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Options Trading Glossary


Daily Range

The difference between the high and low price of a security in one trading day.

Day Order

A type of option order which instructs the broker to cancel any unfilled portion of the order at the close of trading on the day the order is first entered.

Day Trade

A position (stock or option) that is opened and closed on the same day.

Day Trading

An approach to trading in which the same position is entered and exited within one day.

Debit

Money paid out from an account either from a withdrawal or a transaction that results in decreasing the cash balance. A debit transaction is one in which the net cost is greater than the net sale proceeds.

Debit Spread

The difference in value of two options, where the value of the long position exceeds the value of the short position.

Decay

A term used to describe how the theoretical value of an option 'erodes' or reduces with the passage of time. Time decay is specifically quantified by theta.

Deep-in-the-Money

A deep-in-the-money call option has the strike price of the option well below the current price of the underlying instrument. A deep-in-the-money put option has the strike price of the option well above the current price of the underlying instrument.

Delayed Time

Quotes from a data service provider which are delayed up to 20 minutes from real time quotes.

Deliver

To take securities from an individual or firm and transfer them to another individual or firm. A call writer who is assigned must deliver stock to the call holder who exercised. A put holder who exercises must deliver stock to the put writer who is assigned.

Delivery

The process of satisfying an equity call assignment or an equity put exercise. In either case, stock is delivered. For futures, the process of transferring the physical commodity from the seller of the futures contract to the buyer. Equivalent delivery refers to a situation in which delivery may be made in any of various, similar entities that are equivalent to each other (for example, Treasury bonds with differing coupon rates).

Delta

A measure of the rate of change in an option's theoretical value for a one-unit change in the price of the underlying security. Call options have positive deltas, while put options have negative deltas. Technically, the delta is an instantaneous measure of the option's price change, so that the delta will be altered for even fractional changes by the underlying entity.

Delta Neutral

A position arranged by selecting a calculated ratio of short and long positions that balance out to an overall position delta of zero.

Delta Position

A measure of option or underlying securities delta.

Delta Spread

A ratio spread that is established as a neutral position by utilizing the deltas of the options involved. The neutral ratio is determined by dividing the delta of the purchased option by the delta of the written option.

Delta-Hedged

An options strategy protecting an option against price changes in the option's underlying instrument by balancing the overall position delta to zero. These hedges are constructed by taking a position in the underlying instrument that is equal in magnitude but opposite in sign (+/-) to the option's delta.

Delta-Neutral

This an "options/options" or "options/underlying instrument" position constructed so that it is relatively insensitive to the price movement of the underlying instruments. This is arranged by selecting a calculated ratio of offsetting short and long positions.

Depository Trust Corporation (DTC)

A corporation that will hold securities for member institutions. Generally used by option writers, the DTC facilitates and guarantees delivery of underlying securities if assignment is made against securities held in DTC.

Derivative

Financial instruments based on the market value of an underlying asset.

Derivative Security

A financial security whose value is determined in part from the value and characteristics of another security, the underlying security.

Derivatives

Financial contracts the value of which depends on the value of the underlying instrument - commodity, bond, equity, currency or a combination.

Diagonal Spread

A strategy involving the simultaneous purchase and sale of two options of the same type that have different strike prices and different expiration dates. Typical types of diagonal spreads are diagonal bull spreads, diagonal bear spreads, and diagonal butterfly spreads.

Discount

An option is trading at a discount if it is trading for less than its intrinsic value. A future is trading at a discount if it is trading at a price less than the cash price of its underlying index or commodity.

Discount Arbitrage

A riskless arbitrage in which a discount option is purchased and an opposite position is taken in the underlying security. The arbitrageur may either buy a call at a discount and simultaneously sell the underlying security (basic call arbitrage) or may buy a put at a discount and simultaneously buy the underlying security (basic put arbitrage).

Discount Brokers

Brokerage firms that offer lower commission rates than full service brokers, but do not offer services such as advice, research and portfolio planning.

Discretion

Freedom given by an investor through his or her Account Executive to use judgment regarding the execution of an order. Discretion can be limited, as in the case of a limit order that gives the floor broker.125 or.25 point from the stated limit price to use his judgment in executing the order. Discretion can also be unlimited, as in the case of a market-not-held-order.

Divergences

When two or more averages or indices fail to show confirming trends.

Dividend

A sum of money paid out to a shareholder from the stock's profits.

Divisor

A mathematical quantity used to compute an index. It is initially an arbitrary number that reduces the index value to a small, workable number. Thereafter, the divisor is adjusted for stock splits (price-weighted index) or additional issues of stock (capitalization-weighted index).

Dow Jones Industrial Average (DJIA)

Used as an overall indicator of market performance, this average is composed of 30 blue chip stocks which are traded daily on the New York Stock Exchange.

Downside

The potential for prices to decrease.

Downside Protection

Generally used in connection with covered call writing, this is the cushion against loss, in case of a price decline by the underlying security, that is afforded by the written call option. Alternatively, it may be expressed in terms of the distance the stock could fall before the total position becomes a loss (an amount equal to the option premium), or it can be expressed as percentage of the current stock price.

Downside Risk

The potential risk one takes if prices decrease in directional trading.

Dynamic

For option strategies, describing analyses made during the course of changing security prices and during the passage of time. This is as opposed to an analysis made at expiration of the options used in the strategy. A dynamic break-even point is one that changes as time passes. A dynamic follow-up action is one that will change as either the security price changes or the option price changes or time passes.

Each Way

The commission made by a broker for the purchase and sale sides of a trade.
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