Odd Lot Theory
- This theory is based on the assumption that the small investor is always wrong. Since these investors usually buy and sell in odd-lot amounts (less than 100 shares) and have low risk-tolerance (the theory continues), they tend to buy high and sell low. A bullish signal is when odd-lot sell orders increase relative to odd-lot buy orders.
- OHLC (bar) chart
- Short for Open High, Low Close chart. This type of chart is used to spot trends and view stock movements, particularly on a short term basis.
- Online Discount Broker
- A stockbroker who carries out buy and sell orders online, at reduced commissions, but provides no investment advice.
- Open end fund
- A type of mutual fund that does not have restrictions on the amount of shares the fund will issue. If demand is high enough, the fund will continue to issue shares no matter how many investors there are. Open-end funds also buy back shares when investors wish to sell. The majority of mutual funds are open-end.
- Open interest
- The open interest of an option contract is the number of outstanding options of that type which currently have not been closed out or exercised
- A contract that gives the owner the right, if exercised, to buy or sell a security or basket of securities (index) at a specific price within a specific time limit. Stock option contracts are generally for the right to buy or sell 100 shares of the underlying stock.
- Option account
- An account opened with an options or securities firm that permits a customer to trade options. The customer opening an option account must have margin and sign an options agreement prior to trading.
- Option chain
- A way of quoting option prices through a list of all the options for a given security. For each underlying security, the option chain tells investors the various strike prices, expiration dates, and whether they are calls or puts.
- Options contract
- Represents 100 shares in the underlying stock. Information included consists of the underlying security, type of option (call or put), expiration month, strike price and premium.
- Option premium
- The price at which the contract trades. It is the price paid by the buyer to the writer, or seller, of the option. In return the writer of the call option is obligated to deliver the underlying security to an option buyer if the call is exercised or buy the underlying security if the put is exercised. The writer keeps the premium whether or not the option is exercised.
- OTO order (one triggers other)
- A one triggers the other orders involves two orders—a primary order and a secondary order. The primary order may be a live order in the marketplace. The secondary order, held in a separate order file, is not. If the primary order executes in full, the secondary order is released to the marketplace and becomes live.
- A call option is out-of-the-money if the strike price is greater than market value of the underlying security.
- Over-the-counter option (OTC)
- An option traded off-exchange, as opposed to a listed stock option. The OTC option has a direct link between buyer and seller, has no secondary market, and has no standardization of strike prices and expiration dates. This securities market is not geographically centralized like the trading floor of the NYSE. Trading takes place through a telephone and computer network.
- A technical condition that occurs when prices are considered too high and susceptible to decline. Overbought conditions can be classified by analyzing the chart pattern or with indicators such as the Stochastic Oscillator. Generally, a security is considered overbought when the Stochastic Oscillator exceeds 80. Overbought is not the same as being bearish. It simply infers that the stock has risen too far too fast and might be due for a pullback.
- A technical condition that occurs when prices are considered too low and ripe for a surge. Oversold conditions can be classified by analyzing the chart pattern or with indicators such as the Stochastic Oscillator. Generally, a security is considered oversold if the Stochastic Oscillator is less than 20. Oversold is not the same as being bullish. It merely infers that the security has fallen too far too fast and may be due for a reaction rally.
- Paper trade
- A hypothetical trade that does not involve any monetary transactions. It is a risk-free way to learn the ins and outs of the market.
- Painting the tape
- An illegal action by a group of market manipulators buying and/or selling a security among themselves to create artificial trading activity, which, when reported on the ticker tape, attracts unsuspecting investors as they perceive unusual volume.
- Passive management (of mutual funds)
- An investment strategy that mirrors a market index and does not attempt to beat the market.
- PE Ratio
- P/E Ratio or Price-Earnings Ratio is a valuation ratio that compares the price of a stock to it’s per share earnings.
- PEG Ratio
- PEG = PE Ratio/Annual EPS Growth
- PEGY Ratio
- = PE Ratio/ Expected Earnings Growth + Dividend Yield
- Pinning the strike
- This is when puts and calls are near the money on expiration Friday. There is a tendency called pinning the strike for the stock to move to the strike price or slightly beyond.
- Portfolio management
- The art and science of making decisions about investment mix and policy, matching investments to objectives, asset allocation, and balancing risk versus performance. It requires organized lists of accurate information.
