Call ratio backspread — A bullish strategy
that involves buying and selling options to
create a spread with limited loss potential and
mixed profit potential.
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.
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, in which case, you’d
have your stock “called away” at the short call
strike. In this case, 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 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.
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.
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.
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 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 typi-
cally limited to the debit of the trade.
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.
Straddle (long and short) — 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.
Vertical spreads — 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, while short verticals are sold for a credit
at the onset of the trade. Long call and short
put verticals are bullish, whereas long put and
short call verticals are bearish. The risk of a
long vertical is typically limited to the debit of
the trade, while the risk in the short vertical is
typically limited to the di;erence between the
short and long strikes, less the credit.
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.
Short stock — To short is to sell stock that
you don’t own in order to collect a premium.
The idea is that if you believe the price of the
stock 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.
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.
24 | tdameritrade.com | SUMMER 2018
BIG IDEA: YOU’VE
TOSSED A FEW
INTO YOUR IRA.
NOW WHAT? YOU
DON’T HAVE TO BE
AND NEITHER DO
YOU HAVE TO
FOLLOW THE “SIT
THERE ARE SOME
HERE ARE THREE
WAYS TO TRADE
WORDS BY THOMAS PRESTON
PHOTOGRAPHS BY DAN SAELINGER
•SEASONED / TAKE AWAY: Yes, you may be able to trade stocks, options, and ETFs in your IRA.