Glossary

ATM - At the money (ATM). This is the option (put or call) who’s strike price is closest to the current price of the stock. Usually this option is the most expensive (in terms of time value) to purchase.

BCO - Buy Call to Open (BCO). This is where you are buying a call (long a call) to open a trade. When you want to close this position you would sell a call to close; see SCC.

Bear Call Spread - See BRCS.

Bearish Diagonal - See Diagonal (Bearish).

BLPS - Bull Put Spread. You believe the stock will go up, stay neutral, or go down very little so you would sell a put OTM and buy a put at the next strike further out creating a credit. This has the advantage of putting time decay (theta) in your favor.

BPO - Buy Put to Open (BPO). This is where you are buying a put (long a put) to open a trade. When you want to close this position you would sell a put to close; see SPC.

BRCS - Bear Call Spread. You believe the stock will go down, stay neutral, or up very little so you would sell a call OTM and buy a call at the next strike further out creating a credit. This has the advantage of putting time decay (theta) in your favor.

Bullish Diagonal - See Diagonal (Bullish).

Bull Put Spread - See BLPS.

Call - A call is an option that gives you the right (but not the obligation) to purchase a stock at a specific price in the future. So for instance, if you buy the Jan 2009 500 call on Google you could redeem (or buy that stock) that stock at anytime between now and its expiration (in this case Jan 2009) at $500 a share. So if the stock price of Google is above $500 a share you would would make money. A call is usually located on the left side of the option chain.

Call Diagonal - See Diagonal (Bullish).

Called Out - This is a term that usually applies when selling an option short in a diagonal spread. Say for instance you were bullish on a stock at $117 and its late June. You might buy the Sept 100 calls for a debit of -19.20 and sell the Jul 120 calls for a credit of +2.00 giving you a total cost basis of -17.20. In the event that the price of the stock is at or above 120 by Jul expiration you will likely be exercised. That means that someone will give you $120 a share and ask you for the stock. You would then go to the person you who sold you the Sept 100 calls, give them $100 and ask for the stock. You would then deliver the stock to the person who bought your Jul 120 calls and keep the cash difference of $20 (you received $120 for the stock and only paid out $100 for the stock). That $20 would be used to replenish your initial cost basis of -17.20 giving you a profit of +2.80 (20 - 17.20).

Candles / Candlesticks - Where you take the open, high, low, and closed of the day to form Japanese candle sticks. These candle sticks then form price patterns that will give you a slight advantage in trading. For a good tutorial on candlesticks take a look here.

CCR - Cash-on-cash return. Calculated by the profit / risk (in this case cash). So, if you made $1 of profit on $10 of risk (cash) your CCR would be 1/10 = 10%.

Diagonal (Bearish) - Sometimes called a Put Diagonal. You find a stock where you are neutral-bearish or bearish-neutral, usually between to strike prices, with good premiums. You buy a put usually 2 to 4 months out that is ITM (in-the-money; usually 3 to 4 strikes in) and has a delta of at least .80. Next, you would sell a put in the front month that is either ATM (at-the-money) or slightly OTM (out-of-the-money) to sell the most time value to bring in a credit. You use the credit from selling the front month to either bring in income for the month (in the event you aren’t called out) or to reduce your cost basis and risk (in the event you are called out). For an example please see: Harley Davidson (HOG) Bearish Diagonal. Bearish diagonals are sometimes called “put diagonals” as well.

Diagonal (Bullish) - Sometimes called a Call Diagonal. This is like a covered call on steroids. You find a stock where you are neutral-bullish or bullish-neutral, usually between to strike prices, with good premiums. You buy a call usually 2 to 4 months out that is ITM (in-the-money; usually 3 to 4 strikes in) and has a delta of at least .80. Next, you would sell a call in the front month that is either ATM (at-the-money) or slightly OTM (out-of-the-money) to sell the most time value to bring in a credit. You use the credit from selling the front month to either bring in income for the month (in the event you aren’t called out) or to reduce your cost basis and risk (in the event you are called out). For an example please see: Union Pacific (UNP) Bullish Diagonal. Bullish diagonals are sometimes called “call diagonals” as well.

Hamster - A dear friend, mentee, attorney, and very successful real estate investor. One of the brightest, funniest, and most trustworthy people I know.

