The 50-day Simple Moving Average (SMA) is a very popular technical indicator. Traders and investors use it to analyze price trends. Its calculation is very simple: it’s the security’s average closing price over the last 50 days.

Coach Gino Poore explains the main differences between American and European Options.

An ascending channel is the statistically range bound price action of an ascending price trend contained between upward sloping parallel lines.

Higher highs and higher lows characterize the ascending/uptrend price pattern.

Technical analysts draw an ascending channel by manually drawing a lower trendline that connects the swing low pivot points, and an upper channel line that joins the swing high pivot points, or using a channeling drawing tool.

Some trading software or charting services can automatically plot ascending price channels.

Asset allocation involves dividing an investment portfolio among different asset categories, such as stocks, bonds, and cash. The process of determining which mix of assets to hold in your portfolio is a very personal one. The asset allocation that works best for you at any given point in your life will depend largely on your time horizon and your ability to tolerate risk.

There is no magic formula that determines the right asset allocation for every individual. However, most financial professionals agree that asset allocation is one of the most important decisions that investors make.

Assets are typically allocated in stocks, bonds, and cash and equivalents, which can be one of the principal determinants of your investment results.

An Options Assignment is a situation where the option seller has to fulfil the obligation agreed upon in the options contract, by either selling or buying the underlying security at the strike price (also called exercise price).

If a call option is assigned (when ITM at expiration) the call option seller will have to sell the underlying security at the strike price.

On the other hand, if a put option is assigned, (when ITM at expiration) the put option seller will have to buy the underlying security at the strike price.

Example

An option contract is said to be at-the-money (ATM) if the strike price is the same, or nearly the same, as the current spot price of the underlying security.

Example

Volatility Measurement also known as the ATR.

Used by traders to measure the degree of price volatility.  It is generally measured using Daily Candlesticks

The true range is the largest of the:

Most recent periods high – low

Absolute value of the most recent period’s high – previous close

Absolute value of the most recent periods low – the previous close

Many diverse uses by traders:

To determine entry points

To determine stop losses

A key part of building a trading system. You build trades in the past, using historical data, and apply your rules to the trade to determine the outcome of profit or loss. You then compile the data into a data set. The end result is used to determine how effective a trading strategy is in the conditions that were tested.

A bear call spread, or a bear call credit spread, is a type of options strategy used when an options trader expects a decline in the price of the underlying asset. … The maximum profit to be gained using this strategy is equal to the credit received when initiating the trade.

A bear market is a condition in which securities prices fall and widespread pessimism & fear cause the stock market’s downward spiral to persist.

Although figures vary, a downturn of 20% or more from a peak in multiple broad market indexes, such as the Dow Jones Industrial Average (DJIA) or Standard & Poor’s 500 Index (S&P 500), over a two-month period is considered a bear market.

A Bear Put Spread is an options strategy that involves 2 transactions.

A trader initiates a Bear Put Spread by Buying a Put Option, and conversely Selling a Put option in the same expiration month.

The sold put option, also referred to as the short put, must be at a lower priced strike price than the bought put option, also known as the long put.

By selling -1 put, and buying +1 put at a higher strike price the trader initiates a Debit Spread.

Beta measures the relative movement, or volatility, of a stock (or security) compared with the overall market. High beta securities move faster than the market on average, and low beta securities move in line with the market, on average.

Beta-weighting is a way that investors gauge their portfolio directional exposure (Delta) by normalizing it to a standard benchmark, in this case, the SPY (S&P 500 ETF).

Beta-weighting the portfolio Delta serves three purposes:

1. Assess the total risk of a portfolio;
2. Calculate a portfolio’s expected move;
3. Compare relative risks between stocks.

Example

The bid is the highest price someone is willing to pay for the financial instrument whereas the ask is the lowest price someone is willing to sell the financial instrument. The difference between the bid and the ask is what is referred to as the spread.

The Black Scholes model, is a mathematical model of price variation over time of financial instruments like stocks and ETFs that can be used to determine the price of an option.

The Black Scholes Model formula is the first widely accepted model for option pricing. It’s used to calculate the theoretical value of options using current stock prices, expected dividends, the option’s strike price, expected interest rates, time to expiration and expected volatility.

The Black-Scholes Model was first published in the Journal of Political Economy under the title “The Pricing of Options and Corporate Liabilities” by Fischer Black and Myron Scholes and later expanded upon in “Theory of Rational Option Pricing” by Robert Merton in 1973.

The book value per share formula is used to calculate the per share value of a company based on its equity available to common shareholders. The term “book value” is a company’s assets minus its liabilities and is sometimes referred to as stockholder’s equity, owner’s equity, shareholder’s equity, or simply equity.

A Bull Call Spread is an options strategy that involves 2 transactions.

A trader initiates a Bull Call Spread by buying a Call option, and conversely selling a Call option in the same expiration month. 

The bought call option, also referred to as the long call, must be at a lower priced strike price than the sold call option, also known as the short call.

By buying +1 call, and selling -1 call at a higher strike price the trader initiates a Debit Spread.  This results in a net debit to the trader’s account and requires a higher trading authority.

A bull market occurs when a financial instrument has been and expects to continue to appreciate in value over time. There are short term and long term bull markets.

A BULL PUT SPREAD is an options strategy that involves 2 transactions.

