Glossary
The following glossary is best used as a quick reminder of basic options
definitions. Alternatively, it may be used as a source of jargon for small
talk at wine bars. (Make sure you’re overheard.) It is no substitute for
proper learning.
American style An American-style option can be exercised at any date
during the life of the option’s contract.
Asymmetric spread A spread whose strikes are not equidistant.
At-the-money (ATM) Calls and puts closest to the underlying.
Bear call spread Short call spread.
Bear put spread Long put spread.
Box A long box is a long synthetic plus a short synthetic at a higher strike.
A short box has the opposite long/short position.
Broken spread An asymmetric spread.
Bull call spread Long call spread.
Bull put spread Short put spread.
Butterfly A long call butterfly is a long one by two call spread plus a long
call at a third, higher strike. All strikes are equidistant. A long put butter-
fly is a long one by two put spread plus a long put at a third, lower strike.
Again, all strikes are equidistant. For shorts of these spreads, reverse the
long/short positions.
Calendar spread A long calendar spread is a long option plus a short
option that is closer to expiration. Both options have the same strike.
304 Glossary
Call A call option is the right to buy the underlying asset at a specified
price for a specified time period. The call buyer has the right, but not the
obligation, to buy the underlying. The call seller has the obligation to sell
the underlying at the call buyer’s discretion.
Call spread A long call spread is a long call plus a short call at a higher
strike. A short call spread is the opposite.
Christmas tree See Ladder.
Combo A long out-of-the-money call plus a short out-of-the-money put,
or vice versa. This is also known as the cylinder. The short call, long put
version is also known as the fence. Occasionally this term applies to the
synthetic underlying.
Condor A long call condor is a long call spread plus a short call spread
at higher strikes. All strikes are equidistant. A long put condor is a long
put spread plus a short put spread at lower strikes. Again, all strikes are
equidistant.
Conversion A long underlying plus a short synthetic.
Covered write A long underlying plus a short out-of-the-money call. This
is also know as the buy-write.
Cylinder See Combo.
Delta The rate of change of an option with respect to a change in the
underlying.
Delta neutral Any combination of options and an underlying position
whose delta sum is practically zero.
Delta/price ratio The percent that an option’s value changes with respect
to a change in the underlying.
Diagonal spread A long diagonal is a long option plus a short option that
is closer to expiration and further out-of-the-money.
European style A European-style option can only be exercised at expiration.
Extrinsic value See Time premium.
Fence See Combo.
Future A contract to buy or sell a physical asset at a specified price at a
specified future date. This asset can be a commodity, bond or stock. In the
case of a stock index, the contract is for a cash value of all the stocks that
comprise the index.

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