Options Definitions

Conversion

A position created by selling a call option, buying a put option, and buying the underlying instrument (for example, a futures contract), where the options have the same strike price and the same expiration. See also: Reverse Conversion.

Pegging

Effecting transactions in an instrument underlying an option to prevent a decline in the price of the instrument shortly prior to the option’s expiration date so that previously written put options will expire worthless, thus protecting premiums previously recei

Zeta

Zeta refers to the percentage change in an options price, per 1% change in implied volatility.

Commodity Option

An option on a commodity or a futures contract.

Path Dependent Option

An option whose valuation and payoff depends on the realized price path of the underlying asset, such as an Asian Option or a Lookback Option.

Parity

The state of an option at the time of expiration – when the premium reflects intrinsic value and no time value.

Zero Beta Portfolio

A portfolio designed to have a beta of zero, meaning a systematic risk of zero. See also: Beta

Combination

Puts and calls held either long or short with different strike prices and/or expirations. Types of combinations include straddles and strangles.

Out-Of-The-Money

A term used to describe an option that has no intrinsic value.

Option Writer

The person who originates an option contract by promising to perform a certain obligation in return for the price or premium of the option. Also known as Option Grantor or Option Seller.