Finance Dictionary N – P


What does Naked Call mean?

A naked call is an options strategy were the writer (seller) sells a call option without owning the underlying asset. The opposite of a naked call is a covered call, where the writer (seller) owns the options underlying asset.

Uncovered call and short call are both synonyms to naked call.

Doing a naked call is very risky, since the underlying asset might change significantly in value. Exchanges, brokers and clearinghouses will normally require very a large margin (deposit) from the investor who wish to do a naked call.

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What does Offset mean?

To reduce your net position in an investment to zero. After the offset, you will not experience any more gains nor losses from that position.

When it comes to futures, the offset of an investment is typically carried out by entering into an equivalent, but opposite, transaction and thereby eliminating the obligation to deliver. The practice of offsetting futures contracts is widespread and almost all futures contracts are offset before delivery day.

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What does Closing Offset Order mean?

This is an order for the purchase or sale of a security in order to offset an imbalance very near market close. When NYSE introduced the concept of a closing offset order, it was to help traders who need to buy or sell at closing prices.

On the New York Stock Exchange (NYSE), an offset order must contain a limit price and have a round lot quantity. For legitimate errors, you are allowed to cancel or reduce your closing offset order until 15:45.

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What does Open Interest mean?

  1. The total number of options and futures contracts that are not closed or delivered on a particular day.
  2. The number of purchase market order before the opening of the stock market on a particular day.

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What does Open Outcry mean?

Open Outcry is a traditional execution process where humans physically present at the exchange communicate bids and offers by using voice and hand signals. Voice and hand signals can also be used to convey other types of trading information.

In its most basic form, open outcry consists of one trader in the trading pit signaling that they want to sell at a certain price and another trader in the same trading pit responds that they are willing to buy at that price.

Today, most exchanges have switched over to electronic trading systems that does not rely on voice or hand signals.

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What does Option mean?

In finance, an option is an instrument that gives its owner the right, but not the obligation, to carry out a certain transaction on or before a specified date.

A call option is a financial contract that gives the owner the right to buy a specified amount of a certain asset at a specified price within or by a specified time period. If the owner has the right to sell instead of buying, the option is a put option.

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What does Option Premium mean?

  1. The current price of a specific option contract.

For stock options, the price is normally expressed as USD per share, and one option contract representing the commitment of one hundred shares is common. In such cases, you need to multiply the quoted option premium with 100 to get the price of the option contract.

  1. The income received by the writer (creator) of an option contract.

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What does OTC (Over The Counter) Derivatives mean?

OTC derivatives are derivative that are traded over the counter instead of being traded on an exchange.

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What does Physical Delivery mean?

Physical delivery is when a contract, such as an options contract, is settled by the delivery of the underlying asset.

Today, physical delivery is quite unusual. Most options contracts and similar are traded out with offsetting contracts. The area where actual physical delivery is most common is when dealing with commodities.

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What does Pit mean?

The trading pit is an area on the trading floor of an exchange designated for trading using voice and hand signals. The traders (brokers) are physically present in the trading pit, where they act based on their clients buy and sell orders. Clerks will receive orders from the clients and runners will transmit the orders to the traders.

Today, electronic trading has largely replaced the traditional trading pit.

Traditional trading pits are octagon in shape, with several tiers to improve visibility. In addition to voice and hand signals, jacket colors and badges worn by the traders were an important source of information since they showed each trader’s brokerage affiliation.

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What does Position mean?

  1. Amount of owned security (long position).
  2. Amount of borrowed security (short position).

Example:

  • Investor XYZ bough 150 shares in Pfizer. He now has a long position in Pfizer.
  • Investor XYZ closed his entire position in Pfizer and made a $2 million profit. He didn’t want to hold that position open anymore because he thinks the price Pfizer shares is about to drop soon.
  • Investor XYZ sold shares in Pfizer short in January by borrowing from his broker. When he closed the position in March, he made a $1 million profit because by then the price of shares in Pfizer had dropped considerably.

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What does Position Limit mean?

The position limit stipulates the highest number of options of futures contracts that an investor is permitted to hold on one underlying security. The position limit can be set by legislators or other regulatory bodies, or by exchanges and similar. The position limit will typically be set based on both trading volume and underlying share quantity.

The main objective of position limits is to help maintain a stable and fair market.

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What does Position Trader mean?

Anyone who trades in long or short positions could be referred to as a position trader, but the term is usually reserved for traders that hold on to positions for a few months or longer. They are long-term traders focusing on long-term trends and expectations rather than short-term fluctuations.

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What does Put Option mean?

In finance, a put option gives the owner the right, but not the obligation, to sell a specific asset at a specified price by a predetermined date to the writer of the put option.

  • The creator (original seller) of an option is called the writer or seller of the put. The writer is the one who has the obligation to buy the asset for the specified price by the predetermined date if the owner of the put option wants to sell, i.e if the owner of the put option chooses to exercise the put option.
  • The asset is called the underlying, since it is the option’s underlying asset.
  • The predetermined date is the maturity date / expiry date of the option. After the maturity date / expiry date the option becomes worthless.
  • The specified price is called the strike price.

There are several types of put options. Three of the most common types are European option, American option and Bermudan option. A European option can be exercised only at the option’s expiry date. An American option can be exercised at any time up until the option’s expiry date. A Bermuda option can be exercised only on specified dates listed in the option contract.