Options Definitions

Front Spread

A delta-neutral ratio spread in which more options are sold than bought. Also called Ratio Vertical Spread. A front spread will increase in value if volatility decreases.

Put-Call Ratio

The Put-Call Ratio shows the ratio of trading volume in put options versus call options and is used to measure the mood of market participants. See also: Sentiment Indicators

Put

An option contract that gives the holder the right but not the obligation to sell a specified quantity of a particular commodity or other interest at a given price (the “strike price“) prior to or on a future date.

Cross-Hedge

Hedging a cash market position in a futures or option contract for a different but price-related commodity.

Credit Spread Option

An option whose payoff is based on the credit spread between the debt of a particular borrower and similar maturity Treasury debt.

Prompt Date

The date on which the buyer of an option will buy or sell the underlying commodity (or futures contract) if the option is exercised.

Premium

(1) The payment an option buyer makes to the option writer for granting an option contract; (2) the amount a price would be increased to purchase a better quality commodity; (3) refers to a futures delivery month selling at a higher price than another, as in July

Cox-Ross-Rubinstein Option Pricing Model

An option pricing model developed by John Cox, Stephen Ross, and Mark Rubinstein that can be adopted to include effects not included in the Black-Scholes Model (e.g., early exercise and price supports).

Covered Option

A short call or put option position that is covered by the sale or purchase of the underlying futures contract or other underlying instrument. For example, in the case of options on futures contracts, a covered call is a short call position combined with

Covered Call

A covered call is a call that creates an open short position while the seller is also long 100 shares of stock for each call sold.