HOD - High of Day. This is the highest price traded for the current day. Sometimes you will see “2 day HOD” which means the high of the past two days. Usually once a stock price trades above the high of the day its momentum will pick up and the price will continue higher if there’s sufficient volume.

hopium - The favorite drug of poor traders everywhere. When a trade is moving against you and you decide to hold the position and “hope” that its going to reverse you are strung out on hopium. Deadly.

IC - See Iron Condor.

Iron Condor (IC) - An iron condor is actually two vertical spreads; one bullish and one bearish. Iron Condors are best used on slower moving indexes such as the SPX, SPY, RUT, or IWM. Since these indexes are made up of at least 500 companies they tend to be well diversified and fairly resistance to event / news risk. Let’s say the SPY is at 150 and has been staying between 148 and 152. Four weeks prior to expiration you could put on an Iron Condor where you have a bull put spread (BLPS) at 145 / 143 for +.30 and a bear call spread (BRCS) at 155 / 157 for +.25. This gives you a total credit of +.55 on a risk of 1.45 (the $2 spread difference minus the credit) for a potential ROI of +29%.

LEAP (Long-Term Equity Anticipation Securities) - An option contract with an expiration date that is more than a year away (usually in Jan). For instance, its Jan 2008, so there are LEAPs for Jan 2009 and Jan 2010 for the SPY.

LOD - Low of Day. This is the lowest price traded for the current day. Sometimes you will see “2 day LOD” which means the low of the past two days. Usually once a stock price trades below the low of the day its momentum will pick up and the price will continue lower.

Not Called Out - This is a term that usually applies when selling an option short in a diagonal spread. Say for instance you were bullish on a stock at $117 and its late June. You might buy the Sept 100 calls for a debit of -19.20 and sell the Jul 120 calls for a credit of +2.00 giving you a total cost basis of -17.20. In the event that the price of the stock is below 120 by Jul expiration you not be exercised. That means that you the Jul 120 calls you sold for +2.00 will expire worthless and you get to keep the entire $2.00. In effect, you’ve just earned $2.00 on an original debit of -19.20 (the cost of the Sept 100 calls you bought). This gives you an ROI of 2.00 / 19.20 = +10.4% for the month of July. Now, at this point you can either sell Aug calls (say for another +2.00) against your Sept 100 calls or close the trade by selling your Sept 100 calls.

Put Diagonal - See Diagonal (Bearish).

Rich - When I talk about rich I don’t just mean in money. I mean rich as a balance of abundance in love, laughter, fun, health, happiness, family, friends, time, AND money. I’ve met many people with huge amounts of money and no happiness.

ROI - Return of investment. Usually calculated at the profit / risk.

Roll -? When you buy to close (BTC) a short option and sell to open (STO) another short option.? For instance, if I’m in a call diagonal on POT and I’m long the Jun 100s and short the Jan 140s I would buy to close the Jan 140s and sell to open the? Feb 140s.? That called rolling.

Roll Down - When you roll and move the strike of the newly sold option lower.

Roll Out - When you roll and change calendar months.? For instance, I buy to close (BTC) the Jan 140s and sell to open (STC) the Feb 140s.Roll Up - When you roll and move the strike of the newly sold option higher.

ROM - Return on Margin. Similiar to ROI but where risk is calculated by the amount of margin required by your broker.

ROR - Return on Risk. Similiar to ROI.

SCC - Sell Call to Close (SCC). This is where you are selling a call (short a call) to close a trade. When you wanted to open this position you probably bought a call to open; see BCO.

Synthetic Long / Short - This is where you control a 100 shares of stock by buying the call and selling the put (for a synthetic long position) or selling the call and buying the put (for a synthetic short position).? The options are usually several months out.? This gives you a delta of 1 so its good for trending stocks.? You can then go ahead and sell a covered call or covered put against this position to put time decay in your favor.? This can be a good substitute for a diagonal position but with better delta and less cash required.

Try / Trying - (verb) Its the worst kind of failure. Its failure in slow motion. People usually use the word ‘try’ to hopefully get half-credit (aka a Gold Star) for an effort that is not done.

Vertical Spreads - Include spreads where you are short one strike and long one strike in the same month at different strikes. Examples of vertical spreads are Bear Call Spreads (BRCS) and Bull Put Spreads (BLPS).

Vulture - A whimsical name for a vertical spread (bear call or bull put) placed within 10 days of expiration. The term ‘vulture’ was invented by my good friend Travis.

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