Glossary R

A rise in the price of a stock or the market as a whole. Compare to reaction.

The high and low prices of a stock or option recorded during a specified time.

An option position composed of either all calls or all puts, with long options and short options at two different strike prices. The options are all on the same stock and usually of the same expiration, with more options sold than purchased. A ratio spread is the purchase of an option(s) and the sale of a greater number of the same type of options that are out-of-the-money with respect to the one(s) purchased. For example, a 50/60 call 1-by-2 ratio spread is long 1*50 call and short 2*60 calls. Please note that multiple-leg option strategies such as this can entail substantial transaction costs, including multiple commissions, which may impact any potential return.

A decline in price of a stock or the market as a whole following a rise. Compare to rally.

The profit or loss incurred in an account when a closing trade on a stock or option is made and matched with an open position in the same stock or option.

The date by which someone must be registered as a shareholder of a company in order to receive a declared dividend. Compare to ex-dividend date and payment date.

An employee of a brokerage firm who has passed the FINRA Series 4 exam, which provides in-depth knowledge related to options. The registered options principal is an officer or partner in a brokerage firm who approves client accounts in writing.

An employee of a brokerage firm who has passed the FINRA Series 7 and Series 63 exam.

The regulation, established by the Federal Reserve Board, governing the amount of credit that brokers and dealers may give to clients to purchase securities. It determines the initial margin requirements and defines eligible, ineligible, and exempt securities.

The practice of pledging a client's securities as collateral for a bank loan. A brokerage firm may rehypothecate up to 140% of the loan amount to a client to finance margin loans to clients.

An order that is not executed because it is invalid or unacceptable in some way.

A margin account in which the equity is less than the REG T initial requirement. A restricted account with TD Ameritrade will be restricted to closing transactions only.

The system utilized by the CBOE to execute option market and executable limit orders for retail clients received by the exchange's ORS. Retail option orders executed via the RAES system are filled instantaneously at the prevailing market quote and are confirmed almost immediately to the originating firm.

The percentage of the mark compared to the buying power of an option position. Since the buying power effect is capital that is made unavailable by the trade, the return on capital could be viewed as the amount of return expected on a sale of the position for cash. Not annualized.
Return on capital = mark / margin req.

The percentage of the mark compared to the potential loss of an option position. Since most spread types have defined risk that is equal to the buying power, this number will often be the same as “return on capital”. Not annualized.
Return on risk = max risk.

When a stock's direction of price movement stops and heads in the opposite direction.

A position of short stock, long a call, and short a put (with the call and put having the same strike price, expiration date, and underlying stock). The long call and short put acts very much like long stock, thus acting as a hedge to the short stock. So, a reversal has a very small delta. A reversal is a strategy designed to exploit mispricing’s in carrying costs. Please note that multiple-leg option strategies such as this can entail substantial transaction costs, including multiple commissions, which may impact any potential return.

An action taken by a corporation in which the number of outstanding shares is reduced and the price per share increases. For example, if a trader were long 100 shares of stock of a company with a price of $80, and that company instituted a 1-for-4 reverse split, the trader would see his position become long 25 shares of stock with a price of $320. The value of the trader's position does not change (unless the price of the stock subsequently changes) and his proportionate ownership in the company remains the same. Compare to stock split.

An instantaneous measurement of the price sensitivity of an option relative to a change in interest rates when all other factors are held constant. This is typically expressed in the amount of money per option, per one-percent (100 basis point) change in interest rates. Rho is dependent upon the stock price, strike price, volatility, interest rates, dividends, and time to expiration.

An option spread position composed of both calls and puts. The options are all on the same stock and strike price, but on two expirations. The roll is long synthetic stock (long call, short put) at one expiration and short synthetic stock (short call, long put) at another expiration. The quantity of long options and the quantity of short options net to zero. For example, short the SEP/DEC 70 roll is long 1 September 70 call, short 1 September 70 put, short 1 December 70 call, and long 1 December 70 put. The roll is usually executed when someone wishes to roll from a hedge in an expiring month to a hedge in a deferred month for added time. Please note that multiple-leg option strategies such as this can entail substantial transaction costs, including multiple commissions, which may impact any potential return.

Adjusting or changing a position by closing out an existing option position and substituting it with an option on the same stock but with a different strike price or expiration date.

A standard quantity of trading. For example, in U.S. equities, a round lot is 100 shares of stock.