BigTrends Glossary
American Association of Individual Investors (AAII)
This not-for-profit organization conducts investor surveys showing the percentage of their members polled who are bullish, bearish or neutral on the stock market’s outlook. AAII helps educate investors and offers numerous local chapters across the United States, where investors can meet and hear well-known speakers.
American Option
An option that allows the holder (buyer) to exercise anytime prior to expiration. All equity options are American Style as is the S&P 100 Index (OEX). Generally, call options should not be exercised early (except perhaps to capture a dividend) and put options should exercised early once the put is sufficiently in-the-money (where delta = 1 and time value no longer exists).
AMEX
An abbreviation for the American Stock Exchange. The AMEX is home to the second largest options exchange in the world.
Ask Price
Is the lowest price that a stock is being offered for sale. Also called the "offer price". The ask price is higher than the bid price.
At-The-Money
“At-the-Money” describes an option with a strike price equal to the market price of the stock. Because it is rare to see a stock trade exactly at one of the strike prices, the term is loosely used to mean the strike nearest the current stock price.
Average Directional Movement (ADX)
ADX measures the degree of trend or direction in a market. A rising ADX suggests a strong trend; a falling ADX reflects a reversal or non-trending conditions in a market.
Bear (Bearish)
An investor who believes a stock or index will fall. The term gets its name from the way a bear attacks; it raises it paws and swipes down simulating a high to low motion. If you think stocks are moving from high to low, you are bearish.
Behavioral Finance
Behavioral finance focuses on the belief that stock prices are greatly influenced by investors’ behavior and emotions. Such behaviors include fear and greed, as well as the existence of self-reinforcing behavior, which leads to trends which last longer than most expected.
Bid
The price a buyer is willing to pay for a particular stock.
Bid/Ask Spread
The difference between the asking price and the bid price. For example, if the bid is $5 and the ask is $5 1/2, then the spread is 1/2 point. Spreads tend to widen when there is more risk or less liquidity (which is a form of risk). Because of this, it is not uncommon to see far months, out-of-the-money, or deep in-the-money options trade with very wide bid/ask spreads. The market (not the market makers) determines the spreads, which is contrary to what most traders believe.
Black-Scholes Option Pricing Model
Developed by Fisher Black and Myron Scholes, the model produces the theoretical value of an American call option with the following five inputs: stock price, exercise price, risk-free interest rate, volatility and time. Myron Scholes was awarded a Nobel Prize for his contributions in 1997.
Breakout
A technical analysis term, used to indicate a rise in a stock's price above its resistance level (such as its previous high price) or drop below its support level (commonly the last lowest price.) The assumption is that the stock will continue to move in the same direction following the breakout, which generates a buy or sell signal.
Bull (Bullish)
An investor who believes a stock or index will rise. The term gets its name from the way a bull attacks; it lowers its horns and raises its head high. If you think stocks are heading from low to high, you are bullish.
Call Option
A contract between two people which gives the owner the right, but not the obligation, to buy stock at a specified price over a given time period. The seller of the call has an obligation to sell the stock if the long put position decides to buy.
Candlestick Charts
A form of Japanese charting that has become very popular in the US. A narrow line (shadow) shows the day's price range. A wider body marks the area between the high and close. If the close is above the open, the body is white; if the close is below the open, the body is black.
CBOE
An abbreviation for the Chicago Board Options Exchange. This is the largest options exchange in the world.
Closing Price
Is the last price at which a stock transaction takes place on any given day. This is the price quoted in the newspapers and in chart services as the last trade of the day in regular-hours trading.
Closing Stop
Instead of stopping out a position at any point during a particular bar of trading (whether intraday, daily, weekly or monthly bars), the stop is only applied is the stop level is broken at the close of that bar. This method seeks to avoid the noise generated during the bar, while still quickly exiting at the end of the bar if the level is violated at the close.
Consensus Inc.
An organization that provides weekly sentiment data on the percentage of Bulls across all the major futures markets, including Stock Indices.
Contrarian
The process of betting against the prevailing market mood. At BigTrends.com we believe you must define an extreme in investor fear or greed upon which you should then look to be a contrarian.
Covered Call
A short call option position in which the writer owns the number of shares of the underlying stock represented by the option contracts. Covered calls generally limit the risk the writer takes because the stock does not have to be bought at the market price, if the holder of that option decides to exercise it.
