Collar — A collar combines the writing, or
selling, of a call option with the purchase
of a put at the same expiration. Typically,
this involves a call with a strike price above
that of the underlying stock and a put with
a strike below the stock.;The strikes create
“floor” and “ceiling” prices, “collaring” the
underlying stock in between. In return for
accepting a cap on the stock’s upside potential, the investor receives a minimum price at
which the stock can be sold during the life of
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 the
stock price settled 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.
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 $0.50 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
Gamma — A measure of how an option’s
delta is expected to change per $1 move in
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.
Long call vertical — 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.
Long put — Gives the owner the right, but
not the obligation, to sell shares of stock or
other underlying assets at the option’s strike
price within a specific time period. The put
seller is obligated to purchase the underlying at the strike price if the owner of the put
exercises the option. In the case of an index
option, it’s a cash-settled transaction with no
underlying asset changing hands.
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
Short put vertical — 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.
Strangle — A trading position involving puts
and calls on a one-to-one basis in which the
puts and calls have the same expiration and
underlying asset, but di;erent strike prices.
When both options are owned, it’s a long
strangle. When both options are written, it’s a
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 options
premium will decrease by $2 per contract.
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) — 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, options buying activity increases,
and options premiums on the S&P 500 Index
increase as well. As the VIX declines, options
buying activity decreases. The assumption is
that greater options 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.
tdameritrade.com | SPRING 2019
•SEASONED/ TAKE AWAY: Three ways to hedge a stock position in any market.
BIG IDEA: WHEN THE MARKETS ARE IN FLUX, YOU MAY FEEL THE NEED
TO HEDGE SOME INDIVIDUAL POSITIONS, EVEN WHEN YOU’RE
“DIVERSIFIED.” BUT HOW? HERE ARE THREE RISK
SCENARIOS THAT COULD PLAY OUT, AND DEPENDING ON WHERE
VOLATILITY IS, THERE’S AN OPTIMAL STRATEGY FOR YOU.
WORDS BY MARK AMBROSE
PHOTOGRAPHS BY DAN SAELINGER
TM43_SPRING_2019.indd 16-17 2019-02-22 4:56 PM