# Glossary of Derivatives

#### F

 Fundamental analysis** A method of predicting stock prices based on the study of earnings, sales, dividends, and so on.

#### G

 Gamma A measure of the marginal variation of an option’s delta based on the marginal variation of the underlying interest’s price, all other things being equal. Good-’til-cancelled order** (GTC order) *Ordre ouvert** A type of limit order that remains in effect until it is either executed (filled) or cancelled. This is unlike a day order, which expires if not executed by the end of the trading day. If not executed, a GTC option order is automatically cancelled at the option’s expiration.

#### H

 Hedge** (hedge position) (hedging position) *Couverture** 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. Historic volatility** A measure of actual stock price changes over a specific period. Holder** (bearer) (owner) *Détenteur** Any person who has made an opening purchase transaction, call or put, and has that position in a brokerage account.

#### I

 Implied volatility [of an option] The volatility of the underlying interest’s price which is determined using an option pricing model and is implied in the option’s premium. In-the-money option Either a call option that has a strike price below the underlying interest’s price, or a put option that has a strike price above the underlying interest’s price. Index option** An option whose underlying interest is an index. Generally, index options are cash-settled. Individual volatility** The volatility percentage that justifies an option’s price, as opposed to historic volatility or implied volatility. A theoretical pricing model can be used to generate an option’s individual volatility when the five remaining quantifiable factors (stock price, time until expiration, strike price, interest rates and cash dividends) are entered along with the price of the option itself. Institution** A professional investment management company. Typically, this term describes money managers such as banks, pension funds, mutual funds and insurance companies. Intrinsic value The positive difference between the underlying interest’s price and the strike price of a call option or between the strike price of a put option and the underlying interest’s price. By definition, the intrinsic value cannot be negative. Iron butterfly** An option strategy with limited risk and limited profit potential that involves both a long (or short) straddle, and a short (or long) strangle. An iron butterfly contains four options. It is equivalent to a regular butterfly spread that contains only three options.

#### M

 Margin requirement [for writing an option] (margin coverage) *Exigence de marge [pour la vente d’une option] The cash amount or the securities that must be deposited with the broker before writing an option in order to guarantee the purchase or delivery of the underlying interest in case the option is exercised. Market maker** A trader who is mandated to post bids and offers and to maintain a fair and orderly market. Market maker system** [competing] A method of supplying liquidity in options markets by having market makers in competition with one another. Market order** A trading order placed with a broker to immediately buy or sell a stock or option at the best available price. Market quote** Quotations of the current best bid/ask prices for an option or stock in the marketplace. The investor usually obtains this information from a brokerage firm. However, for listed options and stocks, these quotes are widely disseminated and available through various commercial quotation services. Mark-to-market** An accounting process by which the price of securities held in an account are valued each day to reflect the closing price or closing market quotes. As a result, the equity in an account is updated daily to reflect current security prices properly. 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.

#### N

 Naked [option] writing The sale of a call or a put option without holding an equivalent quantity of the underlying interest or the cash required to fulfill the sale or purchase obligation should the written option be exercised. Net credit** Money received in an account either from a deposit or a transaction that results in increasing the account’s cash balance. Net debit** Money paid from an account either from a withdrawal or a transaction that results in decreasing the cash balance. Neutral** An adjective describing the belief that a stock or the market in general will neither rise nor decline significantly. Neutral strategy** An option strategy (Or stock and option position) expected to benefit from a neutral market outcome.

#### R

 Ratio spread** A term most commonly used to describe the purchase of an option(s), call or put, and the writing of a greater number of the same type of options that are out-of-the-money with respect to those purchased. All options involved have the same expiration date. Ratio write** An investment strategy in which stock is purchased and call options are written on a greater than one-for-one basis (more calls written than the equivalent number of shares purchased). Resistance** A term used in technical analysis to describe a price area at which rising prices are expected to stop or meet increased selling activity. This analysis is based on historic price behavior of the stock. Reversal** An investment strategy used mostly by professional option traders in which a short put and long call with the same strike price and expiration combine with short stock to lock in a nearly riskless profit. Rho *Rho A measure of the marginal variation of an option’s premium based on the marginal variation of the risk-free rate, all other things being equal. The rho of a call option has a positive value; the rho of a put option has a negative value. Roll a position, to To close a position and simultaneously open a new similar position expiring at a later date. Rollover (roll forward) *Report de position The replacement of a position with a similar position expiring at a later date.

#### U

 Uncovered call option writing** A short call option position in which the writer does not own an equivalent position in the underlying security represented by his or her option contracts. Uncovered put option writing** A short put option position in which the writer does not have a corresponding short position in the underlying security or has not deposited, in a cash account, cash or cash equivalents equal to the exercise value of the put. Underlying interest (underlying) (underlying asset) *Valeur sous-jacente An interest that underlies and determines the value of a derivative instrument. The underlying interest may be a security, a derivative, a currency, a commodity, any other asset, or an index.

#### V

 Vanilla option (plain vanilla option) (simple option) *Option classique A call or put option that has no unusual characteristics. Exchange-traded options are vanilla options. Vega *Véga A measure of the marginal variation of an option’s premium based on the marginal variation of the underlying interest’s implied volatility, all other things being equal. Vertical spread** Most commonly used to describe the purchase of one option and writing of another where both are of the same type and of same expiration month, but have different strike prices. Volatility The level of variability of a rate or a security’s price through time as measured by the standard deviation of such rate or security’s price. In general, high volatility implies higher risk.

#### W

 Writer (option writer) (option seller) *Vendeur d’une option The investor who writes (or sells) an option. The option writer receives a premium from the buyer. Should there be an assignment, the writer has to fulfill their obligation to sell (in the case of a call option) or to buy (in the case of a put option) the underlying interest at the stated strike price. They can also buy back the option on the market until its expiry date before a possible assignment takes places.

*Equivalent term in French

** The current definition is taken from the Options Industry Council’s Options Glossary. A proprietary Bourse de Montréal definition will follow later.

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