Backwardation—When the price of the
further-expiration futures contracts is lower
than the price of the nearer-expiration futures
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.
Call vertical—The simultaneous purchase of
one call option and sale of another call option
at a di;erent strike price, in the same underlying, in the same expiration month.
Contango—When the price of the further-expiration futures contracts is higher than the
nearer-expiration futures contracts.
Covered call—A limited-reward strategy
constructed of long stock and a short call.
Ideally, you want the stock to finish at or above
the call strike at expiration. If stock price
settles above strike price, you’d have your
stock “called away” at the short call strike. You
would keep your original credit from the sale
of the call as well as any gain in the stock up to
the strike. Breakeven on the trade is the stock
price you paid minus the credit from the call.
Implied volatility—The market’s perception
of the future volatility of the underlying security, directly reflected in an option’s premium.
Implied volatility is an annualized number
expressed as a percentage (such as 25%), is
forward-looking, and can change.
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 vertical spread—A defined-risk, directional spread strategy, composed of a long and
a short option of the same type (i.e., calls or
puts). Long verticals are purchased for a debit
at the onset of the trade. Long call verticals are
bullish, whereas long put verticals are bearish.
The risk of a long vertical is typically limited to
the debit of the trade.
Out of the money (OTM) —An option
whose premium is not only all “time” value,
but also, 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.
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.
Short call—A bearish, directional strategy
with unlimited risk in which an unhedged call
option with a strike that is typically higher
than the current stock price is sold for a credit.
The strategy assumes that the stock will stay
below the strike sold, in which case, as time
passes and/or volatility drops, the call option
can be bought back cheaper or expire worthless, resulting in a profit.
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.
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.
Verticals—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
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.
20 | tdameritrade.com | SPRING 2018
PERIODS OF LOW
CAN GET LURED
INTO THE MARKETS
AT THE WRONG
TIME. WHEN VOL
PICKS UP DURING
HELP SAVE YOU
• PRO/ TAKE A WA Y:
It’s earnings time.
So how do you
trade around those