Day Order
A buy or sell order that is automatically cancelled at the end of the trading day, if it has not been executed as instructed.
Directional Movement
This indicator, called DMI, plots a positive +DI line measuring buying pressure and a negative –DI line measuring selling pressure The pattern is bullish as long as the +DI line is above the –DI line. The formula utilized the past 14 time periods. The ADX line is derived from this system and is based on the spread between the +DI and –DI lines.
Earnings Surprises
Positive or negative differences from the consensus forecast.
Efficient Market Hypothesis (EMH)
The EMH in its strongest form suggests that the stock markets are completely efficient, because all information that is known about a company’s stock is believed to be acted upon as of that point in time. EMH thus believes future price action is completely random, based only upon new information that may be released and acted upon at some future date. EMH is a key assumption of traditional options pricing models. Contrast to Behavioral Finance.
Expiration
Technically, option expiration (for equities) is always the Saturday following the third Friday of the month. If a trader has an October call option, it can no longer be exercised after that point. But, for trading purposes, the last day to buy or sell an option will be the third Friday of the month. Equity options trade until 4:02 EST, while index options trade until 4:15 EST.
Expiration Cycle
In addition to options having a “front month” and “second month” options series, options are listed in one of several cycles, rotating in 3 month increments. Stock options in a January cycle will be listed and expire in January, April, July and October. Stock options in a February cycle will be listed and expire in February, May, August and November. Stock options in a March cycle will be listed and expire in March, June, September and December.
European Option
A style of option that allows the holder (buyer) to exercise only at expiration. Most index options are European style with the exception of the S&P 100 Index (OEX).
Exponential Moving Average (EMA)
An exponential moving average is calculated by applying a percentage of today's closing price to yesterday's moving average value. Contrast to Simple Moving Average.
Fundamental Analysis
The opposite of visual or technical analysis Fundamental analysis relies on economic supply and demand information, as opposed to market activity.
Good 'Til Canceled (GTC)
Sometimes simply called "GTC", it means an order to buy or sell stock that is good until you cancel it. Brokerages usually set a limit of 30-60 days, at which the GTC expires if not restated.
Implied Volatility
The volatility calculated by the Black-Scholes Option Pricing Model to provide the current option quote. It is the future volatility of the underlying security implied by the current market price.
Index Option
An option on an existing index, such as the S&P 100 Index (OEX).
International Securities Exchange (ISE)
The ISE is the newest exchange to open for options trading, seeking to revolutionize options trading via pure electronic mechanisms as opposed to the traditional options trading floors.
In-The-Money
A call option with a strike below (and a put option with a strike above) the current stock price are said to be in-the-money. This is also the intrinsic value of the option -- the amount received if exercised immediately. For example, if the stock is $102.50, a $100 call is $2.50 points in-the-money. Any amount above $2.50 in this example is called time value.
Intrinsic Value
An option's intrinsic value is the amount by which it is in the money.
Investors Intelligence
A firm which has surveyed investment advisers for over 30 years on a weekly basis regarding their outlook for the stock market going forward. Investors Intelligence reports its survey respondents as Bullish, Bearish or Correction. When only 25 percent of professionals are bullish, the market is considered oversold. A reading of 55 percent or higher is overbought.
LEAPS®
Long-Term Equity Anticipation Securities (LEAPS®) are longer-term options with expiration dates as much as 3 years into the future. LEAPS® give investors a way to invest in a stock for the next 1-3 years at a reduced cost relative to owning the underlying stock. LEAPS® also do not experience time decay as quickly as shorter-term options. The longer time frame allows an options investor to create additional strategies with LEAPS® that are not possible with shorter-term options.
Leverage
The use of borrowed capital to increase the return of an investment. Or the use of vehicles like options, which provide financial leverage. The leverage factor is usually calculated by taking the stock price divided by the option price. For example, if the underlying stock is trading for $50 and you purchase a call option for $2, the leverage is $50/$2 = 25. You control stock worth $50 for only $2, so you are leveraging the stock by a factor of 25. Some also examine leverage by taking the strike price of the option divided by the option’s price. If our option is a $60 strike, some consider the leverage as $60/2 = 30. This approach reasons that since you have a right to buy at 60 and paid $2, so the leverage factor has risen from 25 to 30.
