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Accumulation-The first phase of a bull market. While most investors are discouraged with the market, and earnings are at their worst, some investors start buying shares. Or, and addition to a traders position.
Adaptive Filter-Continuously updating the weighting of past prices for smoothing or forecasting purposes.
Advance/Decline Line-Each days declining issues are subtracted from that days advancing issues. The difference is added to (subtracted from if negative) a running sum. Failure of this line to confirm a new high is a sign of weakness. Failure of this line to confirm a new low is a sign of strength.
Alpha-The premium an investment earns above a set standard. This is usually measured in terms of the DOW Industrials or the S&P; 500. How the stock performs independent of the market.
Arbitrage-The simultaneous buying and selling of two or more different, but closely related securities, in different markets to take advantage of price disparities.
Area Pattern-When a stock or commodities upward or downward trend has stalled. The sideways movement in price which follows forms a pattern. Some of these patterns may have predictive value. Examples of these patterns are head & shoulders, triangles, pennants, flags, wedges, and broadening formations.
Arms Index-This is an indicator which relies on advances and declines in the stock market. A reading above 1 or in some software 100, is bearish. A number below 1 or in some software 100, is bullish. The higher the number the more bearish. The lower the number, the more bullish. In the normal course of trading, this number is usually between about 40 and 60. Very high or very low numbers occur infrequently. The formula is: ((# of advancing issues/ # of declining issues)/ (Total up volume/ Total down volume)).
Ascending Trend Channel-The tops of an ascending price line develop along a line parallel to the trend line which slopes upward across the bottoms of the down waves.
At-The-Money-An option whose strike price is equal to the price of the underlying security.
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Back Testing-Optimizing a trading strategy on historical data and applying it to fresh data to see how well the strategy works.
Bear Trap-A false signal which indicates that the rising trend of a stock or index has reversed when in fact it has not.
Bear Market-A longer period of time when prices in the market are generally declining.
Bear Spread-An option strategy with maximum profit when the price of the underlying security declines. Maximum loss occurs if the underlying security rises in price. The strategy involves the purchase and simultaneous sale of options. Puts or calls can be used. A higher strike price is purchased and a lower strike price is sold. The options have the same expiration date.
Beta-The degree of sensitivity of a stock in relation to swings in the market.
Beta (Coefficient)-The degree of risk which cannot be decreased by diversification. A stock with a beta greater than 1 will rise faster or decline faster than the overall market. A stock with a beta lower than 1 will rise slower or decline slower than the overall market.
Black Scholes Option Pricing Model-A model used to estimate the price of an option.
Box Spread-Option arbitrage in which a profitable position is established with no risk. One spread is established with call options. The other spread is established using put options.
Breadth (Market)-Relates to the number of issues participating in a market move. The move can be either up or down. As a rally develops, and the number of advancing issues is declining, the rally is suspect. As a decline develops, and the number of declining issues falls, the decline becomes suspect.
Bullish-Generally a longer period of time in which prices rise.
Bull Spread-An option strategy in which the maximum profit is attained if the underlying security rises in price. Either calls or puts can be used. The lower strike price is purchased and the higher strike price is sold. The options have the same expiration date.
Bull Trap-A false signal which is generated which indicates that the price of a stock or index has reversed to an upward trend but which proves to be false.
Butterfly Spread-An option strategy combining a bull and bear spread. Three strike prices are used. The lower two strike prices are used in the bull spread and the higher two strike prices are used in the bear spread. Either puts or calls can be used. This strategy has limited risk and limited profit.
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Calendar Spread-An option strategy where a trader sells a shorter term option and buys a longer term option. Both options have the same strike price. For instance, a March 50 call might be sold and a May 50 call purchased.
Calendar Combination-An option strategy where a trader opens a call calendar spread and a put calendar spread at the same time. The strike price of the calls is higher than the strike price of the puts.
Call Option-A contract which gives the purchaser the right not the obligation to purchase the underlying security at a specific price within a specific time frame.
Call Price-The price at which a bond or preferred stock can be called in by the issuing authority.
Candlestick Charts-A charting method originally developed in Japan. The high and low are described as shadows and plotted as a single line. The price range between the open and close is plotted as a rectangle on the single line. If the close is above the open, the body of the rectangle is white. If the close of the day is below the open, the body of the rectangle is black.
Capitalization Weighted Index-A stock index which is computed by adding the capitalization's of each individual stock and dividing by a predetermined divisor. The stocks with the greatest market values have the greatest impact on the index.
Chaikin Oscillator-An oscillator created by subtracting a 10 day exponential moving average from a 3 day exponential moving average of the accumulation distribution line.
Contingent Order-An order given to a trading desk to buy stock and sell a covered call option. It is given as one order.
