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Options Glossary

Options Glossary - A
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Abandonment
Voluntarily giving up all title, rights or claims to property that rightfully belongs to the owner, such as bonds, mutual funds or stocks held in a brokerage account for which the company is unable to locate the listed owner over a specified time period, usually several years. Other types of property subject to abandonment include: inventions, leases, patents, contracts, copyrights and trademarks.

ABC
Elliott wave terminology for a three-wave countertrend price movement. Wave A is the first price wave against the trend of the market. Wave B is a corrective wave to Wave A. Wave C is the final price move to complete the countertrend price move. Elliott wave followers study A and C waves for price ratios based on numbers from the Fibonacci series.

ABC Inventory Control System
A system of dividing a company's inventory into three inventory systems, A, B and C, according to the contribution of each to the company's overall investment in inventory. This system may facilitate the application of more efficient and effective inventory control techniques.

Ability to Service
A borrower's ability to meet principal and interest payments on long-term obligations out of earnings. Also referred to as ability to pay (financial). (See also: Fixed Charge Coverage)

Absorption Account
An account that has been combined with related accounts in the preparation of a financial statement and has lost its separate identity. Also called adjunct account.

Accelerated Fund Transfer
A computer-based electronic fund transfer system for inter-account and intra-account transfers, accounts receivable collections, bill payments and overall financial management.

Account Executive (Securities)
A salesperson employed by a stock exchange member broker/dealer, also known as a registered representative. An individual must have a background in the securities business, pass a series of tests and be registered by the securities commission in the province in which he or she works in order to qualify as a registered representative. The account executive gives advice on buying and selling securities, collecting a percentage of any commission income generated as compensation.

Accounts Payable
Debts of a company for goods or services purchased that must be paid within one year. These debts are listed as a current liability on the company's balance sheet.

Accounts Receivable
Money owed to a company for goods and services it has sold. Payment is expected within one year. This money is listed as a current asset on the company's balance sheet.

Accrual Accounting
A method of reporting income when earned and expenses when incurred, as opposed to reporting income when received and expenses when paid.

Accrued Interest
The interest that has accumulated since the last interest payment up to, but not including, the settlement date and that is added to the contract price of a bond transaction. There are two methods for calculating accrued interest: the 30-day-month (360-day-year) method for corporate and municipal bonds, and the actual-calendar-days (365-day-year) method for government bonds. Income bonds, bonds in default and zero-coupon bonds trade without accrued interest (flat).

Accumulation
An addition to a trader's original market position. The first of three distinct phases in a major trend in which investors are buying.

Acid-test Ratio
A measure of a corporation's liquidity, calculated by adding cash, cash equivalents, and accounts and notes receivable, and dividing the result by total current liabilities. It is a more stringent test of liquidity than current ratio.

Acquisition
A term used to describe one company taking controlling interest in another company.

Acquisition Fee
The total charges and commissions paid by any party in connection with the selection or purchase of property by a direct participation program. Included in the total is any real estate commission, acquisition expense, development fee, selection fee or construction fee of a similar nature. The fee is added to the basis in the asset for the purpose of depreciation and calculating gain or loss.

ADA
Block-structured programming language developed under the guidance of the U.S. Department of Defense to provide a medium for writing real-time, concurrent applications for facilitating program verification.

Add-on Method
A method of paying interest where the interest is added onto the principal at maturity or interest payment dates.

Adjunct Account
An account that has been combined with related accounts in the preparation of a financial statement and has lost its separate identity. Also called absorption account.

Adjusted Basis
The value attributed to an asset or security that reflects any deductions taken on, or capital improvements to, the asset or security. Adjusted basis is used to compute the gain or loss on the sale or other disposition of the asset or security.

Adjusted Futures Price
The cash-price equivalent reflected in the current futures price. This is calculated by taking the futures price times the conversion factor for the particular financial instrument (e.g., bond or note) being delivered.