A trader initiates a Bull Put Spread by selling a PUT option and then buying another PUT option in the same expiration month.

The sold put option should be at a higher strike price than the bought put option.

By selling -1Put option and buying +1 Put option in this fashion the trader initiates a CREDIT SPREAD.

A Call Calendar Spread is an options trading strategy that involves the following:

1st a Trader will Buy a Long Term Option

2nd a Trader will Sell a Short Term Option

3rd Both Options Should be at the same strike price

When building a Call Calendar Spread, you pay a debit price and there is limited risk to the trade.

Call options are a contract that give the buyer of a call option the right, but not the obligation, to buy an underlying asset at a specified price called the strike price, within a specific time period before the expiration date.

A call buyer can profit when the underlying asset increases in price and can be sold at will at the current market value anytime before the expiration date. Call options typically give the holder the right to buy 100 shares of the underlying asset.

When building a Put Ratio Backspread, a trader will sell -1 Put option at a higher strike price, and buy +2 Put Options or more options at a cheaper priced option than the one that was sold. Both strikes should be in the same expiration month.

The strategy has Unlimited Profit potential, limited risk, and is generally used when a trader is aggressively bearish on the underlying chart.
When building a Call Ratio Backspread, a trader will sell -1 Call option at a lower strike price, and buy +2 Call Options or more options at a cheaper priced option than the one that was sold. Both strikes should be in the same expiration month.

The strategy has Unlimited Profit potential, limited risk, and is generally used when a trader is aggressively bullish on the underlying chart.

Candlesticks are a popular form of charting in trading. The method was originally developed in Japan. The popularity regarding candlestick charts comes from the simple visual relationships they can help a trader understand. Basic Components of a Candlestick Chart:

• Date
• Open
• High
• Low
• Close
• Range

Although very popular in the Forex market, the Carry Trade is simply a strategy that benefits from the differential between interest rates. A trader would take a long position on a higher interest rate asset while at the same time taking a short position on a lower interest rate asset—or even on a negative interest rate asset.

Putting in another way, a trader is funding the higher interest rate long position with the lower interest rate short position, yielding a positive return from the differential between rates.

The most popular Carry Trades in the Forex market involve buying currencies like the Australian and the New Zealand dollars against the Japanese Yen due to its negative interest rates.

Example

Cash flow per share can be calculated by dividing cash flow earned in a given reporting period (usually quarterly or annually) by the total number of shares outstanding during the same term.

The Collar is a neutral protective options strategy that involves simultaneously buying OTM Puts and selling OTM Calls against a specific holding in your portfolio (a long position). The Collar is also know as Hedge-Wrapper and is most used during earnings announcements.

STRATEGY BIAS

Neutral (Goals is protection)

STRIKE PRICES

Different

EXPIRATION DATE

According to personal rules

UNDERLYING SECURITY

Same

Risk Graph

Physical goods like oil, energy, grains, food, metals and materials. Tradable commodities are very popular products and are most used through the Futures market or Exchange Traded Funds (ETF’s).

The most traded commodities include: oil, coffee, natural gas, gold, wheat, cotton, sugar, silver and copper.

A covered call is a combination strategy in which the trader buys stock in increments of +100 shares and then sells -1 call option contract for each 100 shares of stock. The covered call strategy is used to produce monthly cash flow. It is a great way to create passive income in traditional retirement accounts.

The Covered Put is bearish strategy that consists in shorting an underlying security while selling an OTM put option against it generating a limited reward/unlimited risk strategy since there is no limit to how high the stock price can be at expiration.
This strategy is also considered the short version of the Covered Call.

STRATEGY BIAS

Bearish

RISK

Unlimited

REWARD

Limited

Risk Graph

A Credit Spread is an options strategy that requires simultaneously buying and selling OTM options contracts on the same underlying security, same expiration date but different strike prices, resulting in a net credit. These strategies are considered Theta strategies as they benefit from time decay.
In terms of directional bias, a Credit Spread can be bullish (Bull Put Spread), bearish (Bear Call Spread) or neutral (Iron Condor).

STRATEGY BIAS

Bullish, Bearish or Neutral

STRIKE PRICES

Different

EXPIRATION DATE

Same

UNDERLYING SECURITY

Same

Bull Put Spread Risk Graph

Bear Call Spread Risk Graph

Iron Condor Risk Graph

Day Trading refers to the buying and selling of financial instruments (stocks, ETFs, options contracts, futures contracts, currencies) within the same trading day.

Day traders—typically speculators—open all their positions after the market opens and close them all before the market closes.

Example

When the short term moving average cross below a longer-term moving average

The typical Death Cross is when the 50-day Simple Moving Average (SMA) crosses the 200-day Simple Moving Average (SMA).

The cross signals the start of a new bearish trend. It is thought of as a secondary lagging indidator.

A Debit Spread is an options strategy that requires simultaneously buying and selling OTM options contracts on the same underlying security, same expiration date but different strike prices, resulting in a net debit. These strategies are considered Delta strategies as they benefit from the directional movements of the underlying security.
In terms of directional bias, a Debit Spread can be bullish (Bull Call Spread), bearish (Bear Put Spread) or neutral (Debit Condor).

