Here are some more glossary terms since Section A was posted a while back.
Open Position or Opening Transaction
An addition to, or creation of, a trading position. An opening purchase transaction adds long options (calls) to an investor’s total position, and an opening sale transaction adds short options (puts). An opening option transaction increases that option’s open interest.
Close Position or Closing transaction
A reduction or an elimination of an open position by the appropriate offsetting purchase or sale. An existing long option position is closed by a selling transaction. An existing short option position is closed by a purchase transaction. This transaction will reduce the open interest for the specific option involved.
Spread
The difference in value between what you purchased the option contracts for, and what you sell it for.
Covered Calls or Covered Call Writing
An option strategy in which a call option is written against an equivalent amount of long stock. Example: writing 2 XYZ May 60 calls while owning 200 shares or more of XYZ stock.
ITM or In-The-Money
An adjective used to describe an option with intrinsic value. A call option is in the money if the stock price is above the strike price. A put option is in the money if the stock price is below the strike price.
OTM or Out-Of-The-Money
An adjective used to describe an option that has no intrinsic value, i.e., all of its value consists of time value. A call option is out of the money if the stock price is below its strike price. A put option is out of the money if the stock price is above its strike price.
ATM or At-The-Money
A term that describes an option with a strike price that is equal to the current market price of the underlying stock.
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Assigned or Exercised
Assigned (an exercise) – Received notification of an assignment by The Options Clearing Corporation
Exercise – To invoke the rights granted to the owner of an option contract. In the case of a call, the option owner buys the underlying stock. In the case of a put, the option owner sells the underlying stock.
Expire Worthless
Option contracts lose their value the closer it gets to expiration date. This is due to time decay and if the option contract is no where near its strike price then at expiration the option contract will expire worthless ($0).
Break-Even Point(s)
The stock price(s) at which an option strategy results in neither a profit nor a loss. While a strategy’s break-even point(s) are normally stated as of the option’s expiration date, a theoretical option pricing model can be used to determine the strategy’s break-even point(s) for other dates as well
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The 4 “Golden Rules” That Most
Traders Will NEVER Learn
1. must be a complete method, with setup conditions, entry rules, initial stop rules, and exit strategy rules, leaving no decision to chance.
2. It must include specific risk management, money management, and portfolio management guidelines.
3. It must be based on technical analysis, but it must not be a 100% mechanical system.
4. It must provide a way to trade in as little as 20 minutes a day and not force you to stare at your computer for hours.