A B C D E F G H I J K L M N O P Q R S T U V W X Y Z

---

Options Trading Terms: B

BACK MONTHS:

A rather arbitrary term that refers to the classes of options with the expiration months that are further dated than the option class with the nearest expiration month.

BACKSPREAD:

An option position composed of either all calls or all puts, with long options and short options at two different strike prices. The options are all on the same stock and usually of the same expiration, with more options purchase than sold. A backspread is the sale of an option(s) and the purchase of a greater number of the same type of options that are out-of-the-money with respect to the one(s) purchased. For example, an 80/90 put 1-by-3 backspread is long 3*80 puts and short 1*90 put.

BANK GUARANTEE LETTER:

The document supplied by a bank certifying that a person has a specific amount of funds on deposit with the bank.

BASIS:

Generally referring to the futures markets, it is the difference between the cash price of the underlying commodity and the price of a futures contract based on that underlying commodity. Cash price minus futures price equals basis.

BASIS POINT:

A .01% tick on a 1.00% scale used to describe the yields of interest rates or interest rate products. For example, when the U.S. Fed raises the discount rate 25 basis points, the discount rate goes from 5.00% to 5.25%.

BASIS RISK:

The risk of the basis between the cash price and the future price widening or narrowing between the time a hedge position is implemented and liquidated.

BEAR:

A person who believes that the price of a particular security or the market as a whole will go lower.

BEARISH:

The outlook of a person anticipating lower prices in a particular security or the market as a whole.

BEAR MARKET:

Any market in which prices are trending lower.

BEAR SPREAD:

Generally speaking, it is any spread that theoretically profits when the market moves down. Specifically it refers to a vertical spread.

BETA:

A measure of the return (in percentage terms) on a stock relative to the return (in percentage terms) of an index. For example a stock with a beta of .80 should have a percentage net change equal to 80% of the percentage net change of the index. Therefore if the index is down 2% the stock in question should be down 1.6% (.80x2%).

BID:

The price of a stock or option at which a buyer is willing to purchase a security; the price at which a customer may sell a security.

BID/ASK (OFFER) SPREAD:

The difference between the bid and ask prices for a particular stock or option.

BINOMIAL MODEL:

A mathematical model used to price options. Generally used for American-style options, the model creates a binomial lattice to price an option, based on the stock price, strike price, days until expiration, interest rate, dividends, and the estimated volatility of the stock. One of the main differences from the Black Scholes Model is that it factors in the possibility of early exercise of the options.

BLACK SCHOLES MODEL:

A mathematical model used to price options. Generally used for European-style options, the model prices options using a probability-weighted sum of stock and a bond. Black-Scholes uses the stock price, strike price, days until expiration, interest rate, dividends, and the estimated volatility of the stock as variables in the model.

BLOCK or BLOCK TRADE:

A large position or transaction of stock, generally at least 10,000 shares or more.

BLUE SKY LAWS:

The popular name for laws enacted by various states to protect the public against securities fraud. The term is believed to have been coined by a judge who stated that some brokers were selling everything including the "blue sky" to investors.

BOND:

A debt instrument or promissory note of a corporation, municipality, or the U.S. Government. A bond represents debt on which the issuer of the debt usually promises to pay the owner of the bond a specific amount of interest for a defined amount of time and to repay the loan on the maturity date. Bonds are distinct from stock (equity), which represents ownership.

BOX SPREAD:

An option position composed of a long call and short put at one strike, and a short call and long put at a different strike. For example, a long 50/60 box spread would be long the 50 call, short the 50 put, short the 60 call and long the 60 put. Considered largely immune to changes in the price of the underlying stock, in most cases, a box spread is an interest rate trade. For all intents and purposes, the buyer of the box is lending money to the options market, and the seller of the box is borrowing money from the options market.

BREAK-EVEN POINT(S):

The stock price(s) at which an option position generates neither a profit nor a loss. An option position's break-even point(s) are generally calculated for the options' expiration date. Option pricing models can be used to calculate a position's break-even point before the options' expiration date.

BROKER:

A broker is an individual or firm that charges a fee or commission for executing, either on the floor of an exchange or electronically, buy, sell, or spread orders submitted by a customer or firm.

BROKER LOAN RATE:

This is the interest rate that banks charge brokerage firms to finance their (the brokerage firms) customers' stock and option positions.

BROKER-DEALER:

Generally, a broker-dealer is a person or firm who facilitates trades between buyers and sellers and receives a commission or fee for his services. When a broker acts in the capacity of a dealer, he may buy and sell stocks and options for his own account, which can generate profits or losses.

BULL:

A person who believes that the price of a particular security or the market as a whole will go higher.

BULLISH:

The outlook of a person anticipating higher prices in a particular security or the market as a whole.

BULL MARKET:

Any market in which prices are trending higher.

BULL SPREAD:

Generally speaking, it is any spread that theoretically profits when the market moves up. Specifically it refers to a vertical spread.

BUTTERFLY SPREAD:

An option position composed of either all calls or all puts (with the exception of an iron butterfly), with long options and short options at three different strikes. The options are all on the same stock and of the same expiration, with the quantity of long options and the quantity of short options netting to zero. The strikes are equidistant from each other. For example, a long 50/60/70 put butterfly is long 1*50 put, short 2*60 puts, and long 1*70 put.

BUY ON CLOSE:

To buy at the end of a trading session at a price within the closing range.

BUY ON OPENING:

To buy at the beginning of a trading session at a price within the opening range.

BUYING POWER:

The amount of money available in an account to buy stocks or options. Buying power is determined by the sum of the cash held in the brokerage account and the loan value of any marginable securities in the account without depositing additional equity.

BUY-TO-COVER:

A buy order that closes or offsets a short position in stock or options.

BUY-WRITE:

Synonymous to a covered call or covered write, this is a position of long stock and short a number of calls representing the same amount of shares as the long stock position. This position may be entered into as a spread order via Thinkorswim with both sides (buying stock and selling calls) being executed simultaneously. For example, a buy-write is buying 500 shares of stock and writing 5*50 strike calls.

Top