Glossary of Terms Used
- American Style Option
An option that can be exercised at any time on or before its expiry time
- Ask Price
The price at which a seller is offering to sell an option or a stock or other asset
Underlying financial instrument used to determine the strike price of the contract. They are generally categorised as commodities, stocks, currency pairs or indices.
- At the Money
A term that describes an option with a strike price that is equal to the current market price of the underlying stock. If a Binary Options trade finishes “At the Money” the original investment is returned, i.e. no gain and no loss
- Averaging Down
Buying more of a stock or an option at a lower price than the original purchase so as to reduce the average cost.
- Bear or Bearish
An opinion that an option, asset or market will decline in price
- Bid Price
The price at which a buyer is willing to buy an option or other asset
- Binary Options
Options allowing traders to earn a predetermined return if they correctly predict whether the price of an underlying asset will expire above or below the strike price. The investment is lost if they predict incorrectly
- Black-Scholes Formula
The first widely-used model for option pricing. This formula can be used to calculate a theoretical value for an option using current stock prices, expected dividends, the option’s strike price, expected interest rates, time to expiration and expected stock volatility. While the Black-Scholes model does not perfectly describe real-world options markets, it is still often used in the valuation and trading of options.
- Break Even Point
The stock price at which an option strategy results in neither a profit nor a loss at expiry.
A person acting as an agent for making securities transactions. An ‘Account Executive’ or a ‘broker’ at a brokerage firm deals directly with customers. A ‘Floor Broker’ on the trading floor of an exchange actually executes someone else’s trading orders.
- Broker Ratings
Buy, sell, or hold recommendations or ratings given to individual company stocks by securities analysts, depending on how they think the stock will perform in the short- or long-term.
- Bull or Bullish
An opinion that an option, asset or market will rise in price
Trader jargon referring to the Sterling/US Dollar exchange rate. So called because the rate was originally transmitted between the London and New York exchanges via the transatlantic telegraph cable in the mid-1800s.
- Call Option
If a trader believes that the value of an underlying asset will reach a higher value at the time of expiry, then they can purchase a call option.
The Chicago Board Options Exchange
The Chicago Board of Trade
- Central Bank
A government or quasi-governmental organisation that manages a country’s monetary policy. For example, the US Central Bank is the Federal Reserve, and the German Central Bank is the Bundesbank, the Indian Central Bank is the Reserve Bank of India
Visual representations of financial data. Investors can learn to spot recurring patterns on financial charts to help them make informed decisions about a market or a company.
- Class of Options
A term referring to all options of the same type, either calls or puts, covering the same underlying stock.
The process of ending an existing trade. Closing a trade results in a profit or loss being realised.
- Closing Price
The final price of a security at which a transaction was made
Chicago Mercantile Exchange
Commodity Exchange Inc, New York
A basic good used in commerce which is usually uniform across producers and can be traded on an exchange. Soft commodities are goods that are grown, such as coffee and sugar, while hard commodities are extracted through mining, such as gold and coal.
Money received in an account either from a deposit or a transaction which increases the account’s cash balance
- Crude Oil & WTI
The unrefined state of petroleum, Crude Oil is one of the world’s most important and well-traded commodities. WTI or West Texas Intermediate is a type of low sulphur crude oil or sweet crude, used as an oil benchmark or marker.
Coffee, Sugar and Cocoa Exchange
- Currency Pair
The two currencies that comprise a Forex rate. A Forex rate is the amount that the first currency in the pair is worth expressed in terms of the second currency.
The Cyprus Securities and Exchange Commission is the supervisory and regulatory authority for binary options in Cyprus and is a member of the Committee of the European Securities Regulators
- Day Trade
A position (stock or option) that is opened and closed on the same day.
A measure of the rate of change in an option’s theoretical value for a one-unit change in the price of the underlying stock.
The funds required as an initial outlay for a trade. It is not the total amount that can be lost on the trade. Also refers to the funding of a trading account to provide capital for Binary Options trading.
The fall in value of an asset
Financial contracts, such as futures and options, whose value is derived from an underlying asset, rate or index.
- Digital Option
Another name used for a binary option. It has fixed payout and fixed loss.
An adjective used to describe an option that is trading at a price less than its intrinsic value.
- Dow Jones Industrial Average
The benchmark US stock market index that tracks the performance of a selection of thirty US blue-chip stocks.
- Down Trade
A trade backing a particular price to fall.
A price trend characterised by a series of lower highs and lower lows.
- Economic Indicator
A statistic that indicates current economic growth and stability, or the lack of it. Common indicators include employment rates, Gross Domestic Product (GDP), inflation, retail sales, etc.
Ownership, or what a person, company or account has to its name.
- Equity Option
An option on shares of an individual common stock or exchange traded fund.
European Exchange, Frankfurt
- European Central Bank (ECB)
The central bank responsible for monetary policy of the EU.
- European Style Option
An option that can be exercised only on its expiration date and not before.
- Exercise Price
The price at which the owner of an option can purchase (Call) or sell (Put) the underlying stock. Used interchangeably with striking price, strike, or exercise price.
- Exotic Options
These are types of options used exclusively by big time traders before they were available to the public. Binary options are simplified versions of exotic options.
- Expiration Date
The calendar cycle of expiration months that is assigned to basic exchange-traded stock options. Although some options have contracts in every month, most equity options are traded with expiration months in every quarter.
