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Fundamentals In Trading Definitions

Fundamentals In Trading Definitions

Options trading terms can seem like a foreign language. We clear it up for traders here where we provide fundamentals in trading definitions and acronyms. If you don’t see specifically what you are looking for, send us a chat message or an email at sherri@lockeinyoursuccess.com to get the fundamentals in trading definition you need.

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TermDefinition
40 x 60BWB configuration meaning 40 wide debit wing and 60 wide credit wing
50 x 50Symmetrical Butterfly often referred to as “50-wide BF”
Absolute
Acceptable
Max Loss
The maximum loss that you are prepared to accept on any single trade.
Absolute
Max Loss
The maximum amount of loss that will not be exceeded with a 30 point move in either direction
Adjustment ParametersThe amount that you can adjust in a trade
Adjustment
plan
How much you plan to adjust a trade
APMAdvanced position management
AssetWhat are you trading?
ATMAt-The-Money
Back tradingTradeoff past information, same as simulated trading used as past data
Balanced
Condor
An options trading strategy utilizing two vertical spreads with the same number of contracts in opposing directions, with different short strikes, and the same width wings
Battle CryEmotional statement used to change your state
BBStands for bearish butterfly, a market neutral trading system designed for the Russell 2000 that takes advantage of volatile markets
Bearish marketA period of several months or years during which securities prices consistently fall
BFButterfly
Blowing up
an account
The amount of money has been lost in an account is so great that you can no longer trade from that account any longer.
Bollinger BandsA trading indicator developed by famous technical trader John Bollinger, the indicator is typically plotted two standard deviations away from a simple moving average.
BreadthIs the extent of the emotion. How wide spread is the emotion?
Break resistanceWhen you break a up past certain point where stocks usually do not pass
Broken Wing ButterflyTwo vertical spreads with the same number of contracts in opposing directions, with the same short strikes, and different width wings. (See FIT Lesson 22)
Broken Wing CondorTwo vertical spreads with the same number of contracts in opposing directions, with different short strikes, and different width wings. (See FIT Lesson 22)
Bullish marketA market where prices rise or are expected to rise
ButterButterfly, symmetrical
ButterflyTwo vertical spreads with the same number of contracts in opposing directions, with the same short strikes, and the same width wings. (See FIT Lesson 22)
Butterfly SpreadsRefers to a butterfly
BWBStands for broken wing butterfly, a butterfly trade with one wing shorter than the other.
BWCStands for broken wing condor, a condor with one wing shorter than the other.
Calendar SpreadOptions of the same strike in different expiration cycles where the short options are in the close to expiration cycle and the long options are in the far from expiration cycle with the same number of options in each cycle. (See FIT Lesson 22)
Calls/Call OptionAn option that gives you the right but not the obligation to purchase the asset at the predetermined price
Capital EfficiencyMinimizing the capital needed for a particular trade size
Capital Efficient M3Series of modifications that allow the trader to increase position size, (sometimes to double or triple positions size with same capital) and thereby increase returns, using the same amount of capital. For example – Trade an M3 with 20 butterflies and 2 calls with a 1.5 to 2 times profit target while maintaining less than $50,000 in the position
Cat Position2-50 point wing butterflies with the short strikes 60 points apart
Complex AdjustmentsAdjustments that are comprised of non-standard formations
Complex Adjustments LogA recording of the adjustments made on a trade
CondorsTwo vertical spreads with the same number of contracts in opposing directions, with different short strikes, and the same width wings. (See FIT Lesson 22)
Condor TransitionA series of upside adjustments that gradually converts a broken wing butterfly profile position into a condor profile position
ConfigTrade configuration i.e. trade structure