STRATEGY BIAS

Bullish, Bearish or Neutral

STRIKE PRICES

Different

EXPIRATION DATE

Same

UNDERLYING SECURITY

Same

Bull Call Spread Risk Graph

Bear Put Spread Risk Graph

Debit Condor Risk Graph

A deep in the money option has a strike price significantly below the current market price of the underlying asset for a call option or significantly above the current market price of the underlying asset for a put option. The value of such an option is nearly all intrinsic and has minimal extrinsic premium

Delta measures the sensitivity of the option premium to a change in the price of underlying.

Delta is the ratio at which an option premium changes when the price of the underlying asset changes at a $1.00 increment.

A descending channel is the statistically range bound price action of a descending price trend contained between downward sloping parallel lines.

Lower lows and lower highs characterize the descending/down trend price pattern.

Technical analysts draw a descending channel by manually drawing an upper trendline that connects the swing high pivot points, and a lower channel line that joins the swing low pivot points, or using a channeling drawing tool.

Some trading software or charting services can automatically plot descending price channels.

A Diagonal Call Calendar Spread is an options strategy that involves simultaneously BTO call option while STO another call option of a higher strike price for a different expiration on the same underlying asset.

The Diagonal Call Calendar Spread is generally used when there is anticipation of profiting from stagnation or a small rise in the price of a particular stock or asset.

Example

A Diagonal Put Calendar Spread is an options strategy that involves simultaneously BTO put option while STO another put option of a lower strike price for a different expiration on the same underlying asset.

The Diagonal Put Calendar Spread is generally used when there is anticipation of profiting from stagnation or a small decrease in the price of a particular stock or asset.

Access this one and 30 more strategies with theory videos and PDFs for download in our Trading Playbook. Click on the image below to access the Trading Playbook (PRO Members only).

Example

Dividends per share = total dividends paid ÷ total shares outstanding

A dividend is the distribution of a token reward from a portion of company’s earnings, and is paid to a specified class of shareholders.
Dividends are determined by a company’s board of directors, and approved by shareholders through voting rights.

Dividends are most frequently issued as a cash payment. Larger, more well established companies with consistent profits are typically the best dividend payers. These types of companies seek to maximize shareholder wealth in addition to normal growth by issuing regular dividends (typically quarterly or annually.)

Individual companies, along with some mutual funds and exchange traded funds (ETF) also pay dividends.

The Earnings per Share (EPS) is calculated by dividing the company’s profits or earnings by the total number of outstanding shares of stock.

Earnings per Share is usually abbreviated as EPS and the “ttm” that follows stands for Trailing Twelve Months. This means that EPS (ttm) is the total earnings or profits the company has made over the last 12 months.

EPS = Earnings ÷ Outstanding shares

Exercise

The implementation of the holder’s right to buy (call) or sell (put) the underlying security at the strike price of the option contract.

Assignment

Assignment occurs when the option seller is notified that the contract is being exercised. The option seller must fulfill this obligation by selling the underlying security at the agreed upon strike price if the call was sold or buying the underlying security at the agreed upon strike price if the put was sold.

Financial markets have many instruments and products you can trade or exchange. These products are traded physically or on-line thru brokers, banks and financial exchanges. The most common products that are traded include stocks, commodities, forex, funds, bonds and options.

Also known as the FX market as well as the the foreign exchange market. The Foreign Exchange market, is a decentralized global market where all the worlds currencies trade and is the largest, most liquid market in the world with an average daily trading volume exceeding $5 trillion.

That’s a ton of cabbage moving through the foreign currency exchanges every day. The primary function of the forex market is to facilitate global commerce and trade and there are many ways to trade and invest in currencies with controlled risk as well as speculate on the future value of currencies.

Free cash flow per share is a measure of how much cash per share a business generates after accounting for capital expenditures like equipment or buildings. Free cash flow is available to be used for expansion, dividends, debt reduction, or other purposes.

The option’s gamma is a measure of the rate of change of its delta.

The gamma of an option reflects the change in the delta in response to a one point ($1.00) movement of the underlying stock price.

Options that are deep in the money and or way out of the money have low gamma and values close to 0. Which means that deep ITM/OTM options have very low rate of change for delta or in other words, low velocity.

Options 1 or 2 strike prices OTM have the highest rate of gamma.

Calculated by dividing gross profit by revenues.

Growth Investing is an investment strategy that is primarily focused on capital appreciation.

Growth investors look forward to invest in what is called growth stocks—stocks issued by companies that exhibit above-average growth, i.e., companies whose earnings are expected to grow at an above-average rate compared to its industry.

Typically, growth investors are not too concerned about the current stock valuation. In fact, the most important factor is that the stocks have a long path of growth over the long term. The greater the growth, the better.

However, like value investors, growth investors heavily rely on fundamental analysis to base their investment thesis.

A hedge is a strategy to reduce the risk of adverse price movements in an asset. It can be used to minimize or offset the chance that your assets will lose value. It also limits your loss to a known amount if the asset indeed does lose value.

There are three situations where you can hedge:

1. Protect Profits: You can hedge a position to protect the profits your had so far.
2. Mitigate Losses: You can hedge a position to mitigate or even reverse a loss.
3. Portfolio Protection: You can develop a hedging system for your entire portfolio.

Example

Trends are a core concept in the world of technical analysis and can lead to many profitable trading opportunities. Higher highs and higher lows are one way to help identify a stock that is in an uptrend and once identified can provide entry signals to your trades. These higher price highs and higher price lows can continue for an extended period of time as trends have a tendency to continue.