Conversion Arbitrage-The simultaneous purchase of a stock, the purchase of a put, and the sale of a call. It is a riskless transaction.
Channel-Used in charting, it allows the user to draw parallel lines connecting the low points and the high points. It can be ascending or descending. A body of water between England & France.
Convertible Security-One security which is convertible into another. It is generally used with convertible preferred stock and convertible bonds. There is a specific rate at which the security can be converted.
Cover-The act of buying back in a closing transaction an option which was originally written.
Covered-Writing an option when the writer also own the underlying security on a one to one ratio. A short call is covered if the underlying security is owned. A short put is covered if the underlying security is also short in the account. A short call is covered if a long call of the same underlying security is owned in the same account with the same or lower strike. A short put is covered if a long put of the same underlying security is owned in the same account with a strike price equal to or greater than the strike of the short put.
Confirmation-At least two indicators or indexes corroborate a market turn or trend. In the case of the stock market, with respect to Dow Theory, it would be the Dow Industrials and the Dow Transports.
Congestion Area-At a minimum, a series of trading days in which there is no or little progress in price.
Correction-A price reaction of generally 1/3 to 2/3 of the precious gain.
Cup And Handle-A pattern on bar charts. The pattern can be as short as seven weeks and as long as 65 weeks. The cup is in the shape of a U. And the handle has a slight downward drift. The right hand side of the pattern has low trading volume.
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Daily Range-The difference between the high and low during one trading day.
Delta-The amount an option will change in price for a one point move in the underlying security.
Delta Neutral-An options strategy designed so that the position is insensitive to movements in the underlying security. It can be composed of options/options or options/ underlying security. It is a careful calculation of offsetting long and short positions.
Diagonal Spread-An options strategy in which the purchased options have a longer maturity than the written options. The purchased options also have different strike prices. Examples of Diagonal Spreads are: diagonal bull spreads, diagonal bear spreads, and diagonal butterfly spreads.
Discount-An option is trading at a discount if it is selling for less than its intrinsic value. If a future is trading for less than the price of the underlying security, it is considered to be trading at a discount. Something my wife is always looking for. Something that makes me very happy when she finds it.
Double Bottom/ Double Top-These are reversal patterns. It is a decline or advance twice to the same level (plus or minus 3%). It indicates support or resistance at that level.
Drawdown-Reduction in account equity from a trade or series of trade. It happens to all of us some of the time.
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Early Exercise-Early Exercise Prior to expiration, the exercise or assignment of an option.
Elliot Wave Theory-Originallypublished by Ralph Nelson Elliot in 1939. It is a pattern recognition theory. It holds that the stock market follows a pattern of five waves up and three waves down to form a complete cycle. Many technicians believe that this pattern can hold true for as short a time period as one day. However, it is generally used to measure long periods of time in the market.
Equivolume Chart-Richard Arms created this type of chart. It measures the relationship between price and volume. Price is measured on the vertical axis and volume is measured on the horizontal axis.
Ex-Dividend-The day when the dividend is subtracted from the price of a stock. The ex-dividend date is the date on which this takes place. Investors who own the stock are paid their dividend on that date. Investors who are short the stock must pay the dividend on that date.
Exercise-The right granted under the terms of a listed options contract. Call holders exercise their right to buy the underlying security. Put holders exercise their right to sell the underlying security. There is generally an exercise limit placed by the options exchange. This is to prevent a group of investors or an individual investor from cornering the market on an underlying security.
Exponential Moving Average-See section titled Tutorials on Technical Indicators in the Technical Analysis Section. There is a detailed discussion on them.
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Fair Value-Describes the worth of an options or futures contract. On a daily basis, fair value is published pertaining to the S&P; futures. When fair value falls below a predetermined value, traders sell the cash index and buy futures. When fair value rises above a predetermined value, traders buy the cash index and sell futures.
Fibonacci Ratio-The relationship between two numbers in the fibonacci sequence. The sequence for the first three numbers is 0.618, 1.0, and 1.618. In general terms the fibonacci series is 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, etc.
First Notice Day-The first day a buyer of a futures contract can be called upon to take delivery.
Float-The number of shares outstanding for a particular common stock.
Floor Broker-A trader on the floor of an exchange who executes orders for people without access to the trading area.
Fundamental Analysis-Analysis of a security which takes into consideration sales, earnings, assets, etc.
Fuzzy Systems-Systems which process inexact information inexactly. It describes ambiguity instead of uncertainty of an occurrence. This is not Boolean.
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Gamma-It measures the amount the delta changes for a 1 point move in the underlying security.
Good Till Canceled-An order placed with a broker meaning that it is good until either filled or canceled. In practice, this order has to be re-confirmed twice annually.