Limit Order
An order that guarantees the price but not the execution. If a trader places and order to buy 10 contracts at a limit of $3 (the limit), the only way the order will fill is if it can be filled for $3 or lower. Similarly, if a sell order is placed for $6, the only way it will fill is for $6 or higher. Because of these restrictions, limit orders are not guaranteed to fill.
MACD (Moving Average Convergence Divergence)
A powerful trending indicator consisting of two simple lines. When the lines cross, it can indicate a change in trend. The first (MACD) line is the difference between two exponential moving averages (usually 12 and 26 periods) of closing prices. The second (signal) line is usually a 9-period average of the first (MACD) line. Signals are given when the two lines cross.
Market Order
An order to buy or sell at the best available quote when the trade reaches the floor (or market maker). It is guaranteed to execute because the price is allowed to fluctuate. Also, there is no need to designate "day" or "good-til-cancelled" with a market order because it is sure to fill (unless it is a short sale with no "uptick"). See also Limit Order.
Market Vane
A company based in Pasadena, California, which polls investors each day to determine a percentage who are bullish on the various futures markets, including stocks.
Momentum Divergence
When a new high (low) in Price is not confirmed by a new high (low) in Momentum, this lack of confirmation creates a Momentum Divergence.
Money Management
The process of determining appropriate entry and exit rules to both maximize potential reward and minimize risk. Includes rules on the size of initial positions and increasing or decreasing the size of open positions.
Multiply-Listed
Options
Options for a security which are available for trading on more than one options exchange.
(Nova+OTC)/Ursa
Ratio BigTrends.com tracks asset flows in several key RYDEX funds on a daily basis to measure bullish/bearish sentiment. RYDEX Nova tracks the S&P 500 with a leverage factor of 1.5. OTC tracks the Nasdaq 100 Index 1-to-1. Ursa inversely tracks the S&P 500 1-to-1 (meaning a 10% drop in the S&P 500 should result in a 10% gain if you own the bearish Ursa fund). These assets flows have historically proven to be a useful contrarian indicator at extremes.
Open Interest
The net long and short positions for any option contract. If a trader "buys to open" and another "sells to open," then open interest will increase by the number of contracts. This is because both traders are opening. If one "buys to open" and the other "sells to close," then open interest will remain unchanged. Finally, if one "buys to close" and another "sells to close," then open interest will decrease by the amount of the contracts.
Options Contract
An option contract gives the holder the right to buy or sell a security at a pre-determined price over a limited time period. Investors can use them to generate income, protect an existing investment or leverage new investments with a dramatically reduced outlay of capital compared to purchasing the underlying security.
Out-Of-The-Money
A call option with a strike above and a put option with a strike below the current stock price are said to be out-of-the-money. Also, an option with no intrinsic value is said to be out-of-the-money. For example, if the stock is $100, a $105 call and a $95 put are out-of-the-money. See also In-The-Money and Extrinsic Value.
Premium
The total cost of an option. The option's premium consists of intrinsic value and time value.
ProFunds
A mutual fund family offering leveraged fund trading in both bullish and bearish funds.
PSE
The Pacific Stock Exchange, one of the options exchanges.
Put Option
A contract between two people which gives the owner the right, but not the obligation, to sell stock at a specified price over a given time period. The seller of the put has an obligation to buy the stock if the long put position decides to sell.
Put/Call Ratio
The ratio of volume in put options divided by the volume of call options is used as a contrary indicator. When put buying gets too high relative to call buying (a high put/call ratio), the market is over-sold. A low put/call ratio represents an overbought market condition.
Relative Strength
Calculated by dividing the performance of a stock's price over a period by a market index. Used to determine a stock's performance relative to the market and other stocks.
Resistance
The opposite of support. Resistance is marked by a previous price peak and provides enough of a barrier above the market to halt a price advance.
Reward-to-Risk
A term used by BigTrends.com to define the level of upside compared to the level of down side in your position. Look for Reward-to-Risk ratios of 3-to-1 or higher for the most favorable trading opportunities.
RYDEX
A mutual fund family offering leveraged fund trading in both bullish and bearish funds.
Selling Short
An initial sale of stock by an investor who believes that a stock will go down in price. The investor borrows the stock from a broker, sells it, and eventually hopes to buy it back at a lower price and then return the new shares to the broker. If the stock declines in price between the time the investor sells the shares and buys them back, a profit is realized. If the stock rises in price by the time the investors buys the stock back, a loss is realized.