A Horizontal Call Calendar Spread is an options strategy that involves simultaneously BTO longer term calls while STO an equal number of near term calls with the same strike price and different expirations on the same underlying asset. We can also structure the trade at a strike price where we believe the stock will rise in value.

The Horizontal Call Calendar Spread is generally used when there is anticipation of profiting from stagnation in a particular stock or asset.

Example

A Horizontal Put Calendar Spread is an options strategy that involves simultaneously BTO longer term puts while STO an equal number of near term puts with the same strike price and different expirations on the same underlying asset. We can also structure the trade at a strike price where we believe the stock will fall in value.

The Horizontal Put Calendar Spread is generally used when there is anticipation of profiting from stagnation in a particular stock or asset.

Example

Implied Volatility – IV is a very important metric of an option price.

IV is calculated by taking an option price, inputting it into the Black Scholes mathematical formula to solve for the value of the volatility.

IV is determined by the current option prices to calculate expected future volatility or range of the stock price.

IV is the expected or implied volatility of an annualized stock move of one standard deviation.

Ex: A stock trading at $100 per share with an IV of 23% implies the stocks volatility range (or one standard deviation) is $23 for the next 12 months. That is 23 points up or 23 points down from its current price.

Implied volatility is always changing and is influenced by many factors.

When a stock has a low IV, it implies that the stocks future volatility is expected to be low, but that is a result of the option prices are priced low.

The opposite is also true, when a stock has an IV that is in the higher range, it reflects higher volatility is expected and that is because the option prices are higher or on the expensive side.

– Low IV = cheaper option prices
– High IV = expensive option prices

An in-the-money option is an option contract that would be worth exercising at the strike price. Any call with a strike price lower than the current price of the underlying security is in-the-money while any put with a strike price higher than the current price of the underlying security is in-the-money. In-the-money options hold intrinsic value and have higher deltas than out-of-the-money contracts.

Inflation is the sustained increase in the prices of goods and services over time. It is a quantitative measure generally expressed as a percentage. Inflation indicates a decrease in the purchasing power of each unit of a nation’s currency.

Because there are many possible measures of the price level, there are many possible measures of price inflation. The most common is the Consumer Price Index (CPI).

The term inflation is also used to describe a rising price level within a set of assets, goods or services in the economy, e.g., food, fuel, real estate, services, labor and financial assets.

Example

An Initial Public Offering—known as IPO— is the process by which a private company goes public by selling its stock shares to the general public for the very first time. It is also called “going public”.

Businesses can go public to raise capital for corporate expansion. Venture capitalists, on the other hand, may use a company’s IPO as a way to get out of the investment they made in that particular company.

The ratio of annual sales to average inventory is a common method used to measure the speed at which inventory is produced and sold. A high turnover ratio is considered a good sign and low turnover is an unhealthy sign, indicating excess inventory or poor sales.

The inventory turnover ratio indicates how many times a company has sold and replaced inventory during a given period. Analysts can divide the days in the period by the inventory turnover to estimate the days it takes to sell the inventory on hand.

Calculating inventory turnover can help businesses make better decisions on pricing and manufacturing runs, how and when to purchase new inventory as well as when to leverage/move excess inventory.

A trader uses an Inverted Butterfly Spread when they believe a stock will move up or down a long way but don’t have a directional bias. This is called a bi-directional trade.

A profit will materialize if the stock moves up or down into the profit zones. A loss will occur if a stock stays in the middle of the range.

Access this one and 30 more strategies with theory videos and PDFs for download in our Trading Playbook. Click on the image below to access the Trading Playbook (PRO Members only).

Example

An Inverted Butterfly Spread is a bi-directional option strategy that a trader can use when they believe a stock price will move up or down a significant amount, but determining which direction the price action will break is unclear. Consolidation patterns like symmetrical triangles or a scheduled earnings announcement are commonly identified as bi-directional trading opportunities that can be highly effective for placing an inverted butterfly spread.

A profit will materialize if the stock moves up or down into the profit zones. A loss will occur if a stock stays in the middle of the range.

Access this one and 30 more strategies with theory videos and PDFs for download in our Trading Playbook. Click on the image below to access the Trading Playbook (PRO Members only).

Example

The action or process of investing money for profit or material result or a thing that is worth buying because it may be profitable or useful in the future.

An investment portfolio is a collection of your investments including:
Stocks, Bonds, Cash, Real State, Metals, between other assets.

The Iron Condor is a limited-risk, limited-reward, neutral, cash flow options strategy designed to have high probability of profit when the underlying security is range-bound within a certain price level. This strategy results in a net credit and is considered a Theta strategy as it benefits from time decay.

The construction of an Iron Condor requires the trader to buy and sell four options contracts, two puts and two calls, with four different strike prices, all with the same expiration date and same underlying security. The Iron Condor is made of a Bull Put Spread (bullish options strategy) and a Bear Call Spread (bearish options strategy) traded at the same time.

Iron Condor = Bull Put Spread + Bear Call Spread

Risk Graph

A LEAPS Call is an acronym in Options for Long-Term Equity Anticipation Security.

Long-Term has generally been defined as 8 months or more, and can extend to years of time for the contract.

A LEAPS Put is an acronym in Options for Long-Term Equity Anticipation Security.

Long-Term has generally been defined as 8 months or more, and can extend to years of time for the contract.

