Technical analysis: A method of predicting future stock price movements based on the study of historical market data such as (among others) the prices themselves, trading volume, open interest, the relation of advancing issues to declining issues, and short selling volume.
Technical analysis: Technical analysis uses charts to examine changes in price patterns, volume of trading, open interest, and rates of change to predict and profit from trends. Someone who follows technical rules (called a technician) believes that prices will anticipate changes in fundamentals.
Technician: One who uses technical analysis to forecast price movements.
Terms: The components, elements, or parts of an agreement. The “terms” of a futures contract include: which commodity, its quality, the quantity, the time and place of delivery, and its price. All the terms of futures and futures option contracts are standardized by the exchange, except for price, which is determined through “open-outcry” in the exchanges’ trading pits.
The simultaneous writing of one put option with a higher strike price and the purchase of another put option with a lower strike price. Example: writing 1 XYZ May 60 put, and buying 1 XYZ May 55 put.
Theoretical option pricing model: The first widely-used model for option pricing. This formula can be used to calculate a theoretical value for an option using current stock prices, expected dividends, the option’s strike price, expected interest rates, time to expiration and expected stock volatility. While the Black-Scholes model does not perfectly describe real-world options markets, it is still often used in the valuation and trading of options.
Theoretical value: The estimated value of an option derived from a mathematical model. See also Model and Black-Scholes formula
Theta: A measure of the rate of change in an option’s theoretical value for a one-unit change in time to the option’s expiration date. See also Time decay
Tick: The smallest unit price change allowed in trading a security. For listed stock, this is generally 1/8th of a point. For a listed option under $3 in price, this is generally 1/16th of a point. For a listed option over $3, this is generally 1/8th of a point.
Tick: The minimum allowable price fluctuation (up or down) for a futures contract. Different contracts have different size ticks. Ticks can be stated in terms of price per unit of measure, or in dollars and cents. See also Point .
Time decay: A term used to describe how the theoretical value of an option ‘erodes’ or reduces with the passage of time. Time decay is specifically quantified by theta.
Time spread: An option strategy which generally involves the purchase of a farther-term option (call or put) and the writing of an equal number of nearer-term options of the same type and strike price. Example: buying 1 XYZ May 60 call (far-term portion of the spread) and writing 1 XYZ March 60 call (near-term portion of the spread). Also known as calendar spread or horizontal spread.
Time value: The part of an option’s total price that exceeds its intrinsic value. The price of an out-of-the-money option consists entirely of time value.
Time value: The premium of an out-of-the money option reflecting the probability that an option will move into-the-money before expiration constitutes the time value of the option. There also may be some time value in the premium of an in-the-money option, which reflects the probability of the option moving further into the money. To determine the time value of an in-the-money option, subtract the amount by which the option is in-the-money (intrinsic value) from the total premium.
Today, equity options expire on a hybrid cycle which involves a total of four option series: the two nearest-term calendar months and the next two months from the traditional cycle to which that class of options has been assigned. For example, on January 1, a stock in the January cycle will be trading options expiring in these months: January, February, April, and July. After the January expiration, the months outstanding will be February, March, April and July.
- Any investor who makes frequent purchases and sales.
- A member of an exchange who conducts his or her buying and selling on the trading floor of the exchange.
Trading crowd: a group of traders and brokers occupying a specific location on the trading floor of an exchange designated for the trading of a specific option class or stock.
Trading pit: A specific location on the trading floor of an exchange designated for the trading of a specific option class or stock.
Trading range: The prices between the high and the low for a specific time period (day, week, life of the contract).
Transaction costs: All of the charges associated with executing a trade and maintaining a position. These include brokerage commissions, fees for exercise and/or assignment, exchange fees, SEC fees, and margin interest. In academic studies, the spread between bid and ask is taken into account as a transaction cost.
Trend: A significant price movement in one direction or another. Trends may go either up or down.
Type of options: The classification of an option contract as either a put or a call.