Options Trading 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.

Lookalike Option

An over-the-counter option that is cash settled based on the settlement price of a similar exchange-traded futures contract on a specified trading day.

Exchange Risk Factor

The delta of an option as computed daily by the exchange on which it is traded.

European Option

An option that may be exercised only on the expiration date. See also: American Option, Asian Option.

Back Spread

A delta-neutral ratio spread in which more options are bought than sold. A back spread will be profitable if volatility increases. See also: Delta

Automatic Excercise

Automatic Excercise refers to the action taken by the options clearing firm at expiration when an in-the-money option has not been exercised or canceled.

Options Greeks

In the world of options trading, delta, gamma, vega, and theta are known as the Greeks. The Greeks offer options traders a way to measure the potential risk of a position.

At-the-Money

When an option‘s strike price is the same as the current trading price of the underlying commodity or security, the option is at-the-money.

Asian Option

An exotic option whose payoff depends on the average price of the underlying asset during some portion of the life of the option. See also: American Option

Leaps

Long-dated, exchange-traded options. Stands for “Long-term Equity Anticipation Securities.”