Adjusted Gross Income (AGI)
Earned income plus net passive income, portfolio income and capital gains.

Adjustment
The process of buying or selling instruments to bring your position delta back to zero.

Ad Valorem Tax
A tax based on the value of real or personal property. Property taxes are the major source of revenues for local governing units. (See also: Mill Rate)

Advance/Decline line
A technical analysis tool representing the total of differences between advances and declines of security prices. The advance/decline line is considered the best indicator of market movement as a whole. (See also: Breadth-of-Market Theory)

Adverse Excursion
The loss attributable to price movement against the position in any one trade.

Affiliated Company
A company with less than 50% of its stock owned by another corporation, or one whose stock, with that of another corporation, is owned by the same controlling interests.

Agent
1. An individual or firm that effects securities transactions for the accounts of others.

Aggressive Investment Strategy
A method of portfolio allocation and management aimed at achieving maximum return. Aggressive investors place a high percentage of their investable assets in equity securities and a far lower percentage in safer debt securities and cash equivalents, and pursue aggressive policies including margin trading, arbitrage and options trading. Focuses more on increasing the value of the original investment as an investing priority than on price stability or income. As a result, aggressive investments involve more investment risk.

Agreement Among Underwriters
A contract between participating members of an investment banking syndicate. This contract is sometimes called a syndicate contract or purchase group agreement. The agreement appoints the originating investment banker as syndicate manager and agent; appoints additional manager if needed; defines members' proportional liability and agrees to pay each member's share on settlement date; authorizes the manager to form and allocate units to a selling group and agrees to abide by the rules of the selling group agreement; and defines the life of the syndicate which usually runs until 30 days after termination of the selling group, or earlier by mutual consent.

All Ordinaries Index
The major index of Australian stocks. This index represents 280 of the most active listed companies or the majority of the equity capitalization (excluding foreign companies) listed on the Australia Stock Exchange (ASX). Comprised of 23 sub-indices representing various industry categories and summarized market price movements by following changes in the aggregate market values of the companies listed.

Alpha-Beta Trend Channel
The Alpha-Beta Trend Channel study uses the standard deviation of price variation to establish two trend lines, one above and one below the moving average of a price field. This creates a channel (band) where the great majority of price field values will occur.

Alpha
A measure of selection risk (also known as residual risk) of a mutual fund in relation to the market. A positive alpha is the extra return awarded to the investor for taking a risk, instead of accepting the market return. For example, an alpha of 0.4 means the fund outperformed the market-based return estimate by 0.4 %. A -0.6 means a fund's monthly return was 0.6 % less than would have been predicted from the change in the market alone.

Alpha Equation
The alpha of a fund is determined as follows:

American Depository Receipts
Certificates issued by a U.S. Depository Bank, representing foreign shares held by the bank, usually by a branch or correspondent in the country of issue. One ADR may represent a portion of a foreign share, one share or a bundle of shares of a foreign corporation. If the ADRs are 'sponsored,' the corporation provides financial information and other assistance to the bank and may subsidize the administration of the ADRs. 'Unsponsored' ADRs do not receive such assistance. ADRs carry the same currency, political and economic risks as the underlying foreign share; the prices of the two, adjusted for the SDR/ordinary ratio, are kept essentially identical by American Depository Shares (ADS) and are a similar form of certification.

American Stock Exchange (AMEX)
A private, not-for-profit corporation located in New York City that handles approximately one-fifth of all securities trades within the United States.

American Style Option
An option contract that can be exercised at any time between the date of purchase and the expiration date. Most exchange-traded options are American style.

Amortization
1. The paying off of debt in regular installments over a period of time.

Analysis of Variance (Anova)
The partitioning of total sum of squares into the sum of squares explained by the model and the remaining sum of squares unexplained.

Analyst
Employee of a brokerage or fund management house who studies companies and makes buy and sell recommendations on their stocks. Most specialize in a specific industry.

