Equity and Index Options Explained

Glossary

American style

An option that may be exercised at any time up until expiry

Arbitrage

The exploitation of anomalies in pricing between different markets and instruments

Asian option

An average price option

Assignment

The exact equal and opposite of an option exercise

At-the-money

Term used to describe an option with a strike price close to the prevailing underlying price

Backwardation

Term used to describe a futures market where the nearer months are trading at a premium to further months (opposite of “contango”)

Bearish

View that something will fall in value (opposite of “bullish”)

Bear spread

Any spread designed to benefit from a fall in the underlying

Broker

An intermediary paid to execute orders on clients’ behalf

Bullish

View that something will rise in value (opposite of “bearish”)

Bull spread

Any spread designed to benefit from a rise in the underlying

Calendar spread (aka time spread)

Strategy involving the simultaneous purchase and sale of two options of the same type (call or put) and same strike price but with different expiry dates

Call

An option to buy the underlying

Call spread

Strategy involving the simultaneous purchase and sale of two calls with the same expiry date but different strike prices

Cash-settled

A method of settlement of profit/loss involving cash transfer based upon the closing expiry price (EDSP) of a contract

Class

Group of options of the same type (call or put) with the same expiry date and based upon the same underlying asset

Clearing house ...