Leverage, also known as Financial Leverage, refers to the use of debt, i.e. borrowed money, to acquire assets and increase the potential return of a specific investment.
Leverage also refers to the amount of debt a company uses to finance assets purchasing programs.
In trading, the most common usages of leverage are:

1. Through a margin account.
2. Through options trading
3. Through futures contracts.
4. Though leveraged ETFs.

A Long a call option is a position in which a trader/investor purchases or “Buys to Open” a Call Option Contract thereby securing the right to purchase the underlying asset or security at the pre-determined “strike Price” on or before the pre-determined date “Expiration Date”.

The term “going long” refers to buying a security (not selling one), and applies to any tradable instrument that a trader/investor “buys to open” including options.

A trader/investor would buy “Long Calls” in anticipation of the price of the underlying asset rising in value.

A Long a Put option is a position in which a trader/investor purchases or “Buys to Open” a Put Option Contract thereby securing the right to sell the underlying asset or security at the pre-determined “strike Price” on or before the pre-determined date “Expiration Date”.

The term “going long” refers to buying a security (not selling one), and applies to any tradable instrument that a trader/investor ”buys to open” including put options.

A trader/investor would buy “Long Puts” in anticipation of the price of the underlying asset falling in value.

Long Term Debt to Capital Ratio is a slighlty different definition of the traditional debt-to-equity ratio and shows the financial leverage of a firm. It is calculated by dividing long-term debt by total available capital (long-term debt, preferred and common stocks).

Lower low and lower high is a technical pattern and is considered a continuation pattern. It is similar to to the higher high/higher low pattern except in reverse where a downtrend is occurring. Continuation patterns have a tendency to repeat themselves until a reversal pattern occurs. Once support breaks, a lower low/lower high pattern can begin as the price goes down to a new support level which is lower than the previous level of support and new highs established are also lower than previous highs.

Market capitalization is the total dollar market value of a company’s outstanding shares. Commonly referred to as “market cap,” it is calculated by multiplying a company’s current market price by the total number of shares outstanding. Investors use this figure to determine a company’s size, as opposed to other metrics using sales or total asset figures.

Monetary Supply refers to the total value of monetary assets available in an economy at a specific time.

The monetary assets—also referred to as total circulating money—include printed banknotes, balances held in deposit, checking and saving accounts and other form of liquid assets.

The way the monetary supply is measured can vary from country to country. In the United States the most common data points are: Monetary Base, M1 and M2.

Example #1

A monetary base is the total amount of a currency that is either in general circulation in the hands of the public or in the commercial bank deposits held in the central bank’s reserves. This measure of the money supply typically only includes the most liquid currencies.(all data retrieved from FRED, Federal Reserve Bank of St. Louis)

Example #2

Source: usdebtclock.org

Percentage of revenue left after all expenses have been deducted from sales.

What proportion of a company’s revenue is left over after paying for variable costs of production.

Option pricing refers to the amount of the option premium per share at which an option contract is traded in the live market.

Premium is the price paid or received when buying/selling options. This price can be split into two components.

Intrinsic value = Equity for In the Money Options

Extrinsic value = Time, Volatility, Risk-Free Interest Rates

The option price is calculated using the option pricing model known as the Black Scholes Option Pricing Model.

Join Coach D., to learn how to identify and measure the extrinsic value of options contracts. You’ll learn that Extrinsic Value is simply the difference between the current market price of an option, called the premium, and its intrinsic value. In other words, Extrinsic value is the portion of the option premium value based on factors other than the underlying asset’s price, such as time until expiration, the implication of volatility and the risk-free rate of interest.

Join Coach D to learn how to identify and measure intrinsic value of in the money options contracts. You’ll learn that Intrinsic Value is simply the difference between the current market value of the underlying asset and the strike price of the option contract.

An options contract represents an agreement between a buyer and a seller.
This agreement gives the buyer the right to buy or sell a particular asset at a specified date at an agreed upon price (Strike Price).
On the other hand, this agreement gives the seller the obligation to buy or sell a particular asset at a specified date at an agreed upon price.
Options contracts can be traded on stocks, ETFs, and futures contracts. These are called underlying securities.

Options traders know how to read the “Greeks” which help them to evaluate option positions and to determine option pricing sensitivity to the mathematical variables of the options pricing model.

The “Greeks” are a collection of statistical values that measure the risk involved in an options contract in relation to certain underlying variables.

The Black Scholes Option Pricing Model incorporates the “Greeks” in the option pricing calculations which include Delta, Gamma, Theta, Vega and Rho.

The options market is a derivative market that is traded in contracts. Each contract controls 100 shares of the underlying stock. It is a contract between a buyer and seller, that gives the purchaser of the option the right, but not the obligation, to buy / Sell a specific stock at a specific price on or before a specific date.

There are two types of options:

Call Option: gives the buyer the right to buy the stock at a set price on or before a set date. The set price is referred to as the strike price while the set date is referred to as the expiration sate.

Put Option: gives the buyer the right to sell the stock at a set price on or before a set date. The set price is referred to as the strike price while the set date is referred to as the expiration date.

Open interest indicates the total number of option contracts currently open – contracts that have been opened/traded but not yet liquidated by either an offsetting trade or an exercise or assignment

Open interest = total number of open or outstanding options contracts at the given time.