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Head & Shoulders Pattern-This can also be inverted. It is a reversal pattern And it is one of the more common and reliable patterns. It is comprised of a rally which ends a fairly extensive advance. It is followed by a reaction on less volume. This is the left shoulder. The head is comprised of a rally up on high volume exceeding the price of the previous rally. And the head is comprised of a reaction down to the previous bottom on light volume. The right shoulder is comprised of a rally up which fails to exceed the height of the head. It is then followed by a reaction down. this last reaction down should break a horizontal line drawn along the bottoms of the previous lows from the left shoulder and head. This is the point in which the major decline begins. The major difference between a head and shoulder top and bottom is that the bottom should have a large burst of activity on the breakout.
Horizontal Spread-An options strategy where the options have the same strike and different expiration dates.
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Implied Volatility-A measurement of the volatility of a stock. Current price rather than historical price is used. Generally, if the price of an option rises without a corresponding rise in the underlying equity, implied volatility is considered to have risen.
Index Option-An option whose underlying security is an index. An example would be the S&P; 100 (OEX). A trader can buy index options and bet on the direction of the OEX.
Intermarket Spread-A spread using futures contracts in one market spread against futures contracts in another market. An example would be the Yen spread against the Deutschemark.
In-The-Money-A call option with a strike price below the underlying equity. A put option with a strike price above the underlying equity.
Inside Day-A day in which the total range of price is within the range of the previous days price range.
Island Reversal-A trading range where there is an exhaustion gap down, then prices trade in a narrow range, then there is a breakaway gap up. This leaves a sort of island of prices in the middle. If the trading range is only one day, it is considered a one day reversal.
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Leaps Long-Term Equity Anticipation Securities. Currently, these are long term options with expirations up to 2-1/2 years.
Limit Order-An order to buy or sell at a fixed price. A person can also place a limit order with discretion. This enable the broker to buy or sell within a small range, usually 1/8 or 1/4 of a point.
Limit Up/ Limit Down-Commodity exchange restriction on the maximum amount of movement up or down that a commodity can trade in a given day.
Local-A futures trader in the pit of a commodity exchange who buys or sells for his own account.
Lognormal Distribution-A statistical distribution often applied to stock prices. It implies that stock prices can rise infinitely but can not fall below zero.
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Margin-The minimum amount of money required to buy or sell a security. The investor is using borrowed money.
Margin Call-The demand by a broker to an investor to put up money because his security(s) have declined in value. There are minimum amounts of capital required by the exchanges or the broker.
Market Maker-An exchange member who makes a market by buying and selling for his own account when the public is not buying and selling.
Market Order-An order to buy or sell a security at the present market price. As long as there is a market for this security, the order will be filled. This type of order takes precedence over all other orders.
Market Not Held Order-This is a market order. However, the investor is giving the floor trader the discretion to execute the order when he feels it is best. If the floor trade feels that the market will decline, he may hold the order to try to get a better fill. This order may not get filled.
Market If Touched-An order with the floor broker which becomes a market order if a trigger price is reached.
Momentum-The strength behind an upward or downward movement in price. Graphically, momentum is represented as a horizontal line which fluctuates above and below an equilibrium line.
Moving Average-See moving average in the section titled Tutorials on Technical Analysis Indicators in the Technical Analysis section. There is an extensive discussion of them there.
Moving Average Convergence/Divergence (MACD)-The crossing of two exponentially smoothed moving averages. They oscillate above and below an equilibrium line.
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Noise-Fluctuations in the market which can confuse one's interpretation of market direction.
Negative Divergence-When two or more indicators, indexes, or averages, fail to show confirming trends.
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Odd Lot-A block of stock consisting of less than 100 shares. When odd lots trade, a premium is usually tacked on by the specialist or market maker. These receive the least favorable price and trade last. Or, my next door neighbors.
Open Interest-The net total amount of outstanding contracts in a future or option.
Options Clearing Corporation (OCC)-The issuer of all listed options on all exchanges.
Out Of The Money-A call whose strike price is above the current market price of the underlying equity. A put whose strike price is below the current price of the underlying security.
Overbought-Market prices that have risen too steeply and too quickly.
Oversold-Market prices that have declined too steeply and too quickly.
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Point And Figure Chart-A chart which plots price only. X's are place in boxes representing up days; and O's are placed in boxes representing down days. There is no provision for time in point and figure charting. As long as the trend remains the same, the X's or O's are placed above or below each other. When a reversal takes place, the next vertical column starts the next trend.
Portfolio Insurance-In order to protect a portfolio of stocks an investor may sell index futures or buy index put options for downside protection.
Position Limit-The maximum number of option contracts on the same side of the market which can be held by any one investor or group of related investors. A long call and a short put are on the same side of the market. A long put and a short call are on the same side of the market.
Premium-The price an investor pays the writer of an option above the options intrinsic value.
