Option trading glossary D – K


Read A – C Here

Day order

An order that will be automatically cancelled if it can not be executed that day.

Deferred month or months

The deferred month or months is the latter month or months of a futures contract.

Example: For a newly created three-month future, month two and month three are the deferred months. Once we have reached the second month, only the third month is a deferred month.

Deferred strike option

This is an option where the strike price will be established at a future date, using a method outlined in the option’s term sheet.

Delivery

In finance, delivery is when the underlying asset of a contract is tendered and received by the contract holder. Options, forwards and futures are all examples of contracts for which delivery of the underlying can occur.

Delivery month

In finance, delivery month is the calender month in which delivery of the underlying is to be made for a contract, e.g. for an option.

Delivery day

In finance, delivery day is the date on which delivery of the underlying is to be made for a contract, e.g. for an option. The contract expires on the delivery date.

Delta

The fourth letter of the Greek alphabet is called delta. In finance, delta is used as a symbol for the relationship between the market value change of an option and the market value change of the underlying.

Derivatives

In finance, derivatives are contracts that derive their value from the value or performance of an underlying asset, instrument, index, interest rate, etc. The underlying can even be another derivative.

Examples of frequently traded derivatives are options, futures contracts, forwards and swaps. Many derivatives are traded over-the-counter, but there are also exchange-traded derivatives.

Dynamic hedging

This is a risk management strategy where an asset is hedged by the selling of futures in a way that causes the position to be adjusted frequently. The idea is to swiftly act upon any changes in the balance between the hedged asset and the futures contract.

Exercise

When you use your call option to buy the underlying, or use your put option to sell the underlying, you are exercising your option.

Exercise price

For an option, the exercise price is synonymous with the strike price.

The strike price / exercise price is the price for which the underlying asset or instrument may be purchased (call option) or sold (put option) by the option holder.

Expiration date

An option expires on its expiration date. Once it has expired, it is worthless since it can no longer be exercised.

Financial Futures Contracts

These are futures contracts where the underlying asset is financial. The asset can for instance be a bond or currency. Several subcategories of financial futures exist.

Foreign Currency Future Contracts

These are futures contracts where the underlying asset is foreign currency.

Forward contract

A forward contract is a contract where two parties commit to exchanging an underlying asset on a set future date for a pre-determined price (the delivery price). The future contract is binding for both parties.

Gamma

The third letter of the Greek alphabet is called gamma. In finance, this letter is used as a symbol for the rate of change for delta with respect to the underlying asset’s price.

Gamma is typically utilized by traders to gauge the price movements of an option in relation to how much in the money or out of the money the option is. A small gamma = the option is deep in the money or deep out of the money.

Gamma is the first derivative of delta.

Good Till Cancelled (G.T.C.) order

This is an order that will remain in effect until it is manually cancelled. It can therefore remain active for a long time until market conditions makes it possible to execute it.

Hedge

In finance, a hedge is an investment position held specifically to offset potential losses or gains that may be incurred by a companion investment. Options and other derivatives are frequently used for hedging.

Hedge ratio

The term hedge ratio is used for two different things:

  1. The ratio between the value of purchased or sold future contracts and the value of the hedged cash commodity.
  2. The ratio between the value of the hedged position and the size of the entire position. (The hedged position is the position that is protected via hedge.)

Intrinsic value

For an option, the intrinsic value is the profit (if any) that would be gained if the option was exercised now.

Read the next part of the glossary here