Anaume
Candlestick formation. An exceptional exhaustion pattern (meaning 'gap filling') composed of five candles. The anaume occurs when the gap is filled in after a market price has changed directions. This pattern coupled with the other patterns indicates a strong potential for a bullish reversal and price advance.

Andrews Method
A technique whereby a technician will pick an extreme low or high to use as a pivot point and draw a line, called the median line, from this point that bisects a line drawn through the next corrective phase that occurs after the pivot point. lines parallel to the median line are drawn through the high and low points of the corrective phase. The parallel lines define the resistance and support levels for the price channel.

Annealing (Simulated)
Generally a metallurgical process, in artificial intelligence a process in which a neural network searches for a set of weights to minimize errors; the search constantly shrinks as the weights find better values, analogous to the rearrangement of the molecules in a heated metal bar as the bar cools.

Annual Earnings Change (%)
The historical earnings change between the most recently reported fiscal year earnings and the preceding.

Annual Net Profit Margin (%)
The percentage that the company earned from gross sales for the most recently reported fiscal year.

Annual Report
A report issued by a company to its shareholders at the end of the fiscal year. It contains a description of the firm's operations, its balance sheet (including formal financial statements), and income statement. SEC rules require that it be distributed to all shareholders. A more detailed version is called a 10-K.

Annual Return
The simple rate of return earned by an investment for each year.

Annual Sales Change (%)
The percentage change in sales between the most recently reported fiscal year and the preceding.

Annuity
A series of constant payments at uniform time intervals (for example, periodic interest payments on a bond).

Antithetic Forecasts
Two forecasts whose errors are negatively correlated.

Appreciation
The increase in value of an asset.

Arbitrage
The simultaneous purchase and sale of identical or equivalent financial instruments or commodity futures in order to benefit from a discrepancy in their price relationship.

Arbitration
The procedure of settling disputes between members, or between members and customers.

Arms Ease of Movement
Developed by Richard W. Arms, Jr., this analysis routine expands on Mr. Arms' Equivolume charting tool by quantifying the shape aspects of the plotted boxes. The purpose of this quantifying is to determine the ease, or lack thereof, with which a particular issue is able to move in one direction or another. The ease with which an issue moves is a product of a ratio between the height (trading range) and width (volume) of the plotted box. In general, a higher ratio results from a wider box and indicates difficulty of movement. A lower ratio results from a narrower box and indicates easier movement. This ratio is then related to a comparison between today's and yesterday's trading-range midpoint values to determine the ease of movement value (EMV). A moving average is then applied to the EMV value-the moving average period can be varied in order to make the EMV flexible as a trading tool.

Arms Index
Total up volume/total down volume. An advance/decline market indicator. Less than 1.0 indicates bullish demand, while above 1.0 is bearish. The index often is smoothed with a simple moving average. Also known as TRading INdex (TRIN) = # advancing issues / # declining issues.

Arrears
Interest or dividends which were not paid when due and are still owed

Artificial Intelligence
The field of computer science dedicated to producing programs that attempt to mimic the processes of the human brain.

Asian Board
Introduced in 1993, this company classification is for companies doing business in Asia. Companies that trade on the Asian Board are more senior than those in other company classifications, meeting listing requirements higher than the Toronto Stock Exchange.

Ask
An indication by a trader or a dealer of a willingness to sell a security or a commodity; the price at which an investor can buy from a broker-dealer.

Asset
1. Anything that an individual or a corporation owns.

Asset Allocation
When you divide your money among various types of investments, such as stocks, bonds and short-term investments, you are allocating your assets. The way in which your money is divided is called your asset allocation.

Asset Allocation Fund
A mutual fund that splits its investment assets among stocks, bonds and other vehicles in an attempt to provide a consistent return for the investor.