Price Earnings Ratio-The ratio of the price of a stock to the earnings per share. Or total annual profit divided by the number of shares outstanding.
Program Trading-Trades based on signals from computer programs. These are usually entered directly from the traders computer to the market's computer system. Program trading accounts for an increasingly larger and larger portion of all trades throughout the day. Additionally, these large trades may be hedged by an offsetting position in index futures.
Public Book-The public orders to buy or sell a security which are not market orders.
Put Option-A contract which gives the purchaser the right, not the obligation, to sell a security at a specific price in for a specified period of time.
Put Call Ratio-The ratio of put trading volume divided by the call trading volume. Moving averages can be used to smooth this chart out.
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Ratio Calendar Combination-An options strategy where a trader has at the same time a ratio calendar spread using calls and a ratio calendar spread using puts. The strike price of the calls is greater than the strike price of the puts.
Ratio Calendar Spread-Option strategy using either puts or calls, whereby one sells more near term options than longer term options are purchased. All options have the same strike price.
Ratio Spread-Option strategy using either puts or calls. The trader purchases a certain amount of options and then sells a larger amount of out of the money options.
Ratio Write-Buying stock and selling calls against the stock. It can also be constructed by shorting stock and then selling puts against the short stock.
Relative Strength-A comparison of an individual stock's performance to that of a market index. Most times the S&P; 500 or the Dow Jones Industrial Index are used for comparison purposes. It is calculated by dividing the stock price by the index price. A rising line indicates that the stock is doing better than the market. A declining line indicates that the stock is not doing as well as the market.
Resistance-A price level where a security's price stops rising and moves sideways or downward. It indicates an abundance of supply. Because of this, the stock may have difficulty rising above this level. There are short term and longer term resistance levels.
Return On Assets-Net earnings of a company divided by its assets.
Return On Equity-Net earnings of a company divided by its equity.
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Secondary Market-A market available to trade securities after their initial public offering. The New York Stock Exchange is an example of a secondary market.
Selling Short-Selling a security and then borrowing the security with the intent of replacing that security at a lower price than it was borrowed. The short trader is betting that the price of the security will go down.
Specialist-An exchange member who keeps the public book, maintains an orderly and efficient market, buys and sells for his own account.
Short Interest-Shares that have been sold short and not yet repurchased.
Short Interest Ratio-A ratio which tells how many days it would take to buy back all the share which have been sold short. A short interest ratio of 2 would indicate that it would take 2 trading days to buy back all the shares which have been sold short. This is based on the current volume.
Slippage-The difference between estimated and actual transaction costs. The difference is usually comprised of commissions and price differences.
Spread Strategy-An option strategy having both long and short options on the same underlying security.
Spot Month-The current trading month. Also known as the front month in commodity trading.
Spot Price-The current cash price for which a commodity is trading at a specific time and place.
Stop Order-An order placed which is not at the current market price. It becomes a market order once the security touches the specified price. Buy stop orders are placed above the present market price. Sell stop orders are placed below the present market price.
Stop Limit Order-This is similar to a stop order. It is an order which becomes a limit order once the specified price is touched.
Stop And Reverse-A stop that when hit is a signal to close the current position and open an opposite position. A trader holding a long position would sell that position and then go short on the same security.
Straddle-An options strategy where the purchase or sale of an equal number of puts and calls is made. The same strike price and expiration date is the same for all.
Strangle-An options strategy which is a combination involving a put and a call with different strike prices with the same expiration.
Support-A price level at which declining prices stop falling and move sideways or upward. It is a price level where there is sufficient demand to stop the price from falling. Something my friend Bob pays his ex wife.
Synthetic Stock-Using options, it is equivalent to the stock. A long call and a short put is a synthetic long stock. A long put and a short call is a synthetic short stock.
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Theta-A measurement of how much an options price decay's for every one day that passes.
Trending Market-Price moves in a single direction and it usually closes on an extreme for the day.
Trendline-Constructed by connecting a series of descending peaks or ascending troughs. The more times a trendline has been touched increases the significance of a break in the trendline. It can act as either support or resistance.
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Uncovered Option-This is sometimes referred to as a naked option. It is when a trader writes an option without owning the underlying security. It is a position with large risk.
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Variable Ratio Write-An options strategy in which a trader writes 2 or more options contracts for every 100 shares owned. Each option has a different strike price.
Vega-A measurement of how much an options price changes for a 1% change in volatility.
Vertical Spread-An options strategy which is also a spread where the options have different strike prices but the same expiration dates.
Volatility-The measurement of how much an underlying security fluctuates over a period of time.
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Warrant-A long term security which is similar to an option. A stock warrant usually allows a trader to purchase one share of stock at a fixed price for a certain period of time.
Write-To write an option is to sell an option. The person who sells the option is considered to be the writer.
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