At the money — 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.
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.
Gamma — A measure of how much an option’s delta is expected to change per $1 move
in the underlying.
In the money (ITM) — An option whose
premium contains “real” value, i.e., not just
time value. For calls, it’s any strike lower than
the price of the underlying equity. For puts, it’s
any strike that’s higher.
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 credit received.
Long put calendar spread — A defined-risk
spread strategy, constructed by selling a short-term put option and buying a longer-term put
option. 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.
Long put vertical — The simultaneous purchase of one put option and sale of another put
option at a di;erent strike price, in the same
underlying, in the same expiration month.
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 call vertical — A defined-risk, directional spread strategy, composed of an equal
number of short (sold) and long (bought)
calls 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 call verticals are
bearish. 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 adding the credit received to the
lower (short) call strike.
Short put vertical (spread) — A defined-risk, directional 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.
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.
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 per contract.
CBOE Volatility Index (VIX) — Index that
measures 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.
Long call vertical spread
• A defined-risk, bullish spread strategy composed of a long and short option of
the same type (i.e., calls). Long verticals are purchased for a debit at the onset of
the trade. The risk of a long vertical is typically limited to the debit of the trade.
16 | tdameritrade.com | FALL 2018
•EAS Y/ TAKE AWAY: Choosing the right mix of indicators could potentially yield clues to direction and volatility.
BIG IDEA: YOU RELY ON TRENDS AND VOLATILITY
TO COME UP WITH TRADING STRATEGIES. SO
HOW DO YOU DETERMINE A TREND’S DIRECTION AND
MOMENTUM? THERE’S NO ONE PERFECT WAY,
BUT TECHNICAL INDICATORS MAY PROVE USEFUL.
WITH SO MANY INDICATORS TO CHOOSE FROM, HOW DO
YOU PICK THE RIGHT ONES? HERE’S ONE STRATEGY.