American Style Option
An option contract that can be exercised on any business day before
it expires. (see option below)
The purchase of a put option (see below) priced close to the money
strike price against the sale of a put option with an out-of-the-money
strike price. A long position of bear spread implies anticipation
of a price fall.
Binomial Option Pricing Model
An option-pricing model where the price of an asset is calculated
over successive short periods of time, based on the assumption that
only two discrete price movements are possible in each time period.
Black-Scholes Option Pricing Model
An option-pricing model developed by Fischer Black and Myron Scholes.
It is commonly used in pricing of an option. It factors in current
asset price, strike price, time until expiration, any dividends,
implied volatility of the underlying asset, and interest rate levels.
The purchase of a call option with a close to the money strike price
against the sale of a call option with a out-of-the-money strike
price. A long position of bull spread implies anticipation of a
The sale (purchase) of two options with intermediate strike prices
together with the purchase (sale) of an option with a higher strike
and another with a lower strike. All options have the same expiration
date on the same underlying asset.
The purchase of an option against the sale of another option with
the same strike price but different expiration dates.
An option in which the buyer pays a premium price for the right,
but not the obligation, to purchase a specified amount of an underlying
asset from the option writer at a fixed strike price within a specified
period of time.
A bond that permits the holder to convert to the common shares of
the issuer at a fixed conversion price during the life or at maturity
of the bond. This bond combines the features of a fixed income security
and the option of conversion into a specified number of shares.
A long position in an asset combined with a short position in a
call option on the asset, where the asset position will cover the
obligation of the call in case it is exercised.
A long position in cash combined with a short position in a put
option on any asset, where the cash position will cover the obligation
of the put in case it is exercised.
The rate of change of an option's price with respect to the price
movement of the underlying asset. The delta of a call is always
positive, while the delta of a put is always negative.
Delta Neutral Portfolio
When the delta of a derivatives portfolio is zero, the value of
the portfolio will be insensitive to a change in the price of the
A financial instrument whose value is derived from the value of
another investment vehicle, called the underlying asset.
Equity Linked Note (ELN)
See Understand SIP - ELN
European Style Option
An option contract that can be exercised only on the expiration
Only investors holding a stock purchased before the ex-dividend
date are entitled to receive the dividend; holders of a short position
in the stock are obliged to pay out the dividend.
The final date on which the option may be exercised.
A theoretical value of an option derived by an option-pricing model
such as the Black-Scholes or Binomial option pricing model. (see
Binomial Option Pricing Model and Black-Scholes Option Pricing Model.)
The rate of change of delta with respect to the price movement of
the underlying asset.
A strategy used to reduce risk exposure by making a transaction
to offset the risk of the existing position.
Historical volatility is a retrospective measure that directly estimates
the volatility of an underlying asset based on data of its past
A call is in-the-money when the market price of underlying asset
is greater than the strike price. A put is in-the-money when the
market price of underlying asset is less than the strike price.
A forward looking view of the volatility of the price of the underlying
asset derived from option pricing models such as Black-Scholes,
that take into consideration other factors including the option
price, strike (exercise) price, interest rate and maturity date.
The difference between an in-the-money option strike price and the
current market price of the underlying asset. The intrinsic value
of an out-the money option is always zero.
The efficiency of liquidating or establishing a position in the
market without disrupting the existing market prices. Liquidity
is often taken to refer to the ease with which assets can be traded.
A liquid market means a market where it is easy to buy and sell
On-the-money Option (At-the-money Option)
A call is on-the-money when the market price of the underlying asset
is equal to the strike price.
The right to buy an asset, most often securities, on a set date
for a specified amount.
The buyer of an option.
The seller of an option.
Principal Guaranteed Note (PGN)
SIP - PGN.
An option in which the buyer pays a premium price for the right,
but not the obligation, to sell a specified amount of an underlying
asset to the option writer at a fixed price within a specified period
of time. Put options are purchased by investors anticipating a fall
in price of the underlying asset.
A spread transaction in which two or more related options are traded
in a specified proportion. Ratio spread forms when the number of
options bought differ from the number of options sold. The spread
can vary .
Ratio Call Spread
In anticipation of a price rise of an underlying asset, a trader
may buy two call options with a higher strike price and sell one
call option with a lower strike price.
Ratio Put Spread
In anticipation of a price decline of an underlying asset, a trader
may buy one put option with a higher strike price and sell two put
options with a lower strike price.
The rate of change of the price of an option caused by fluctuations
in interest rates.
Series( for options)
All option contracts of the same class bearing the same unit of
trade, expiration date, and exercise price.
A position taken by an investor anticipating a fall in the price
of an asset.
An option strategy involving a call and a put on the same underlying
assets with the same expiration date and the same strike price.
A long straddle means buying both calls and puts while a short straddle
means selling both calls and puts.
A position consisting of a long (or short) call and a long (or short)
put on the same underlying asset, both options have the same expiration
date, but different strike prices. Most strangles involve out-the
Strike Price (Exercise Price)
The price at which the underlying asset under a call or put option
can be purchased (call) or sold (put).
Structured Investment Product (SIP)
A Structured Investment Product (SIP) is an investment product that
is structured to meet investor's individual risk-return criteria.
The return or reward profile may not necessarily be the same as
that derived from investing directly in the underlying asset. SIPs
are normally a combination of bond, asset, and derivative instruments.
Refer to Understanding
An option value generated by a mathematical option's pricing model
to determine what an option is worth theoretically.
The rate at which the price of an option changes over a period of
time (e.g. one day)
The process whereby the value of an option premium is eroded as
The rate of change of the price of an option with volatility.
A measure of the expected price fluctuation of an underlying asset
in a given period of time. Volatility is a primary determinant in
evaluating the option's premium and time value.
A theory stating that a deeply out-of-the-money option tends to
have higher implied volatility levels than an at-the-money option.
Volatility skew measures and accounts for the limitations found
in most options pricing models and gives the trader an edge in estimating
an option's value.
A security entitling the holder to buy a proportionate amount of
stock at a specified future date and at a specified price, usually
one higher than the current market price. Warrants are traded as
securities whose price reflects the value of the underlying stock.
Warrants are like call options, but with much longer time spans
- sometimes years.
The percentage return on an investment relative to the amount invested.
Zero Coupon Bond
A bond that does not pay any interest before maturity but is sold
at a discount to its redemption value. The entire principal amount
is due for repayment at maturity. The value of the bond is equal
to the discount value of the principal amount derived from prevailing
interest rates and/or the prevailing credit spread.