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Options Trading Terms: C
CABINET OR "CAB" TRADE:
An option trade at a "cabinet price", which is equal to one dollar. Generally, cabinet trades only occur at very far out-of-the-money options. Cabinet trades are not available via thinkorswim.
CALENDAR SPREAD (TIME SPREAD):
An option position composed of either only calls or only puts, with the purchase or sale of an option with a nearby expiration offset by the purchase or sale of an option with the same strike price, but a more distant expiration. The options are on the same stock and have the same strike price. The quantity of long options and the quantity of short options net to zero. For example, long the AUG/NOV 65 call calendar spread is short 1 August 65 call and long 1 November 65 call.
CALL OPTION:
A call option gives the buyer of the call the right, but not the obligation, to buy the underlying stock at the option's strike price. The seller of the call is obligated to deliver (sell) the underlying stock at the option's strike price to the buyer of the call when the buyer exercises his right.
CALLED AWAY:
The term used when the seller of a call option is obligated to deliver the underlying stock to the buyer of the call at the strike price of the call option.
CALL WRITER:
An investor who receives a premium and takes on, for a specified time period, the obligation to sell the underlying security at a specified price at the call buyer's discretion.
CANCELED ORDER:
An order to buy or sell stock or options that is canceled before it has been executed. Generally, it is easier to cancel a limit order than a market order. A limit order can be canceled at any time as long as it has not been executed. Market orders can get executed so quickly that it is usually impossible to cancel them. Thinkorswim will not accept an order cancellation for a market order.
CAPITAL GAIN OR CAPITAL LOSS:
Profit or loss generated from transactions in stocks, options, bonds, real estate, or other property.
CARRY/CARRYING CHARGE:
Interest is charged on any money borrowed to finance a position of stocks or options. The interest cost of financing the position is known as the carry.
CASH ACCOUNT:
An account in which all positions must be paid for in full. No short positions in stocks or options are allowed in a cash account.
CASH MARKET:
Generally referred to regarding futures markets, the cash market is where transactions are made in the commodity or instrument underlying the future. For example, there are cash markets in physical commodities such as grains and livestock, metals, and crude oil, financial instruments such as U.S. Treasury Bonds and Eurodollars, as well as foreign currencies such as the Japanese yen and the Canadian dollar. As it relates to futures on stock indices, the cash market is the aggregate market value of the stocks making up the stock index.
CASH SETTLED OPTION:
An option that delivers a cash amount, as opposed to the underlying stock or futures contracts such as with options on stocks or futures, when exercised. The amount of cash delivered is determined by the difference between the option strike price and the value of the underlying index or security. In the U.S., stock index options like the OEX and SPX are cash settled options.
CHICAGO BOARD OF TRADE (CBOT):
Founded in 1848 with 82 original members, today the CBOT is the one of the largest futures and options exchanges in the world. It is known for its grain and U.S. Treasury Bond futures. Futures and futures options are traded at the CBOT.
CHICAGO BOARD OPTIONS EXCHANGE (CBOE):
The Chicago Board Options Exchange is currently (2000) the largest option exchange in the U.S. Formed in 1973, the CBOE pioneered "listed options" with standardized contracts. Equity and index options are traded at the CBOE.
CHICAGO MERCANTILE EXCHANGE (CME):
Originally formed in 1874 as the Chicago Produce Exchange, where products such as butter, eggs, and poultry were traded, the CME is now one of the biggest futures and options exchanges in the world. The CME trades futures on stock indices, foreign currencies, livestock, and Eurodollars. Futures and futures options are traded at the CME.
CLASS OF OPTIONS (OPTIONS CLASS):
Options of the same type either all calls or all puts on the same underlying security.
CLEAR/CLEARING:
The process by which orders are accounted for and matched, and funds transferred.
CLEARING BROKER-DEALER:
A broker-dealer that clears its own trades as well as those of introducing brokers.
CLEARING HOUSE:
An agency connected with an exchange through which all stock and option transactions are reconciled, settled, guaranteed, and later either offset or fulfilled through delivery of the stock and through which payments are made. It may be a separate corporation, rather than a division of the exchange itself.
CLEARING MEMBER:
Clearing members of U.S. exchanges accept responsibility for all trades cleared through them, and share secondary responsibility for the liquidity of the exchanges' clearing operation. Clearing members earn commissions for clearing their customers' trades. Clearing members must meet minimum capital requirements.
CLOSE (C), THE:
The time at which trading on a stock or option ends for the day. In reference to the O,H,L,C "C" represents the closing price of the session.
CLOSING PRICE:
The price of a stock or option at the last transaction of the day.
CLOSING PURCHASE:
A transaction in which a person who had initially sold short a stock or option exits or closes his short position by buying back the stock or option.
CLOSING RANGE:
The range of high and low prices, or bid and ask prices, recorded during the close (the final closing minutes of the trading day).
CLOSING TRANSACTION:
A transaction in which a person who had initially bought or sold stock, futures or options exits or closes (liquidates) his position by selling his long stock, futures or options or buying back his short stock, futures or options.
COMBO:
Often another term for synthetic stock, a combo is an option position composed of calls and puts on the same stock, same expiration, and typically the same strike price. The quantity of long options and the quantity of short options nets to zero. Buying a combo is buying synthetic stock; selling a combo is selling synthetic stock. For example, a long 60 combo is long 1*60 call and short 1*60 put. Sometimes, combo is used to describe options at two different strikes, in which case it would not be synthetic stock.