If a buyer and a seller combine to initiate a new position/contract, then open interest will increase by one contract. If a buyer and a seller both exit a position/contract, then open interest decreases by one contract.

If a buyer or seller passes off their current position to a new buyer or seller, then open interest remains unchanged.

Option Premium is the credit or income received by an investor who “writes” or sells an option contract to another party. The option premium may also refer to the current market price of any specific option contract that actively being traded and has yet to expire.

The premium is the total trade price of an option contract. The premium is paid to the seller of the option and is quoted on a per-share basis.

The premium of an option contract quoted at $6.50 per share, represents a premium/payment of $650 ($6.50 x 100 shares).

The Premium is non-refundable, and secures the buyer’s rights to either buy or sell the underlying asset according to the terms of the specific option contract.

“Writers” or sellers of options, receive the premium in exchange for “underwriting” or promising to sell or buy the underlying asset according to the terms of the specific option contract.

In some strategies that lay out buying and selling options on the same security, the selling portion of the theory is to collect premium for either cash flow or to defray the cost of the purchase.

Volume is the total number of option contracts bought and sold for the day, for a particular strike price.

Trading volume on an option is typically relative to the volume of the underlying stock. Higher volume stocks usually have higher average daily volume on options contracts.

Options trading volume measures the number of options contracts being exchanged between buyers and sellers,  identifying the level of activity for that trading day for each specific contract, strike price & expiration date.

An Out-of-the-Money option is an option contract that is not worth exercising at the strike price. Any call with a strike price higher than the current price of the underlying security is out-of-the-money while any put with a strike price lower than the current price of the underlying security is out-of-the-money. Out-of-the-money options carry no intrinsic value and have lower deltas than in-the-money-options.

Position Trading refers to a long-term type of trading, either speculative or based on fundamentals, that a trader holds from weeks to months.

Position traders are less concerned with short-term fluctuations in the price of the financial instrument (stock, options, futures contract, currencies).

They usually rely on both technical and fundamental analysis to make trading decisions referring to the daily, weekly and monthly price charts when evaluating any given position.

Example

The Protective Put is a protective options strategy that involves buying OTM Puts to protect against a potential downside risk of a specific holding in your portfolio (a long position).
It differs from the Long Put strategy in the sense that the latter is a bearish directional strategy and it does not require the investor to hold any underlying security in the portfolio.

STRATEGY GOAL

Protection

Risk Graph

Put options are a contract that give the buyer of a put option the right, but not the obligation, to sell an underlying asset at a specified price called the strike price, within a specific time period before the expiration date. A put buyer can profit when the underlying asset decreases in price and can be sold at will at the current market value anytime before the expiration date. Put options typically give the holder the right to sell 100 shares of the underlying asset.

When building a Put Ratio Backspread, a trader will sell – 1 Put Option at a higher strike price, and buy +2 Put Options or more options at a cheaper priced option than the one that was sold. Both strikes should be in the same expiration month. The strategy has unlimited profit potential, limited risk, and is generally used when a trader is aggressively bearish on the underlying chart.

The quick ratio is a measure of a company’s short-term liquidity, and ability to meet its short-term debt obligations with its most liquid assets.

The quick ratio excludes inventories from current assets because this metric is only concerned with the most liquid assets,

Quick ratio calculation:

Quick ratio = (current assets – inventories) / current liabilities)

Quick ratio = (cash and equivalents + marketable securities + accounts receivable) / current liabilities

A price level or price zone where traders and investors are willing to sell a security, thereby creating supply at that price level, causing the price to stop rising and start falling.

Resistance is an downward movement in price caused by supply.

Historic price resistance levels or historic price resistance/support zones are key price levels on price charts that tend to act as a catalyst for the anticipated change in the direction of price.

Price resistance zones are a naturally occurring part of the price cycle pattern and frequently a self fulfilling prophecy.

ROA = Net Income/Average Total Assets

This tells you how effective the company is using their assets to produce earnings.

It’s useful to look at this number when analyzing competing companies in the same industry.

Return on equity (ROE) is the amount of net income returned as a percentage of shareholders’ equity. Return on equity, (also known as “return on net worth” or RONW) measures a corporation’s profitability by revealing how much profit a company generates with the money shareholders have invested.

The calculation for Return on Equity is relatively simple,

ROE = Net Income/Shareholders’ Equity.

ROE is typically expressed as a percentage.

ROE is typically measures an entire fiscal year and is calculated before dividends are paid to common stockholders but after dividends to preferred stock holders.

Shareholders’ equity may not include preferred shares, and is sometimes called return on common equity (ROCE) = net income – preferred dividends / common equity.

Rho is the rate at which the price of an option changes relative to a change in the risk-free interest rate. 

Rho is the measure of an option’s sensitivity to interest rate changes.

Rho measures the sensitivity of an option or an entire portfolio of options to a change in interest rate.

A graphical representation that displays the range of profit or loss potential for an equity or an option.

The x-axis represents the price of the underlying security and the y-axis represents the potential profit/loss of the position.

Often called a P&L graph or a profit/loss diagram, this graph provides an easy way to understand and visualize the effects of what may happen to an equity an option based on estimated or known variables.

Risk graphs can be drawn to show the potential gains/losses for single options as well as for multiple leg strategies like spreads or any other combination strategies.