ContractsRefers to the number of shares you buy in one transaction
D:TDelta to Theta ratio
DeltaFirst meaning: The amount of money the position is expected to gain or lose with a 1 dollar movement of the underline. Second meaning: An option’s theoretical probability of expiring in the money. Often refers to position Delta or composite Delta of a trade
DiagonalOptions with different strikes in different expiration cycles where the short options are in the close to expiration cycle and the long options are in the far from expiration cycle with the same number of options in each cycle. (See FIT Lesson 22)
DIIDiagnose, Identify and Improve
Directional BiasFavoring one direction over the other in regards to price movement
Disaster PlanA plan that encompasses worst-case scenarios, as in how to handle a total loss of the trade or how you may handle loss of data, the internet, personal injury, death, and other extreme conditions
DITMDeep-in-the-money
DownsideThe area to the left of the price of the asset on an analyze graph.
DrawdownThe amount of money the trade has lost
DTEStands for days until expiration
Entry CriteriaThe conditions under which you are willing or allowed to enter the trade
EODStands for end of day
ESS and P 500 futures symbol
Exit CriteriaThe conditions in which you are allowed to exit the trade
Expected Max LossMaximum amount of drawdown allowed before exiting the trade
Expected ProfitThe average amount of money a trade generally makes in normal trading conditions
Expiration CycleThe expiration date of the options in the trade that are closest to expiration except when the closer expiration options are used exclusively as a hedge
Expiration GuidelinesGuidelines that are used in a trade when it’s close to expiration. In the case of the bearish butterfly, expiration guidelines are used when the trade is closer than 21 days until expiration
Expiration LineTrade risk profile as of expiration in the future
Fibonacci Lineshttp://www.investopedia.com/terms/f/fibonacciretracement.asp?lgl=no-infinite
GammaThe amount of change in Delta with a one dollar price movement of the underline
GreeksDescribe the way an option’s value will change with price movement, the passage of time and volatility changes. The most commonly used greeks are Delta, Theta, Gamma, and Vega.
GTCGood Till Cancelled
ICIron condor
IntradayNormal trading hours
Inversion FlipAn advanced M3 technique where you flip the expiration tent from the right of your lowest long put to the left of your lowest long put in a down trending market.
Iron ButterfliesA butterfly that is made up of a put vertical spread and a call vertical spread.
ITMIn the money
IVImplied volatility
IWMThe symbol for the ETF that tracks the Russell 2000.
Long callWhen you’ve bought a call
Lot sizeRefers to the number of shares you buy in one transaction
Lower LongsThe options that you own or are long at the lowest strike
M21A trading style that utilizes technical analysis to design high probability trades to take advantage of the most likely price movement.
M3A market neutral trading system designed with the intent to teach the trader how to manage complex option positions while live trading with minimal risk
M3EAn M3 that utilizes a deep in the money call that is closer to expiration than other options in the trade – Click here for a detailed list of M3 variations
M3UM3 without a deep in the money call – Click here for a detailed list of M3 variations
Market BiasesFavoring one direction over the other in regards to price movement
Market resetWhen an oversold or overbought price move corrects itself and is now more likely to continue in the same direction
Market VolatilityThe amount of price movement expected in the market
Max LossMaximum amount of drawdown allowed in the trade
MLMax loss
NNNno notes needed
NYSENew York stock exchange
ONEOption Net Explorer; Options analytical software
Options Contractan agreement between a buyer and seller that gives the purchaser of the option the right to buy or sell a particular asset at a later date at an agreed upon price.
Option Net ExplorerOptions analytical software
Options SeriesRefers to option cycle type or date: Weekly, Monthly, Quarterly, Standard
Option SizeCan refer to “lots” or “contracts”; same thing
OptionVueOptions analytical software
OTFI