COMMINGLING:
The combining by a brokerage firm of customer securities with firm securities and pledging them as joint collateral for a bank loan; this practice is prohibited unless authorized by customers.(FINRA)
COMMISSION:
The one time fee charged by a broker to a customer when the customer executes a stock or option trade through the brokerage firm.
CONDOR SPREAD:
An option position composed of either all calls or all puts (with the exception of an iron condor), with long options and short options at four 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. Generally, the strikes are equidistant from each other, but if the strikes are not equidistant, the spread is called a pterodactyl. For example, a long 50/55/60/65 call condor is long 1*50 call, short 1*55 call, short 1*60 call, and long 1*65 call. In a long (short) condor the highest and lowest stikes are both long (short) while the two middle strikes are both short (long).
CONFIRMATION STATEMENT:
After a stock or options transaction has taken place, the brokerage firm must issue a statement to the customer. The statement contains the name of the underlying stock, the number of shares or options bought or sold and the prices at which the transactions occurred.
CONSOLIDATED TAPE:
The ticker reporting transactions of NYSE listed stocks that take place on the NYSE or any of the other regional stock exchanges. Similarly, transactions of AMEX listed securities, and certain other securities listed on regional stock exchanges, are reported on a separate tape.
CONTINGENCY ORDER:
When you place a stock or options order you can choose to place contingencies on that order, meaning that the order will be filled only when a specific event has occurred. For example, a contingency order might be, "Buy 10 XYZ 80 calls at the market if XYZ stock trades above 75".
CONTRACT:
The basic unit of trading for options. An option, whether it's a put or a call, is an agreement between two parties (the buyer and the seller) to abide by the terms of the option contract as defined by an exchange.
CONTRACT MONTH:
Generally used to describe the month in which an option contract expires.
CONTRACT SIZE:
The number of shares of the underlying stock that an options contract would deliver if exercised. Contract sizes for equity options in the U.S. are generally 100 shares, unless the contract size has been adjusted for a split, merger, or spin-off. For example, if you are long 1 XYZ 50 call with a contract size of 100 and you exercise that call, you will get 100 shares of XYZ for a price of $50 per share. If you are long 1 ABC 90 call with a contract size of 250 and you exercise that call, you will get 250 shares of ABC for a price of $90 per share. Thinkorswim incorporates the contract size in the calculation of your delta and gamma.
CONVERSION:
A position of long stock, short a call, and long a put (with the call and put having the same strike price, expiration date, and underlying stock). The short call and long put acts very much like short stock, thus acting as a hedge to the long stock. So, a conversion has a very small delta. A conversion is a way to exploit mispricings in carrying costs.
CORRECTION:
A temporary reversal of direction of the overall trend of a particular stock or the market in general.
COST BASIS:
The original price paid for a stock or option, plus any commissions or fees. It is used to determine capital gains or losses when the stock or option is sold.
COVER:
Frequently used to describe the purchase of an option or stock to exit or close an existing short position.
COVERED WRITE OR COVERED CALL OR PUT/COVERD CALL OR PUT WRITING (SELLING):
An option strategy composed of a short call option and long stock, or a short put option and short stock. For example, selling (writing) 2 XYZ 50 calls while owning 200 shares of XYZ stock is a covered call position.
COVERED WRITER (SELLER):
Someone who sells or "writes" an option is considered to have a "covered" position when the seller of the option holds a position in the underlying stock that offsets the risk of the short option. For example, a short put option is covered by a short position in the underlying stock, and a short call option is covered by a long position in the underlying stock.
CREDIT:
An increase in the cash balance of an account resulting from either a deposit or a transaction. As it relates to option orders, a credit is how much the premium collected from selling options exceeds the premium paid for buying options.
CREDIT BALANCE (CR):
This is the money the broker owes the customer after all commitments have been paid for in full. The money could come after a sale of securities, or simply be cash in the customer's account.
CREDIT SPREAD:
Any option spread where you collect a credit when you execute the spread.
CROSSED MARKET:
A situation that occurs on multiple-listed stock and options, where the highest bid price for a stock or option on one exchange is higher than the lowest ask price for that same stock or option on another exchange.
CROSSING ORDERS:
The practice of using one customer's orders to fill a second customer's order for the same security on the opposite side of the market. For this to occur each order must be first offered on the exchange floor; if there are no takers, the broker may cross the orders usually at a price somewhere in between the existing bid and ask prices.
CURRENT MARKET VALUE (CMV):
The current worth of the securities in an account. The market value of listed securities is based on the closing prices on the previous business day. Syn. long market value (LMV). (FINRA)
CUSTOMER:
Any person or entity that opens a trading account with a broker-dealer. The customer may be classified in terms of account ownership, payment methods, trading authorization or types of securities traded.
CUSTOMER AGREEMENT:
The document a customer signs when opening a margin account with a broker- dealer; this document allows the firm to liquidate a portion or all of the customer's account if the customer fails to meet margin requirements set by the firm or Exchange.
CUSTOMER STATEMENT:
This document displays a customer's trading activity, positions and account balance. The SEC requires the statement be sent quarterly, however, Thinkorswim's customer statements will be sent daily via email or may be accessed on line at anytime day or night.
Michael Shulman
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