Glossary

Break-Even Point (BEP): The stock price(s) at which an option
strategy results in neither a profit nor loss.
Call: An option contract that gives the holder the right to buy
the underlying security at a specified price for a certain, fixed
period of time.
In-the-money: A call option is in-the-money if the strike price is
less than the market price of the underlying security. A put option
is in-the-money if the strike price is greater than the market
price of the underlying security.
Long position: A position wherein an investor is a net holder in a
particular options series.
Out-of-the-money: A call option is out-of-the-money if the strike
price is greater than the market price of the underlying security.
A put option is out-of-the-money if the strike price is less than
the market price of the underlying security.
Premium: The price a put or call buyer must pay to a put or call
seller (writer) for an option contract. Market supply and demand
forces determine the premium.
Put: An option contract that gives the holder the right to sell
the underlying security at a specified price for a certain, fixed
period of time.
Short position: A position wherein the investor is a net writer
(seller) of a particular options series.
Strike price or exercise price: The stated price per share for which
the underlying security may be purchased (in the case of a call)
or sold (in the case of a put) by the option holder upon exercise of
the option contract.
Synthetic position: A strategy involving two or more instruments
that has the same risk/reward profile as a strategy involving only
one instrument.
Time decay or erosion: A term used to describe how the time value
of an option can “decay” or reduce with the passage of time.
Volatility: A measure of the fluctuation in the market price of the
underlying security. Mathematically, volatility is the annualized
standard deviation of returns.

neutral strategy LONG CALL BUTTERFLY

Example: Sell 2 calls;
buy 1 call at next lower strike;
buy 1 call at next higher strike
(the strikes are equidistant)
Market Outlook: Neutral around
strike
Risk: Limited
Reward: Limited
Increase in Volatility:
Typically hurts position
Time Erosion: Typically helps position
BEP: Two BEPs
1. Lower long call strike plus
net premium paid
2. Higher long call strike minus
net premium paid

neutral strategy RATIO SPREAD WITH CALLS

Example: Buy 1 call;
sell 2 calls at higher strike
Market Outlook: Neutral to slightly
bullish
Risk: Unlimited
Reward: Limited
Increase in Volatility: Typically hurts
position
Time Erosion: Typically helps position
BEP: Two BEPs
1. Long call strike plus premium paid
2. Short call strike plus
[(the difference between the long
call strike and short call strike)
minus premium paid]

neutral strategy SHORT STRANGLE

Example: Sell 1 call;
sell 1 put at lower strike
Market Outlook: Neutral
Risk: Unlimited
Reward: Limited
Increase in Volatility:
Hurts position
Time Erosion: Helps position
BEP: Two BEPs
1. Call strike plus premium
received
2. Put strike minus premium
received

neutral strategy LONG STRANGLE

Example: Buy 1 call;
buy 1 put at lower strike
Market Outlook: Large move
in either direction
Risk: Limited
Reward: Unlimited
Increase in Volatility:
Helps position
Time Erosion: Hurts position
BEP: Two BEPs
1. Call strike plus premium paid
2. Put strike minus premium paid

neutral strategy LONG STRADDLE

Example: Buy 1 call;
buy 1 put at same strike
Market Outlook: Large move
in either direction
Risk: Limited
Reward: Unlimited
Increase in Volatility:
Helps position
Time Erosion: Hurts position
BEP: Two BEPs
1. Call strike plus premium paid
2. Put strike minus premium paid

neutral strategy SHORT STRADDLE

Example: Sell 1 call;
sell 1 put at same strike
Market Outlook: Neutral
Risk: Unlimited
Reward: Limited
Increase in Volatility:
Hurts position
Time Erosion: Helps position
BEP: Two BEPs
1. Call strike plus premium
received
2. Put strike minus premium
received