Sales per share is a simple ratio that calculates the total revenue earned per share over a designated period, typically quarterly, annually or most commonly a TTM (trailing 12 months metric)

The formula to use for this calculation is simple, take the yearly sales revenue and divide by the average shares outstanding for the designated time frame.

A higher ratio is preferable and this data can be interpreted as a company that has successfully used its resources to produce sales.

The sales-per-share ratio is more reliable/significant when coupled with other share value metrics like EPS (Earnings Per Share) to more effectively assess the profitability of a company.

A Short Call Option is a position in which a trader/investor Sells or “Sells to Open” a Call Option Contract thereby promising to sell the underlying asset or security at the pre-determined “Strike Price” on or before the pre-determined date “Expiration Date” in exchange for receiving the premium.

The term “going short” refers to opening a position by selling a security (not buying one), and applies to any tradable instrument that a trader/investor ”sells to open” including call options.

A trader/investor would sell “Short Calls” in anticipation of the price of the underlying asset falling in value, or staying range bound, or simply to get paid to sell the asset at a desired price.

Short calls are often sold to receive the premium and thereby get paid to sell the security in advance. A covered call involves owning the underlying and selling a short call.

A Short Put Option is a position in which a trader/investor Sells or “Sells to Open” a Put Option Contract thereby promising to buy the underlying asset or security at the pre-determined “strike Price” on or before the pre-determined date “Expiration Date” in exchange for receiving the premium.

The term “going short” refers to opening a position by selling a security (not buying one), and applies to any tradable instrument that a trader/investor ”sells to open” including put options.

A trader/investor would sell “Short Puts” in anticipation of the price of the underlying asset rising in value, and short puts are often sold to receive the premium and thereby acquire the security at a discount.

A sideways trend is defined by range bound price action contained between established support and resistance price zones.

Equal or repeating lows and equal or repeating highs characterize a sideways trend.

Sideways price trends or range bound price action typically cycles or oscillates between the established support/resistance price zones in a repetitive pattern.

The Straddle is a bidirectional options strategy that involves simultaneously buying (in case of a Long Straddle) or a selling (in case of a Short Straddle) an ATM Put and a ATM Call at the same strike price, same expiration date and on the same underlying security.

STRATEGY BIAS

Bidirectional

STRIKE PRICES

Same

EXPIRATION DATE

Same

UNDERLYING SECURITY

Same

Long Straddle risk graph

Short Straddle risk graph

The Strangle is a neutral options strategy that involves simultaneously buying (in case of a Long Strangle) or a selling (in case of a Short Strangle) an OTM Put and a OTM Call at different strike prices, same expiration date and on the same underlying security.

STRATEGY BIAS

Neutral

STRIKE PRICES

Different

EXPIRATION DATE

Same

UNDERLYING SECURITY

Same

Long Strangle risk graph

Short Strangle risk graph

The Strike Price is the exact price that a trader agrees on to buy or sell the underlying asset. The Strike Price is also called Exercise Price.

If the trader is the owner of the option contract, i.e., is in a long position, the strike price refers to the price at which the trader has the right to buy (in case of a long call) or sell (in case of a long put) the underlying asset.

Conversely, if the trader is the seller of the option contract, i.e., is in a short position, the strike price refers to the price at which the trader has the obligation to buy (in case of a short put) or sell (in case of a short call) the underlying asset.

Example

A price level or price zone where traders and investors are willing to buy a security, thereby creating demand at that price level, causing the price to stop falling and start rising.

Support is an upward movement in price caused by demand.

Historic price support levels or historic price support/resistance zones are key price levels on price charts that tend to act as a catalyst for the anticipated change in the direction of price.

Price support zones are a naturally occurring part of the price cycle pattern and frequently a self-fulfilling prophecy.

Swing Trading refers to a speculative, short-term type of trading, that attempts to capture gains in a financial instrument (stocks, options contracts, futures contracts, currencies) within a timeframe that can range from one day to two weeks.

Swing traders rely on technical analysis and indicators to look for short-term price momentum.

Example

The Tackle 25 list is Tackle Trading’s Fundamental and Technical list of stocks that represent both Growth and Cash Flow opportunities. This list only includes stocks that have options for potential Covered Calls.

While the Tackle 25 is not a long-term fundamental or technical list, we certainly took those forms of analysis in mind when selecting the 25 stocks placed on Tackle Trading’s list of the best covered call stocks.

The Tackle 25 also includes three more lists of potential candidates for Covered Calls: Dividend Fireworks, Poor Boy’s Covered Call and the Dirty Sexy Money.

Get access to the Tackle 25

Get instant access to the Tackle 25 by clicking HERE.

Example

Tax Rate is the percentage of tax paid for different levels of income.

Tax Rate is the percentage at which an individual or corporation is taxed. The tax rate is the tax imposed by the federal government and some states based on a corporation’s earnings or an individual’s taxable income.

The current U.S. IRS Tax Code implements a progressive tax rate system, where the percentage of taxes paid increases as taxable income increases.

Theta is the amount of decay an option price has as time moves forward.

Options prices have a rate of decline for every day that passes.

The rate is a number based in value or cents of the amount it will theoretically drop from one day to the next.

This is what is know as time decay of an option price, or “Theta”

Stocks, Options, Futures & Forex all have unique ticker symbols which are also known as “hard-code” for traders and a sure way to identify that we are buying and selling the correct security

The ratio of net sales to total assets.

