Finance Dictionary S – Z


What does Settlement Price mean?

In derivative markets, the settlement price is the average price at which a contract trades during a predetermined period of the day.

Example: At the Chicago Mercantile Exchange, the settlement price for an equity is determined by a volume weighted average of trading activity carried out in the pit during the period 15:14:30 – 15:15:00 CDT (Central Daylight Time).

Uses:

  • In derivative markets, the settlement price is the price used for determining profit or loss for the day.
  • The settlement price is also important when determining margin requirements.

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What does Short Position mean?

  1. When you sell short, you are selling a borrowed asset (such as security, commodity or currency). You are hoping that the asset will drop in value before you need to return it to the owner, and that you will make a profit this way.

Until you have returned the borrowed asset, you have a short position open.

Example: You borrow 100 shares in Merck from your broker when they are worth $100 a piece. You immediately sell them for $100 x 100 = $10,000.

When it is time to return the 100 shares to your broker, the market price for Merck shares is only $95. You purchase 100 shares for $9,500 and return them to your broker. If we disregard any transaction costs, you have made a $500 profit.

Having a short position open is very risky, since there is (at least not in theory) any limit to how much money you can lose. Let’s revisit the example above. If the Merck shares had not dropped in value but instead increased, this would have caused a loss for you.

Example: It is time for you to return the 100 shares to your broker, and the market price for Merck has skyrocketed up to $700 a share. Purchasing 100 shares costs you $70,000. Your net loss is $60,000.

  1. In the context of options, the writing of an options contract places the writer in a short position. The writer will remain in a short position until the options contract has been exercised or expired.

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What does Short Hedge mean?

A short hedge is a hedging that involves a shorted security (usually a derivatives contract) that hedges the investor against potential losses incurred by a specific long investment. The aim of the short hedging is to mitigate a risk that has already been taken (the long investment). The idea is to let gains in the short position offset losses in the long position and vice versa.

Short hedging is often carried out in the agriculture business, where producers want to hedge themselves against a potential low price on their future produce.

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What does Short Sale mean?

See Short Position

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What does SMS loan mean?

A SMS loan is a type of quick loan that is popular in parts of Europe. Especially in Scandinavia. It is a type of loan that you could apply for by text message. Today you usually apply through internet.  You can read more about this type of loan by visiting smslån.org.

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What does Speculator mean?

A speculator is an investor who buys or sells in the hope of profiting from future price changes. A speculator can for instance trade in financial instruments, commodities, fine art, or real estate. It is common for speculators to pay little attention to fundamental value and to be willing to take large risks in exchange for potentially large returns.

When it comes to financial instruments, the term speculator is normally used for someone who trades in financial instruments hoping to make a profit from market fluctuations rather than trying to profit from underlying financial attributes embodied in the instruments (dividends, interest, etc).

Actors in the financial markets are typically divided into four categories: investors, speculators, arbitrageurs and hedgers. (It is possible for an individual or legal entity to belong to more than one category.) Investors aim to make a profit through long-term ownership of an instrument’s underlying attributes, speculators aim to make a profit through price changes that may or may not have anything to do with the instrument’s underlying attributes, arbitrageurs aim to make a profit by exploiting price differences between markets, and hedgers aim to offset pre-existing risk.

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What does Spot Market mean?

  1. A market where assets are sold for cash and delivered immediately. The assets can be physical products like commodities (sugar, tea, coffee beans, aluminum, crude oil, and so on) or securities such as stocks, bonds, options, futures, etc.
  2. A futures transaction where the commodities are expected to be delivered within a month. Crude oil is an example of a commodity that is frequently sold on this type of spot market.

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What does Spot Price mean?

The current price of an asset on the spot market.

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What does Spread (Bear) mean?

Bear spread is an options strategy where the investor aims to make maximum profit when the price of the underlying security drops. You carry out this strategy by simultaneously purchasing and selling identical or closely related futures contracts with the same expiration date but with different strike prices.

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What does Spread (Bear -Call) mean?

A bear call spread is an options strategy where you simultaneously write a call option with a lower strike price and buy a call option with a higher strike price. This options strategy is typically utilized when the investor expects the underlying asset to drop in price.

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What does Spread (Bear – Put) mean?

A bear put spread is an options strategy where you simultaneously write a put option with a lower strike price and buy a put option with a higher strike price. This options strategy is typically utilized when the investor expects the underlying asset to drop in price.

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What does Spread (Bid – Offer) mean?

The difference in price/points between the Bid (buyers) and Offer (sellers) on a quote.

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What does Spread (Bull – Call) mean?

A bull call spread is an options strategy where you simultaneously write a call option with a higher strike price and buy a call option with a lower strike price. This options strategy is typically utilized when the investor expects a moderate price increase for the underlying asset.

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What does Spread (Bull – Put) mean?

A bull call spread is an options strategy where you simultaneously write a put option with a higher strike price and buy a put option with a lower strike price. This options strategy is typically utilized when the investor expects a moderate price increase for the underlying asset.

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What does Spread (Calendar) mean?

This options strategy will typically involve the purchase of a farther-term call or put option and the simultaneous writing of a nearer-term option of the same type as the farther-term option and with the same strike price.

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What does Spread (Debit) mean?

Two options with different market prices that the investor trades on the same underlying security. The investor purchase the higher price option while simultaneously selling the lower priced option.

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What does Spread (Options or Futures) mean?

This is an options or futures transaction consisting of a short position in one contract and a long position on another (similar) contract.

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What does Spread Delta mean?

A measure of how sensitive a spread is to a price change in the underlying.

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What does Stock Index Future mean?

A stock index future is a futures contract on a stock index.

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What does Straddle mean?

This is an options transaction where the investor is in a long position in a put and a call at the same time. The exercise price and the expiration is the same for both the put and the call.

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What does Strangle mean?

A strangle consists of a long put and a long call, where the exercise price of the long call is higher than the exercise price of the long put.

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What does Strap mean?

A strap is an options transaction consisting of two calls and one put – all long and all with the same exercise price and expiration.

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What does Strike Price mean?

See exercise price.

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What does Strip mean?

A strip is an options transaction consisting of two puts and one call – all long and all with the same exercise price and expiration.

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What does Swaps mean?

Swaps are forward contracts where the owners of the contracts agree to exchange one type of asset or cash flow for another, in accordance with the specific rules outlined in the contracts.

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What does Synthetics mean?

In finance, synthetics are customized hybrid instruments where a an underlying bond or note has been amalgamated with an options contract or futures contract.

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What does Synthetic futures mean?

Synthetic futures are instruments formed by combining a long call and a short put that replicates the price behavior of a long futures contract.

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What does Theta mean?

Theta is the eight letter in the Greek alphabet. In finance, theta represents the lost-value rate of an option over time (i.e. time value decay).

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What does Tick mean?

In an organized market, a tick is the minimum permissible price fluctuation.

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What does Time Value Decay mean?

See theta.

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What does Traded Options mean?

Traded options are options contracts that are being traded on an exchange.

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What does Uncovered Call mean?

If you write an option without owning the underlying, you are doing an uncovered call.

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What does Underlying mean?

The asset on which a futures or option is written.

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What does Warrant mean?

A warrant is a security that can be converted into a specified number of shares of a stock. It is thus a type of call option.

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What does Writer mean?

The individual or legal entity that creates an options contract, and is obligated to honor that options contract.