Ask
The disseminated price at which exchanges indicate options can be bought.

Assignment
Writers of American options can be assigned at any time. Upon assignment they receive cash from the option owner and must deliver the underlying securities.

Back-spread
Position in which options are shorted, and a greater number of options of the same type but more OTM are purchased. This position benefits from a large move in the underlying security.

Bid
The disseminated price at which exchanges indicate options can be sold.

Black-Scholes Model
The original and most widely recognized model for pricing options (this model prices European-style options). Co-author Myron Scholes was awarded a Nobel prize for his work in derivatives pricing.

Butterfly
An option strategy with limited risk/potential in which one option in each of two outside strikes are purchased and two options on the middle strike is sold. An example of a call butterfly would be to buy one XYZ Jan 50 call, sell two Jan 55 calls, and buy one Jan 60 call. This is called "buying a butterfly." The opposite would be to sell the butterfly. One can also trade put butterflys, which have similar risk characteristics.

Cash-settled American index options
Similar to European index options, though these options can be exercised on any business day before expiration. The settlement value will be based on the index close that day. The cut-off time for exercising these options is well before the market close.

Cash-settled European index option
Options on indexes do not settle for stock. Instead, ITM options at expiration settle for the cash equivalent of the ITM amount.

Covered Write
A position in which a call option is written against a long stock position.

Delta
An option's sensitivity to stock movement. Typically a 50 delta indicates that an option should theoretically move 1/2 point when the stock moves 1 point.

Exercise
For American style options, the procedure an option owner invokes when he wishes to take delivery on the securities underlying his option. This involves notifying your broker that you wish to exercise your option. An alternative is to sell your option position. European style options (most index options are European) can only be exercised at expiration.

Fast Market
In periods of high volume and rapid price movements, or in periods with technical system problems, the exchange can declare a "fast market" in which disseminated quotes are deemed unreliable, and they may turn off certain electronic access systems. During fast markets, it may become difficult and/or slow to execute or cancel orders.

FLEX options
These are customized options cleared by OCC and traded in the auction market on exchange floors. Quotes are not disseminated for FLEX options. The minimum volume to open a FLEX series is 250 contracts, and the minimum trade size thereafter is 100 contracts. Expiration of FLEX options must be at least 3 days before regular expiration of after expiration. The purpose of FLEX options is to allow customization regarding strike, expiration date, and many other parameters. Certain restrictions apply.

Front-spread
The opposite of back-spread, this position is net short contracts and benefits from a lack of movement in stock. Front spreads have unlimited risk.

Gamma
A derivative of delta, gamma measures the change in delta with a very small change in stock price.

Historical volatility
The volatility of a stock as determined by measuring the variability of the stock's past price movements.

Implied Volatility
The volatility derived by taking the price of an option in the marketplace and working backwards through the theoretical model to find the volatility used to achieve that price.

Index
A sum of stock prices divided by a divisor. Indexes can be price-weighted or capital-weighted, or variations of price and capitalization.

LEAPs
Introduced in October 1990, LEAPs are essentially the same as regular options, except that they usually have a two and one half year term and are converted to non-LEAPs roughly six months before their expiration.

Long Straddle
Owning a put and call of the same strike, month and underlying stock. This position profits from a substantial stock move in either direction.

Multiplier
One of the terms of all option contracts. The multiplier is used to calculate the amount you pay (or receive) for an option and the amount you pay (or receive) upon exercising or being assigned on an option. For example, if you pay 1 1/4 for an option with a multiplier of 100, the cost is $125. If the multiplier were 200, the cost would be $250. Standard options have a multiplier of 100. If an option with a strike of 50 and multiplier of 100 is exercised, you pay 100 x 50, or $5,000 for the underlying stock. If the multiplier were 150 and the strike 50, you would pay $7,500 for the underlying stock.

Opening rotation
Options have a one-price opening in which all marketable orders in a given series that trade on the opening must trade at the same price.

RAES
The CBOE's Retail Automatic Execution System. This system allows small market orders to be automatically executed without manual intervention. Other exchanges have analogous systems.

Rho
An option's sensitivity to changes in interest rates.

If interest rates increase, call values increase and put values decrease. Positive rho indicates that a value will increase when interest rates rise.

Scalp
A term used on option floors by market makers when a position is opened and closed within minutes for a very small profit.

Short Straddle
A short position in a put and call of the same strike, month and underlying stock. This position has unlimited risk.

Spread
An order to simultaneously trade more than one option series. Spread orders typically specify a limit price, so that the individual prices at which each option is executed is not important, provided that the net debit or credit is correct. Spread orders are typically to buy one series and sell an identical amount of a different series, though there are many different types of spreads.

Strangle
The purchase of an OTM call and OTM put of the same month in the same stock, or the sale of both. A long strangle benefits from a large rapid move in the underlying stock, while a short strangle benefits from a lack of stock movement. Short strangles have unlimited risk.

Strike
The price at which stock is traded upon exercise of an option contract. Some options have multiple underlying stocks. In these cases, the strike times the multiplier is the total price paid for all of the option's underlying securities.

Teeny
Slang term for a 1/16th point. On most options this represents $6.25 The securities industry plans to convert to decimals sometime in 2000, at which time stocks and options will trade in nickels or pennies.

Theoretical Value
The value of an option as calculated by a mathematical model. The six variables are: strike price, stock price, dividend amount, interest rate, expiration date, and volatility.

Theta
The rate at which an option loses its time value.

Time & Sales
An exchange record of the exact time of every quote and of the price and volume of every trade.

Underlying
The cash or securities that are delivered upon exercising an option. Most options deliver 100 shares of a single stock.

Unwind
A trade in which long stock is sold and the short option that was written against it is purchased to close the position.

Vega
An option's change in theoretical value given a change in volatility. This value is used to measure position risk given changes in the option marketplace.

Volatility
A measure of the variability of stock movement. A stock that moves up exactly 1% every day has a zero volatility. A stock that moves up and down large random amounts every day has a high volatility.