OTM
Options Trading for Income by the Guidelines sessions

Out of the money
OVOptionVue Analytical Software
P/LProfit and loss
PCPlanned capital
Pivot PointA pivot point is a technical analysis indicator used to determine the overall trend of the market during different time frames. The pivot point itself is simply the average of the high, low and closing prices from the previous trading day.
Planned CapitalThe maximum amount of capital that is expected to be in the trade. We use this number to determine our percent drawdowns and profit targets.
Positive ExpectancyPercentage of winning trade gains exceeds percentage of losing trade losses i.e. trade return performance is profitable over sufficient period of time
Priceis a measure of investors attitude. When investors are optimistic, price rises. When investors are pessimistic, price falls.
Profit ObjectivesThe amount of money you would like to make on a trade
Profit TargetThe amount of money you would like to make on a trade
Psychology JournalA journal where you track your thoughts and emotions during trading
PTProfit target
Puts/Put optionA put option is the right, but not the obligation, to sell an asset at the strike price of the put.
Put ProtectAdd long puts to reduce downside risk of a position
Ratio CalendarAnd options strategy with options of the same strike in different expiration cycles where the short options are in the close to expiration cycle and the long options are in the far from expiration cycle with a different number of options (usually extra long strikes) in each cycle. (See FIT Lesson 22)
Ratio DiagonalOptions with different strikes in different expiration cycles where the short options are in the close to expiration cycle and the long options are in the far from expiration cycle with a different number of options in each cycle
Ratio SpreadsVertical spreads with extra long strikes. (See FIT Lesson 22)
ResistanceGeneral area where the price resists going higher
RetracementWhen an asset moves downward after an up move
Reverse Calendar (or Short Calendar)Options of the same strike in different expiration cycles where the long options are in the close to expiration cycle and the short options are in the far from expiration cycle with the same number of options in each cycle. (See FIT Lesson 22)
Reverse Diagonal (or Short Diagonal)Options with different strikes in different expiration cycles where the long options are in the close to expiration cycle and the short options are in the far from expiration cycle with the same number of options in each cycle. (See FIT Lesson 22)
Risk CriteriaThe description of the amount of money that can go into the trade and the maximum amount of money the trade can draw down before exiting. Risk primers often include profit objectives.
Risk Off OnlyAdjustment strategy where we do not roll up the structure but only adjust upper long strikes to reduce trade risk, such as a vertical used for the purpose of reducing Delta or raising the expiration line in one direction.
Risk Off Strategywould essentially keep the trade in the same position while removing risk in the direction of concern. In the case of UB1 we enter a bullish leaning butterfly (BWB) and when the price goes up, we remove up risk while keeping the primary position in place, therefore we have a risk-off upside adjustment strategy… On the downside of UB1 we roll back, therefore, the downside adjustment strategy would be a rollback making the UB1 a Risk Off (RO) (up), Roll Back (RB) (down) BWB strategy.
RLSSettlement price of the RUT
RockA complex options trading system by John Locke
Roll Back AdjustmentUnder certain conditions, trade structure is repositioned lower than existing position to reduce trade risk
Rolling Strategy
would be where we pick up a trade and move it to a new level. In the M3 (or UB2) for example, we put on a trade and first perform “risk off ” adjustment to the upside and then if the market goes too far, we roll (pick up and move) the position. Therefore the M3 would be considered a bullish bias butterfly/call position with a risk-off and then roll upside adjustment strategy and a rollback downside adjustment strategy. (ROR RB)
Russell 2000The index that represents 2000 small cap stocks
RUTThe symbol for the Russell 2000
SBNshould be noted
Short Calendar (or Reverse Calendar)Options of the same strike in different expiration cycles where the long options are in the close to expiration cycle and the short options are in the far from expiration cycle with the same number of options in each cycle. (See FIT Lesson 22)
Short Diagonal (or Reverse Diagonal)Options with different strikes in different expiration cycles where the long options are in the close to expiration cycle and the short options are in the far from expiration cycle with the same number of options in each cycle. (See FIT Lesson 22)
Short Ratio SpreadsShort vertical spreads with extra long strikes. (See FIT Lesson 22)
Short strikesThe option strikes that are sold short.
Short the stockA short, or short position, is selling first and then buying later. The trader’s expectation is that the price will drop; the price they sell at is higher than the price they buy it at later.
SIMShort for simulated
SkewsMost commonly used to refer to differences in volatility between options
SlippageRefers to the difference between advertise prices and actual execution prices
Split Strike ButterflyBWB with 2 short strikes
SPXThe symbol for the S and P 500 index
SPYThe symbol for the exchange-traded fund that emulates the S and P 500 index
Strike IncrementsRefers to 5 or 10 point strikes offered in asset option chain
StrikesThe asset at value that a specific option will be at the money
SupportGeneral area where the price resists going lower.
Synthetic EquivalentsPositions that react the same but are constructed differently
T+0Refers to the trade risk profile as of today
TentThe portion of the expiration graph that is above 0 profit and loss
TFThe symbol that for the Russell 2000’s future contracts
ThetaOne of the greeks and it refers to how much dollar value a position or option will theoretically gain or lose in value in one day
Total RiskThe entire amount of financial risk in the position
Trade DebriefTo systematically review your performance and the effectiveness of the plan
Trade JournalA journal used to record trading information
Trade StructureRefers to type of trade position such as a Butterfly, Condor, BWB, Unbalanced BG, etc.
TrendIs the price going up, down, or sideways?
UB1Unbalanced Butterfly trade version 1
UB2Unbalanced Butterfly trade version 2
UB3Unbalanced Butterfly trade version 3
Unbalanced Broken Wing ButterflyTwo vertical spreads with a different number of contracts in opposing directions, with the same short strikes, and different width wings. (See FIT Lesson 22)
Unbalanced Broken Wing CondorTwo vertical spreads with a different number of contracts, in opposing directions, with different short strikes, and different width wings. (See FIT Lesson 22)
Unbalanced ButterflyTwo vertical spreads with a different number of contracts in opposing directions, with the same short strikes, and the same width wings. (See FIT Lesson 22)
Unbalanced CondorTwo vertical spreads with a different number of contracts, in opposing directions, with different short strikes, and the same width wings. (See FIT Lesson 22)
UpsideThe asset moving higher
VegaOne of the greeks and it represents the amount of money the position with theoretically gain or lose with a one point increase of volatility
Vertical SpreadsA complex options spread where one option is bought at a strike level and another option is sold at a different strike level with the same expiration month
Volumeis the intensity of investors attitude. High volume indicates more intense optimism and/or pessimism.
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