- Portfolio overwriting
- This is where a call option is sold on a stock already part of an existing portfolio. That option is selected in a manner such that the option is NOT expected to be exercised as every effort is made to retain the equity.
- Portfolio rebalancing
- The process of realigning the weightings of one’s portfolio of assets. Rebalancing involves periodically buying or selling assets in your portfolio to maintain your original desired level of asset allocation.
Preferred stock: A class of ownership in a corporation that has a higher claim on the assets and earnings than common stock. Preferred stock generally have dividends that must be paid out before dividends to common stockholders and the shares usually do not have voting rights.
- Premium report
- The weekly stock screen and watch list published by the Blue Collar Investor Corp. This is a screen specific for candidates geared to writing 1-month covered calls.
- Price-to-book ratio (P/B)
- A ratio used to compare a stock’s market value to its book value. It is calculated by dividing the current closing price of the stock by the latest quarter’s book value per share. It is also known as the "price-equity ratio".
—————————————————– = P/B Ratio
Total Assets – Intangible Assets and Liabilitites
- Protective put
- A put option purchased for a stock that is already owned by the owner of the option. A protective put defends against a decrease in the share price of the underlying security
- Pump and dump scam
- A scheme that attempts to boost the price of a stock through recommendations based on false, misleading or greatly exaggerated statements. The perpetrators of this scheme, who already have an established position in the company’s stock, sell their positions after the hype has led to a higher share price. This practice is illegal based on securities law and can lead to heavy fines.
- Price bar
- see OHLC.
- An option contract that gives the holder the right, but not the obligation, to sell the underlying security at a specified price for a certain fixed period of time.
- This is the ticker symbol for the Nasdaq 100 Trust, which is an exchange traded fund (ETF) that trades on the Nasdaq. It offers broad exposure to the tech sector by tracking the Nasdaq 100 index, which consists of the 100 largest non-financial stocks on the Nasdaq. It is also known as the quadruple-Qs.
- Ratio valuation
- A form of fundamental analysis that looks to compare the valuation of one security to another, to a group of securities or within its own historical context. Valuation analysis is done to evaluate the potential merits of an investment or to objectively assess the value of a company. For equities, the most common valuation metric to use is the P/E ratio, although other valuation metrics include: Price/Earnings, Price/Book, Price/Sales among others.
- Return on equity (ROE)
- The amount of net income returned as a percentage of shareholders equity. Return on equity measures a corporation’s profitability by revealing how much profit a company generates with the money shareholders have invested. ROE is expressed as a percentage and calculated as:
Return on Equity = Net Income/Shareholder’s Equity
Net income is for the full fiscal year (before dividends paid to common stock holders but after dividends to preferred stock.) Shareholder’s equity does not include preferred shares.
- The price level at which there is a large enough supply of a stock available to cause a halt in the upward trend and turn the trend down. Resistance levels indicate the price at which most investors feel that the prices will move lower.
- Reverse stock split
- A decrease in the number of a corporation’s shares outstanding that increases the par value of its stock or its earnings per share. The market value of the total number of shares (market capitalization) remains the same.
- Not considered a major Greek, measures the change in the option price due to a change in interest rates.
- The chance that an investment’s actual return will be different than expected. Risk includes the possibility of losing some or all of the original investment.
- Risk-reward profile
- A risk reward profile is a chart of the theoretical maximum profit or loss a particular investment can have in your portfolios.
- Rolling down
- Closing out options at one strike price and simultaneously opening another at a lower strike price.
- Rolling out (forward)
- Closing out of an option contract at a near-term expiration date and opening a same strike option contract at a later date.
- Rolling up
- Close out options at a lower strike and open options at a higher strike.
- ROO (return on option)
- The percent profit realized from the sale of a covered call option based on the cost basis of the underlying stock. If an in-the-money option was sold, the intrinsic value is deducted from the option premium before calculating the return.
- Rule of 72
- A rule stating that in order to find the number of years required to double your money at a given interest rate; you divide the compound return into 72. The result is the approximate number of years that it will take for your investment to double.
- S&P 500 (Standard and Poor’s 500)
- : An index consisting of 500 stocks chosen for market size, liquidity, and industry grouping, among other factors. It is designed to be a leading indicator of U.S. equities and is meant to reflect the risk/return characteristics of the large-cap universe.
- Sarbanes-Oxley Act of 2002 (SOX)
- An act passed by the U.S. Congress to protect investors from the possibility of fraudulent accounting activities by corporations. It includes the establishment of a Public Company Accounting Oversight Board where public companies must now be registered.
