Common Options Trading Terms Explained

Common Options Trading Terms Explained

An article that introduces and explains some of the more commonly used terms in options trading.

Common Options Trading Terms Explained are financial instruments that give the owner the right, but not the obligation, to buy or sell shares of an underlying security at a pre-determined price within a specified time frame. The underlying security can be common stock, exchange traded funds (ETFs), foreign stocks, indexes or Treasury securities yields.

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The term “market maker” refers to an exchange member on the trading floor who is in competition with each other to provide liquidity by making bids and offers in a given options class, or series, at market-determined prices. They are responsible for maintaining a fair and orderly market. See also specialist group and system.

Option chains provide a listing of available options for sale for a specific security at a given strike price and expiration. The list includes every possible combinations of these variables for a given security. They are used for quoting via a variety of commercial quotation services.

A type of market order that gives discretion to the floor broker regarding the price and/or time of trade execution. See also limit order and good-til-cancelled (GTC).

The difference between the amount of equity in a margin account and the total value of positions held, including all margin loans owed. This is what the investor keeps after closing positions and paying off any margin loans. Also known as the net-asset position. This is a very important concept in understanding the risk-reward of various strategies.