Options Glossary

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Back Months

The futures or options on futures months being traded that are furthest from expiration.

Backspread

A spread in which more options are purchased than sold and where all options have the same underlying and expiration date. Backspreads are usually delta neutral.

Back-Testing

The testing of a strategy based on historical data to see if the results are consistent.

Bear

An investor who acts on the belief that a security or the market is falling or is expected to fall.

Bear Call Spread

A strategy in which a trader sells a lower strike call and buys a higher strike call to create a trade with limited profit and limited risk. A fall in the price of the underlying increases the value of the spread. Net credit transaction; Maximum loss = difference between the strike prices less credit; Maximum gain = credit; requires margin.

Bear Market

A declining stock market over a prolonged period of time usually caused by a weak economy and subsequent decreased corporate profits.

Bear Put Spread

A strategy in which a trader sells a lower strike put and buys a higher strike put to create a trade with limited profit and limited risk. A fall in the price of the underlying increases the value of the spread. Net debit transaction; Maximum loss = d ifference between strike prices less the debit; no margin.

Bid

The highest price at which a floor broker, trader or dealer is willing to buy a security or commodity for a specified time.

Bid and Asked

The bid (the highest price a buyer is prepared to pay for a trading asset) and the asked (the lowest price acceptable to a prospective seller of the same security) together comprise a quotation, or quote.

Bid-asked Spread

The difference between bid and asked prices constitute the bid-asked spread.

Bid Up

Demand for an asset drives up the price paid by buyers.

Block Trade

A trade so large (for example, 10,000 shares of stock or $200,000 worth of bonds) that the normal auction market cannot absorb it in a reasonable time at a reasonable price.

Blow-Off Top

A steep and rapid increase in price followed by a steep and rapid drop in price. This indicator is often used in technical analysis.

Blue Chips

This term is derived from poker where blue chips hold the most value. Blue chips in the stock market are stocks with the best market capitalization in the marketplace.

Blue Chip Stock

A stock with solid value, good security, and a record of dividend payments or other desirable investment characteristics. Many times they have a record of consistent dividend payments, receive extensive media coverage and offer a host of other benefic ial investment attributes. On the downside, blue chip stocks tend to be quite expensive and often have little room for growth.

Board Lot

The smallest quantity of shares traded on an exchange at standard commission rates.

Bond

Financial instruments representing debt obligations issued by the government or corporations traded in the futures market. A bond promises to pay its holders periodic interest at a fixed rate (the coupon), and to repay the principal of the loan at mat urity. Bonds are issued with a par or face value of $1,000. Bonds are traded based upon their interest rates - if the bond pays more interest than available elsewhere, its worth increases.

Break-even

The point at which gains equal losses. The market price that a stock or future must reach for an option to avoid loss if exercised. For a call, the break-even equals the strike price plus the premium paid. For a put, the break-even equals the strike price minus the premium paid.

Breakout

A rise in the price of an underlying instrument above its resistance level or a drop below the support level.

Broad-based Index

An index designed to reflect the movement of the market as a whole. (For example, the S&P 100, the S&P 500, and the AMEX Major Market Index).

Broker

An individual or firm which charges a commission for executing buy and sell orders.

Bull

An investor who believes that a market is rising or is expected to rise.

Bull Call Spread

A strategy in which a trader buys a lower strike call and sells a higher strike call to create a trade with limited profit and limited risk. A rise in the price of the underlying increases the value of the spread. Net debit transaction; Maximum loss = debit; Maximum gain = difference between strike prices less the debit; no margin.

Bull Market

A rising stock market over a prolonged period of time usually caused by a strong economy and subsequent increased corporate profits.

Bull Put Spread

A strategy in which a trader sells a higher strike put and buys a lower strike put to create a trade with limited profit and limited risk. A rise in the price of the underlying increases the value of the spread. Net credit transaction; Maximum loss = difference between strike prices less credit; Maximum gain = credit; requires margin.

Butterfly Spread

The sale (purchase) of two identical options, together with the purchase (sale) of one option with an immediately higher strike, and one option with an immediately lower strike. All options must be the same type, have the same underlying and have the same expiration date.

Buy IV Sell IV

Many options are spreads that have a buy option leg and a sell option leg. Buy IV is the implied volatility of the option leg with a buy component. Sell IV is the implied volatility of the option leg with a sell component.

Buy on Close

To buy at the end of a trading session at a price within the closing range.

Buy on Opening

To buy at the beginning of a trading session at a price within the opening range.

Buy Stop Order

An order to purchase a security entered at a price above the current offering price triggered when the market hits a specified price.