Glossary

 

Advance/DeclineRatio  
The ratio of advancing issues over declining issues. Taking the moving average of the AD ratio will smooth it so it can be used as an overbought and oversold indicator.
 
Buy-write
A covered call position in which stock is purchased and an equivalent number of calls written at the same time. This position may be transacted as a combined order, with both sides (buying stock and writing calls) being executed simultaneously. Example: buying 500 shares XYZ stock, and writing 5 XYZ May 60 calls.
 
CBOE Volatility Index® (VIX®)
VIX is a key measure of market expectations of near-term volatility conveyed by S&P 500 stock index option prices. Since its introduction in 1993, VIX has been considered by many to be the world's premier barometer of investor sentiment and market volatility.
 
Collar
A protective strategy in which a written call and a long put are taken against a previously owned long stock position. The options may have the same strike price or different strike prices and the expiration months may or may not be the same. For example, if the investor previously purchased XYZ Corporation at $46 and it rose to $62, a 'collar' involving the purchase of a May 60 put and the writing of a May 65 call could be established as a way of protecting some of the unrealized profit in the XYZ Corporation stock position. The reverse -- a long call combined with a written put -- might also be used if the investor has previously established a short stock position in XYZ Corporation.
 
Hedge / hedged position
A position established with the specific intent of protecting an existing position. For example, an owner of common stock may buy a put option to hedge against a possible stock price decline.
 
Hedge wrapper
An options strategy in which an investor with a long position in an underlying stock buys an out-of-the-money put and sells an out-of-the-money call. The hedge wrapper defines a range where the stock could be sold at expiration of the option, depending on which way the stock moves.
 
Married put strategy
The simultaneous purchase of stock and put options representing an equivalent number of shares. This is a limited risk strategy during the life of the puts because the stock can always be sold for at least the strike price of the purchased puts.
 
Protective put buying strategy
A strategy that involves buying a put option on the underlying security that is held in a portfolio.
 
Put/Call ratio
P/C ratio is a popular sentiment indicator. These types of indicators attempt to gauge the prevailing level of bullishness or bearishness in the market. Typically, sentiment indicators are used as contrarian tools. In other words, when market participants are most bullish, the likelihood of a downside reversal is greatest. And when investors become overly bearish, a market rally may be on the horizon.
 
Repair Strategy
The repair strategy is built around an existing losing stock position and is constructed by purchasing one call option and selling two call options for may be the premium obtained from the sale of two call options is enough to cover the cost of the one call options, the result is a option position that may help you break even on your investment much more quickly.
 
Spread / spread order
A position consisting of two parts, each of which alone would profit from opposite directional price moves. As orders, these opposite parts are entered and executed simultaneously in the hope of (1) limiting risk, or (2) benefiting from a change of price relationship between the two parts. 
 
Straddle
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 stock. A long straddle is when both options are owned and a short straddle is when both options are written. Example: a long straddle might be buying 1 XYZ May 60 call, and buying 1 XYZ May 60 put.
 
Multi-leg option strategies involve mutiple comission charges.
  
Options are not suitable for all investors. There are risks involved in any option strategy. Individuals should not enter into option transactions until they have read and understood the option disclosure document titled "Characteristics and Risks of Standardized Options," which outlines the purposes and risks of option transactions. This booklet is available from your Stifel Nicolaus Financial Advisor or through the link below. Investors considering options should consult with a professional tax advisor regarding their particular situation. Supporting documentation of claims will be supplied upon request.