Asset Stripper
A term to describe a corporate raider who takes over a company planning to sell large assets in order to repay debt. The theory behind this practice is that once assets are sold and debt paid, the raider will be left with valuable assets that are worth more than the original purchase price.

Assign
To make an option seller perform his obligation to assume a short futures position (as a seller of a call option) or a long futures position (as a seller of a put option).

Assignment
The receipt of an exercise notice by an options writer that requires him to sell (in the case of a call) or purchase (in the case of a put) the underlying security at the specified strike price.

Associated Company
A company owned jointly by two or more other companies.

Associated Person (AP)
An individual who solicits orders, customers, or customer funds (or who supervises persons performing such duties) on behalf of a Futures Commission Merchant, an Introducing Broker, a Commodity Trading Adviser, or a Commodity Pool Operator.

Associate Membership (CBOT)
A Chicago Board of Trade membership that allows an individual to trade financial instrument futures and designated markets.

Astrophysical Cycle
Any earthly cycle, such as a market cycle, that has been scientifically related to the physics of the planetary system.

Attenuation
The fractional part of reduced energy or lost power due to smoothing or filtering.

At-the-Money Option
An option with an exercise or strike price that is equal, or almost equal, to the current market price of the underlying security. ATM options have a delta of +50 or -50.

At-the-Opening Order
An order that specifies it is to be executed at the opening of the market or of trading in that security or else it is to be canceled. The order does not have to be executed at the opening price.

Auction Market
A market in which buyers enter competitive bids and sellers enter competitive offers simultaneously. Most stock and bond markets function as an auction market. This means that there is a bid and an ask price for each security. You as an investor can choose to buy or sell at the given bid or ask, or you can establish your own bid or ask price. Think of the stock market as a giant garage sale. If you don't like the price that you see, you can make your own bid for the item. The NYSE is an auction market.

Auction Value
Refers to the projected pricing for an asset, such as office equipment or a real estate holding, belonging to a company that is going out of business. liquidation value assumes that assets will be sold separately from the rest of the company. Also called liquidation value and liquidating value.

Audit
Verifying the accuracy of accounting and financial records by a member of the Institute of Certified General Accountants and Certified Management Accountants.

Authorized Stock
The number of shares of stock that a corporation is permitted to issue. This number of shares is stipulated in the corporation's state-approved charter, and may be changed by a vote of the corporation's stockholders.

Autocorrelation
The correlation between the values of a time series and previous values of the same time series.

Automatic Exercise
An exercise by the clearing firm in which the firm automatically exercises an in-the-money option at expiration.

Autoregressive
Using previous data to predict future data.

AutoRegressive Integrated Moving Average (ARIMA)
A linear stochastic model forecasting methodology described by Box and Jenkins in their book Time Series Analysis, Forecasting and Control.

Average
An arithmetic mean of selected stocks intended to represent the, behavior of the market or some component of it. One good example is the widely quoted Dow Jones Industrial Average, which adds the current prices of its 30 stocks, and divides the results by a predetermined number, the divisor.

Average ARMAX (AutoRegressive Moving Average Xogenous Variables Model)
The combination of fundamental variables outside the particular market that correlates with the independent variable added with the ARMA modeling of the remaining residuals.

Average Directional Movement Index (ADX)
Indicator developed by J. Welles Wilder to measure market trend intensity.

Average Maturity
The average time to maturity of securities held by a mutual fund. Changes in interest rates have greater impact on funds with longer average life.

Average Price
A step in determining a bond's yield to maturity. A bond's average price is calculated by adding its face value to the price paid for it and dividing the result by two.

Averages and Indices
Statistical measures of the state of the stock market or the economy, based on the performance of stocks or other components. Examples are the VSE Composite Index, TSE 300 Composite Index, the Dow Jones Industrial Average and the Consumer Price Index.

Average True Range
True range is the greatest of the following differences:

Averaging Down
Buying more of a security at a lower price than the original investment in order to reduce the average cost per share.

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