- Securities and Exchange Commission (SEC)
- A government commission, created by Congress, established to regulate the securities markets and protect investors. It also monitors the corporate takeovers in the U.S. The SEC is composed of five commissions appointed by the U.S. President and approved by the Senate. The statutes administered by the SEC are designed to promote full public disclosure and to protect the investing public against fraudulent and manipulative practices in the securities markets. Generally, most issues of securities offered in interstate commerce, through the mail or on the internet, must be registered with the SEC.
- Sell to open
- A phrase used by many brokerages on the street to represent the opening of a short position in option transactions.
- Short (or short position)
- The sale (also known as writing) of an options contract or a stock to open a position.
- Short sale
- Short sale is the sale of a stock not owned by the seller. It is borrowed from the broker and eventually must be replaced. The seller anticipates a decline in equity value and realizes a profit by covering (buying back) the short sale at a lower price in the future.
- Show or Fill Rule
- This regulation requires the market makers to show or publish any order that improves the current bid or ask prices unless it is filled.
- Short Interest Theory
- This theory states that a larger short interest is the predecessor of an increase in the price of a stock.
- Sideways Pattern (consolidation)
- This is the horizontal price movement of an equity where the forces of supply and demand are equal. The stock simply cannot establish an uptrend or a downtrend.
- Simple moving average (SMA)
- A moving average that gives equal weight to each day’s price data.
- Single Tab of the ESOC
- Allows you to evaluate returns from different strikes for the same stock.
- Standard Deviation
- This is a statistical measurement that sheds light on historical volatility.
- Stochastic Oscillator
- A momentum indicator that measures the price of a security relative to the high/low range over a set period of time. The indicator oscillates between 0 and 100. Readings below 20 are considered oversold. Readings above 80 are considered overbought.
- StockScouter Rating
- MSN Monet Central’s rating of stocks from 1 to 10, with 10 being the best. It uses a system of advanced mathematics to determine a stock’s expected risk and return.
- Stock split
- A change in the number of shares outstanding (in circulation). The number of shares is adjusted by the split ratio, e.g. 2 to 1. In this case, 1000 shares splits to 2000 shares but the opening price and current price are cut in half. The overall effect is to maintain the same cost and current value of an investment while increasing the number of shares and lowering the per share price. This makes it easier for small investors to own the stock in round lots.
- Stop loss order
- This is an order placed with your broker to sell a security when it reaches a certain price.
- Stop Order
- This is an order to buy or sell a security when its price surpasses a specific price called the stop price. At that point the stop order becomes a market order.
- Stop Limit Order
- This is a combination of a stop order and a limit order. Once activated, it becomes a limit order which means that it can only be executed at a specific price or better.
- Street expectation
- The average earnings estimates made by brokers and security analysts.
- Strike price
- The stated price per share for which the underlying security may be purchased (in the case of a call) or sold (in the case of a put) by the option holder upon exercise of the option contract.
- A price level at which there is sufficient demand for a stock to cause a halt in a downward trend and turn the trend up. Support levels indicate the price at which most investors feel that prices will move higher.
- Technical analysis
- The method of predicting future stock price movements based on observation of historical stock price movements.
- Theoretical Value
- The hypothetical value of an option as calculated by a mathematical model such as the Black-Scholes Option Pricing Model.
- Theta is an estimate of how much the theoretical value of an option declines when there is a passage of one day while there is no change in the stock value or volatility. Theta is expressed as a negative number since the passage of time will decrease time value.
- Ticker symbol
- An arrangement of characters (usually letters) representing a particular security listed on an exchange. Every listed security has a unique ticker symbol, facilitating the trade orders that flow through the financial markets every day.
- Time decay
- A term used to describe how the theoretical value of an option erodes or reduces with the passage of time.
- Time value
- The portion of the option premium that is attributable to the amount of time remaining until the expiration of the option contract. Time value is whatever value the option has in addition to its intrinsic value.
- Trading is a more active, short-term strategy than investing. Buying and selling frequently to take profits rather than accumulate long term growth.
- Trading range
- The spread between the high and low prices traded during a period of time.
- Trailing stop loss order
- A stop-loss order set at a percentage level below the market price – for a long position. The trailing stop price is adjusted as the price fluctuates. The trailing stop order can be placed as a trailing stop limit order, or a trailing stop market order.