Asset turnover ratio is a measure of the value of a company’s sales or revenues generated relative to the value of its assets.

The Asset Turnover is an indication of the efficiency with which a company is deploying capital assets in generating revenue.

Asset Turnover = Sales ÷ Average Total Assets

The Tackle Trading Trade Center is your home base for getting an overview on the market and diving into Tackle Trading’s great content. It should be the foundation for your Daily Routine and the first stop when you’re about to do some trading.

A gap on a chart is simply an empty space on the chart where the opening price today is different than the closing price yesterday. This is caused by economic reports, earnings reports, company news or differences in overnight supply/demand

A Trading Journal is a spreadsheet or an application where you will log, crunch and analyze all your data so you can see if you are making money over time.

Good traders keep excellent records. Quality trading journals are essential to your progress and growth as a trader and keeping good records will help you learn more from both your income and expense trades.

Disciplined use of quality trading journals will benefit you greatly by specifically tracking and measuring your overall performance with a constant eye on your success.

Get access to the Tackle Trading Journals

Get instant access to the Tackle Trading Journals by clicking HERE or by clicking on the image below.

Example from the video

Liquidity is a description of the degree to which an asset, security or contract can be quickly bought or sold in the market without affecting the asset’s price.

Market liquidity is measured against how quickly an individual or firm can buy or sell an asset with a minimal effect  asset’s price.

Liquidity is about the speed of the transaction and the agreed upon price. In a liquid market, the trade-off is mild: selling quickly will not reduce the price much.

In a relatively illiquid market, selling it quickly will require discounting or cutting price to attract a buyer.

A trendline is a line drawn from pivot to pivot and extends to the right, typically drawn under swing pivot lows or over swing pivot highs or to show the prevailing direction of the price trend.

Trendlines can be used on any timeframe and are a commonly used technical tool, to identify and forecast price trends by using past support and resistance zones to geometrically forecast potential trend price zones. Trendlines can be used to identify the direction and speed of the trends rate of change and are an integral part of many chart patterns.

A trend can be defined as the overall direction of a stock. For simplicity sake, there are three sweeping categories of trends:

• Uptrends – a series of higher highs and higher lows
• Downtrends – a series of lower lows and lower highs
• Sideways – trading horizontally between floors and ceilings or a channel

Simply put, underlying asset describes a security on which a derivative is based. This terms is mostly used in the derivatives market.

Options contracts, for example, are derivative instruments meaning that their prices are derived from the price of their underlying security.

Stocks, ETFs, indices and currencies are the most common underlying securities in the financial markets.

Value Investing is an investment strategy that involves buying financial assets that appear underpriced, i.e., assets that are trading for less than their intrinsic value, thus, maximizing returns.

Value investors heavily rely on fundamental analysis and valuation methods to determine the intrinsic value of a company and also to project its growth. They look for safe and sound companies that show great growth potential but, for some reason, are mispriced by market participants.

Considered the father of Value Investing, Benjamin Graham—together with David Dodd—taught the first lessons on Value Investing in 1928, at the Columbia Business School, giving birth to their seminal work Security Analysis in 1934. Benjamin Graham mentored the most successful and famous value investor of all time, Warren Buffett.

Example

Vertical Spreads are options strategies that involve the simultaneous purchase and sale of the same type of option, either Calls or Puts on the same underlying asset, with the same expiration date, but different strike prices.

The term “vertical” comes from selecting the desired option strike prices/positions from the same vertical column within the option chain.

A vertical spread, involves buying and selling puts, for a put spread,  or buying and selling a calls, for a call spread.  A vertical spread by definition requires buying/selling of the same type of options with the same expiration date but different strikes. A vertical spread can be bullish or bearish and can be either debit or credit trade.

Volatility is a statistical measure of the dispersion of price for a given security or market index. Volatility can be measured by using the standard deviation or variance of price from that same security.

The more volatile the price variance, the more potential risk for the security.

There are two distinct types of volatility that traders need to understand.

Historic Volatility: Is the statistical volatility, or the measured historic price volatility of the underlying security. H.V. is ”known volatility” because it is based on actual price changes in the underlying.

Implied Volatility: Is the projection or “implication” of potential volatility primarily used for option pricing.  Higher estimates of implied volatility will increase options premium and lower estimates of implied volatility will decrease options premium on average.

Volume is the number of shares or contracts that indicates the overall activity of a security or market for a given period.
How do Trader’s use volume when trading?

1st – Establish a minimum amount of volume you need to trade the underlying product

Generally, a million shares traded per day on a stock or Exchange Traded Fund (ETF) will indicate a liquid and tradable company. The more liquid the stock, the more likely the options contracts will be liquid as well

2nd – Use it as a Technical Confirmation

Volume confirms price. Strong moves – up or down – with a higher amount of volume indicate that traders are making decisions with more conviction. A large volume bar, on big candlesticks, tends to indicate that institutional players are moving in or out of a market.
Increasing volume and decreasing volume patterns give us information about the underlying price action, and the strength or weakness of those moves.

3rd – Use a Volume Indicator

There are many volume-based indicators that are popular with traders. On Balance Volume (OBV) and the Chaikin Money Flow (CMF) are two of the more popular ones. Consider adding a volume indicator to your chart, to help you understand the volume characteristics of the underlying.