Sentiment Analysis
The study of sentiment involves indicators focused on measuring investor emotions like fear and greed, in an effort to assess when the crowd has over-reacted in a particular direction. Generally used for contrarian strategies at major market extremes.
Sentiment Survey
A survey of the prevailing bullish or bearish opinions of those surveyed. Generally expressed as a percentage of those surveyed who are bullish or bearish. See American Association of Individual Investors, Consensus Inc., Investors Intelligence, and Market Vane.
Simple Moving Average
A trend-following indicator that works best in a trending environment. Moving averages smooth out price action but operate with a time lag. A simple 10-day moving average of a stock, for example, adds up the last 10 days' closing prices and divides the total by 10. A buy signal is given when the price closes above the average. When two averages are employed, a buy (sell) signal is given when the shorter average crosses above (below) the longer average.
Split
The dividing of a company's shares, creating a greater number of shares, while halving the price per share. The most common is a 2-1 split. Sometimes this creates more opportunities for a buyer, due to being less expensive. Example you own 100 shares at $20 each the invested amount equals $2,000. The company announces they are splitting the shares “2-for-1.” This means the price per share is now $20/2=$10. The 100 shares you own equal 100*2=200 shares now owned. The dollars invested are the same: 200 shares times $10 =$2,000. Companies like to split their growing stocks to keep the perceived cost per share low, which attracts individual investors who want to own more shares at a lower price.
Standard & Poor's 100 Index (S&P 100 - OEX)
The S&P 100 Index (OEX) is a market-capitalization weighted index of 100 large capitalization stocks. Options on the OEX options are traded on the Chicago Board Options Exchange (CBOE).
Stop Order
A limit order that becomes a market order if the stock trades at that limit. For example, say a stock is trading for $10. A trader placing an order to sell the stock at a stop price of $9.50 wants to make the order a market order if the stock trades at $9.50 or lower. Stop orders do not eliminate losses, since a market order will occur at any price below $9.50. The stock could open for trading at $7, and the trade will be exit at this price instead of the $9.50 he expected.
Strike Price
The pre-determined price per share for which underlying stock may be purchased (in the case of a call) or sold (in the case of a put) by the option holder upon exercise of the option contract.
Support
A price area below the current market price, where buying power is sufficient to halt the price decline. A previous reaction low usually forms a support level.
Target
The anticipated profit level at which partial or full profits can be realized on an investment.
Technical Analysis
The study of market action on price charts including the use of volume and other indicators. Also called chart analysis, market analysis and visual analysis.
Time Decay
The steady erosion of the option's value as time passes, as other factors held constant. An option seller will typically prefer to sell short-term options with greater time decay, while option buyers will seek to buy more time to minimize the impact of time decay.
Time Stop
Exiting a position based on a pre-determined number of bars if the position is not profitable by that time. Especially useful for options buyers.
Time Value
The portion of the premium that is based on the amount of time remaining until the expiration date of the option contract, and that the underlying components that determine the value of the option may change during that time. Time value is generally equal to the difference between the premium and the intrinsic value.
Trading Range
The difference between the high and low prices traded during a certain time period. The high end of the range is known as Resistance, while the low end of the range is known as Support.
Trailing Stop
A regularly-adjusted order to sell as stock when the price falls to a specified level. As the price moves up, you keep moving up the stop loss order--trailing it under the share price--to avoid giving up all of your profits if the stock pulls back.
Underlying Security
The security subject to being purchased or sold upon exercise of an option contract. For example, General Electric (GE) stock is the underlying security for GE options.
VIX
The CBOE Volatility Index (VIX) produces an anticipated volatility reading based on the prices of 8 OEX options (4 calls and 4 puts) with an average expiration date of 30 days. A good contrarian indicator, as spikes in fear produce high VIX readings near significant market bottoms.
Volatility
This describes the fluctuations in the price of a stock or other type of security. If the price of a stock is capable of large swings, the stock has a high volatility. The pricing of options contracts depends in part on volatility. A stock with high volatility, for example, commands higher prices in the options market than one with low volatility. Volatility may be gauged by several measures, one of which involves calculating a security's standard deviation.