- Treasury note (one of the treasuries)
- A marketable, U.S. government debt security with a fixed interest rate and a maturity between one and ten years. T-notes can be bought either directly from the U.S. Government or through a bank.
- Trend analysis
- An aspect of technical analysis that tries to predict the future movement of a stock based on past data. It is based on the idea that what has happened in the past gives traders an idea of what will happen in the future. The concept is that moving with trends will lead to profits for the investor.
- Trigger line / signal
- Usually an exponential or simple moving average of a technical indicator which serves as a frame of reference for positive and negative divergences. For example, if the MACD indicator moves above its moving average, a bullish signal is produced.
- Unit investment trust (UIT)
- An investment company that offers a fixed, unmanaged portfolio, generally of stocks and bonds, as redeemable "units" to investors for a specific period of time. It is designed to provide capital appreciation and/or dividend income. Unit investment trusts are one of three types of investment companies; the other two are mutual funds and closed-end funds.
- Upside potential
- Additional % of profit, as it relates to the underlying stock cost basis that can be realized if the stock price reaches the strike price at expiration. It applies to out-of-the-money strike prices.
- Uptrending Stock
- This is a stock increasing in price with higher highs and higher lows.
- Vega is the only "Greek" not represented by a real Greek letter. It is the amount that the price of an option changes compared to a 1% change in volatility.
- Velocity (of money)
- A term used to describe the rate at which money is exchanged from one transaction to another.
- VIX- CBOE Volatility Index
- Demonstrates the market’s expectation of 30-day volatility. It measures market risk and is often referred to as the investor fear gauge.
- This is the fluctuation, not direction, of a stock price movement. It represents the deviation of day to day price changes. It measures the speed and magnitude at which the underlying equity’s price changes.
- The number of trades in a security over a period of time. On a chart, volume is usually represented as a histogram (vertical bars) below the price chart. The NYSE and Nasdaq measure volume differently. For every buyer, there is a seller: 100 shares bought = 100 shares sold. The NYSE would count this as 100 shares of volume. However, the Nasdaq would count each side of the trade and as 200 shares volume.
- Volume confirmation
- Using the volume indicator indicator or chart pattern to provide evidence that the initial trading alert in question is indicative of an actual trading opportunity. Traders look to other technical indicators to confirm their expected prediction so that they can have as many technical factors working in their favor as possible. This increases the probability of making a highly successful trade.
- Volume divergence
- When the price of a stock and the volume indicator move in opposite directions. In technical analysis, traders make transaction decisions by identifying situations of divergence, where the price of a stock and an indicator such as volume are moving in opposite directions. Divergence is considered either positive or negative, both of which are signals of major shifts in the direction of the price. Positive divergence occurs when the price of a security makes a new low while the indicator starts to climb upward. Negative divergence happens when the price of the security makes a new high, but the indicator fails to do the same and instead closes lower than the previous high.
- Volume surge
- An increase in the daily trading volume of an equity equal to at least 1.5 times its normal trading volume.
- Wash Sale
- A wash sale loss is not deductible. A wash sale occurs when you sell a stock for a loss and, within 30 days before or after the trade, buy the same stock, or substantially the same stock. This means that if you sell a stock at $35 for a loss, and buy a $35 call option, you have a wash sale and cannot deduct the loss on the stock.
- Watch list
- A list of securities that are in consideration for investment buy/sell decisions.
- What Now Tab of the ESOC
- Calculates the returns for a package transaction where an option is bought back and another is sold.
- Whisper number
- The unofficial and unpublished earnings per share (EPS) forecasts that circulate among professionals on Wall Street. They were generally reserved for the favored (wealthy) clients of a brokerage.
- Wilshire 5000 Total Stock Market Index
- A market capitalization-weighted index composed of more than 6700 publicly traded companies. These companies must be headquarted in the U.S. and actively traded on an American stock exchange.
- Yen carry trade
- A strategy in which an investor sells the Japanese currency (yen) with a relatively low interest rate and uses the funds to purchase a different currency (dollar) yielding a higher interest rate. A trader using this strategy attempts to capture the difference between the rates-which can often be substantial, depending on the amount of leverage the investor chooses to use.
- Yield curve
- A line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but differing maturity dates. The most frequently reported yield curve compares the three-month, two-year, five-year and 30-year U.S. Treasury debt. This yield curve is used as a benchmark for other debt in the market, such as mortgage rates or bank lending rates. The curve is also used to predict changes in economic output and growth.