Calendar spread—A defined-risk spread
strategy, constructed by selling a short-term
option and buying a longer-term option of
the same type (i.e., calls or puts). The goal: as
time passes, the shorter-term option typically
decays faster than the longer-term option, and
profits when the spread can be sold for more
than you paid for it. The risk is typically limited to the debit incurred.
Delta—A measure of an option’s sensitivity
to a $1 change in the underlying asset. All else
being equal, an option with a 0.50 delta (for
example) would gain 50 cents per $1 move up
in the underlying. Long calls and short puts
have positive (+) deltas, meaning they gain as
the underlying gains in value. Long puts and
short calls have negative (–) deltas, meaning
they gain as the underlying drops in value.
Iron condor—A defined-risk, short spread
strategy, constructed of a short put vertical
and a short call vertical. You assume the
underlying will stay within a certain range
(between the strikes of the short options).
The goal: as time passes and/or volatility
drops, the spreads can be bought back for
less than the credit taken in or expire worthless, resulting in a profit. The risk is typically
limited to the largest di;erence between
the adjacent and long strikes minus the total
Margin call—A margin call is issued when
your account value drops below the maintenance requirements on a security or securities
due to a drop in the market value of a security or when you exceed your buying power.
Margin calls may be met by depositing funds,
selling stock, or depositing securities.
TD Ameritrade may forcibly liquidate all or
part of your account without prior notice,
regardless of your intent to satisfy a margin
call, in the interests of both parties.
Out of the money (OTM)—An option whose
premium is not only all “time” value, but the
strike is away from the underlying equity. For
calls, it’s any strike higher than the underlying.
For puts, it’s any strike that’s lower.
Short—To sell an asset, such as an option or
stock, that you don’t own in order to collect
a premium. The idea is that if you believe the
price of the asset will decline, you can “borrow”
the stock from your broker at a certain price,
and buy back (“cover”) to close the position at
a lower price later. Your potential profit would
be the di;erence between the higher price you
shorted at and the lower price you covered.
Short put vertical—A defined-risk, direc-
tional spread strategy, composed of an equal
number of short (sold) and long (bought)
puts in which the credit from the short strike
is greater than the debit of the long strike,
resulting in a net credit taken into the trader’s
account at the onset. Short put verticals are
bullish. The risk in this strategy is typically
limited to the di;erence between the strikes
less the received credit. The trade is profitable
when it can be closed at a debit for less than
the credit received. Breakeven is calculated
by subtracting the credit received from the
higher (short) put strike.
Straddle—A trading position involving puts
and calls on a one-to-one basis in which the
puts and calls have the same strike price,
expiration, and underlying asset. When both
options are owned, it’s a long straddle. When
both options are written, it’s a short straddle.
Synthetic covered call—A position composed of long stock and a long put. The number
of long puts multiplied by 100 equals the number of long stock shares. For example, long five
synthetic 70 calls can be created by being long
five 70 puts and long 500 shares of stock.
Vega—A measure of an option’s sensitivity
to a one percentage point change in implied
volatility. For example, if a long option has a
vega of 0.04, a one percentage point increase
in implied volatility will increase the option
premium by $4.
Verticals/vertical spreads—An option
position composed of either all calls or all puts,
with long options and short options at two
di;erent 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.;
Theta—A measure of an option’s sensitivity
to time passing one calendar day. For example,
if a long put has a theta of -0.02, the option premium will decrease by $2 per option contract.
CBOE Volatility Index (VIX)—The de facto
market volatility index used to measure the
implied volatility of S&P 500 index options.
Otherwise known to the public as the “fear
index,” it is most often used to gauge the level
of fear or complacency in a market over a specified period of time. Typically, as the VIX rises,
option buying activity increases, and option
premiums on the S&P 500 index increase as
well. As the VIX declines, option buying activity decreases. The assumption is that greater
option activity means the market is buying up
hedges in anticipation of a correction. However, the market can move higher or lower,
despite a rising VIX.
At the money (ATM)
• An option whose strike is “at” the price of the underlying equity. Like out-of-the-money options, the premium of an at-the-money option is all “time” value.
16 | tdameritrade.com | FALL 2017
•EASY/ TAKE AWAY: Use your trading tools to monitor transactions, evaluate risk, and leverage a range of strategies.
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