Glossary

At The Money Options (ATM)

At the money, the strike price of the underlying stock is equal to or very close to the option’s strike price. At the money option, contracts have no intrinsic value but only time value. At the money, the option can quickly move into profit or loss with small price changes.

Backwardation

Backwardation is a market condition where the spot price of the underlying asset is higher than its futures price. It typically occurs when there is greater demand for the asset in the present compared to contracts expiring in the future.

Bear Call Spread

A Bear Call Spread, also known as a Short Call Spread or Call Credit Spread, is an options strategy that profits when the underlying asset's price declines or remains below the short call's strike price.

Bull Calendar Spread

A bull calendar spread is an options trading strategy that involves buying and selling call options with the same strike price but different expiration dates, where the longer-dated option is purchased, and the shorter-dated option is sold.

Call Option

A call option is a financial contract that gives the buyer the right, but not the obligation, to buy an underlying asset such as a stock or index at a fixed price before a specified expiry date. Traders usually buy call options when they expect the price of the asset to rise.

Contango

Contango is a market condition where the futures price of a commodity is higher than its current spot price. It often happens when traders expect the price of the commodity to rise in the future after factoring in costs like storage, insurance, and interest.

Cost of Carry

Cost of carry is the extra money you pay to keep an investment instead of selling it immediately. This includes expenses like financing costs, storage costs in holding the asset, and interest on loans used to invest.

Counterparty Risk

Counterparty risk is the risk that the other person or party in a financial deal might not keep their promise, like not paying or not delivering what they agreed to.

Credit Default Swap (CDS)

A Credit Default Swap (CDS) is a financial derivative where one party transfers the risk of a borrower defaulting to another party in exchange for periodic payments, providing protection against credit losses on bonds or loans.

Currency Swap

A Currency swap is a financial agreement between two parties to exchange interest payments and principal amounts in different currencies over a set period of time.

Delta Neutral

Delta neutral is a portfolio or trading strategy where the overall delta of the position is zero, meaning the portfolio's value does not change with small movements in the underlying asset's price.

Delta in Option

Delta is an option Greek that helps traders understand how much the price of an option is likely to change when the underlying stock price moves at specific points.

Derivative Markets

Derivative Markets are financial markets where derivative instruments, such as futures, options, swaps, and forwards, are traded. These instruments derive their value from an underlying asset, such as stocks, commodities, currencies, interest rates, or indices.

Derivatives

Derivatives are financial contracts that derive their value from the underlying asset or security, like stocks, commodities, or interest rates. These financial contracts are mutual agreements between two or more parties that can be traded on the exchanges or over the counter(OTC).

Exposure Margin

Exposure margin is a type of margin that brokers charge to help protect against market fluctuations and potential losses in futures and options (F&O) trading. It is often referred to as an additional margin.

Extrinsic Value

Extrinsic value is the portion of the option price that exceeds its intrinsic value and is attributed to external factors like time and volatility. Extrinsic value affects the cost of the option.

Forward Contract

A forward contract is a customised agreement between two parties to buy or sell an asset at a predetermined price on a future date. Forward contracts can mutually decide prices, quantities, and delivery dates, and they are traded over the counter (OTC).

Future Contracts

A futures contract is a standardised legal agreement to buy or sell a specific asset, such as commodities, currencies, or financial instruments, at a predetermined price on a specified future date.

Futures

A future is a type of mutual agreement between two parties where they decide to buy or sell a particular asset security at a predetermined price on a future date. It is widely used in financial markets for hedging against price fluctuations and for speculative trading to profit from price movements.

Futures Expiration and Contract

Futures expiration is the date on which a futures contract officially ends or expires. After this date, the contract is no longer valid for trading. After the futures contract expiration, the contract closes through cash or delivery.