- Expiration Time
The time at which a Binary Option expires, 60 second, 15 minute, end of hour, end of day ate the more common expiration times although some options are longer such as One Touch which expire at the end of the trading week.
- Expiry Price
The price of the asset when the contract expires. In binary trading, an option is determined as either in-the-money or out-of-the-money based on the expiry price of the underlying asset.
- Federal Reserve (FED)
The Central Banking system for the United States.
- Fiscal Policy
The use of government spending and taxation to influence macroeconomic conditions.
- Foreign Exchange (FX or Forex)
The simultaneous buying of one currency and selling of another.
Financial Services Authority. The governing body that regulates the financial services industry.
The FTSE 100, 250 and 350 are the best-known stock indices in the UK and are used primarily to bench mark the performance of UK companies by market capitalisation. The constituent companies within each index are calculated quarterly. Informally known as the ‘Footsie’, the indices are maintained by FTSE Group, which is jointly owned by the Financial Times and the London Stock Exchange.
- Fundamental Analysis
One of the major types of analysis used when trading to predict stock prices. Traders analyse companies by taking into account sales, earnings, products or services, and analyse the economy by taking into account factors like GDP, interest rates and unemployment. This differs from technical research, which uses past prices and trading to predict future prices.
- Future (Forwards)
A future or forwards rate is notionally an agreement to conduct a transaction at some specified time in the future where the price is agreed now. Often the price of a future or forwards bet will differ from the cash price.
Gross Domestic Product, the total value of all final goods and services produced by the economy. A key measure of national income and output for a country’s economy.
UK Government Bonds. So called because the certificates were originally gilt edged.
- Hedge or Hedging
A position established with the specific intent of protecting an existing position. For example, an owner of common stock may buy a put option to hedge against a possible stock price decline.
Hong Kong Futures Exchange
- In the Money
This is a term used to describe when an investor reaches a position when they realise profit. A call option is in the money if the expiry price is above the strike price. A put option is in the money if the expiry price is below the strike price.
A statistical indicator that represents the total value of the stocks that constitute it e.g. the FTSE or the Dow Jones. It often serves as a barometer for a given market or industry and acts as a benchmark from which financial or economic performance is measured.
- Interbank Rates
Foreign Exchange rates at which large international banks quote other large international banks.
- Interim Report
All companies quoted on the London Stock Exchange must release an interim report after the first 6 months of their financial year. It tends to concentrate on profitability, and may be used to justify an interim dividend.
- Intrinsic Value
For a call option, this occurs when the level of the market is higher than the strike. Conversely a put option has intrinsic value if the strike is higher than the market level. In both cases the amount of the intrinsic value is calculated by deducting the strikes from the market level.
Initial Public Offering. The offering of shares making their market debut.
A professional investment management company. Typically, this term is used to describe large money managers such as banks, pension funds, mutual funds, and insurance companies.
Another term used for assets.
- Investment Amount
This is the amount of money used to purchase the binary options contract. It is the money at stake for a put or call option.
London Stock Exchange
The National Association of Securities Dealers’ Automated Quotations System is an electronic stock exchange based in New York listing many leading high-tech companies.
An adjective describing the belief that a stock or the market in general will neither rise nor decline significantly.
New York Stock Exchange
- NYSE AMEX
American Stock Exchange
- Offer Price
In the options business this means the same as ask / ask price, or the price at which a seller is offering to sell an option or a stock.
- Opening Level
Means the price or market level at which a position was initiated.
A contract that gives the owner the right, but not the obligation, to buy or sell a particular asset at a fixed price, the strike price, for a specific period of time until expiration.
- Out of the Money
This is a term used to describe when an investor reaches a position where they experience loss. A call option is out-of-the-money if the expiry price is below its strike price. A put option is out of the money if the expiry price is above its strike price.
The profit realised when the contract expires in-the-money.
A ‘Percentage In Point’ is generally the fourth decimal place, i.e. 0.0001. Traditionally, a pip was the smallest point by which a Forex rate could move, although with modern advances in precision this is no longer the case.
The combined total of an investor’s open option contracts (calls and / or puts) and long or short stock.
- Put Option
It is one of the two option choices. If a trader believes that the value of the underlying asset will drop to a lower value at the time of expiry, then they can purchase a call option.
A term used in technical analysis to describe a price area at which rising prices are expected to stop or meet increased selling activity. This analysis is based on historic price behavior of the stock.
- Risk Management
If you are new to trading it is possible to make substantial losses as well as substantial profits. You can manage your risks via controlled risk trades, making it possible to put an absolute limit on potential losses.
The procedure whereby a trade approaching expiry is closed and a trade of the same size and direction is opened for the next period, thereby prolonging the exposure to a particular market.
The Securities and Exchange Commission. The SEC is an agency of the federal government which is in charge of monitoring and regulating the securities industry.
A unit of ownership, usually in a corporation, that entitles the owner to a share of profits in the form of a dividend. Also known as equities
The difference between the Buy and Sell price.
The price for a currency, index, commodity or share for immediate settlement or delivery.
- Strike Price
The price at which the owner of an option can purchase (call) or sell (put) the underlying stock. Used interchangeably with striking price, strike, or exercise price.
- Technical Analysis
A method of predicting future stock price movements based on the study of historical market data such as (among others) the prices themselves, trading volume, open interest, the relation of advancing issues to declining issues, and short selling volume.
The smallest unit price change allowed in trading a security. For listed stock and options, this is generally 1/8th of a point. However for a listed option under $3 in price, this is normally 1/16th of a point.