As part of Traders' Library's continuing efforts to support our customers in their professional development, this comprehensive glossary will provide you with quick, easy access to published definitions and explanations of key trading terms. Whether your interest is Forex, options, trading psychology, Elliott waves, candlesticks, or you’re just looking for general information, you can find it here.
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Action – Defines the type of trade the investor is entering. The standard actions when entering a trade are Buy to Open or Sell to Open. When closing a position, the standard actions are Buy to Close or Sell to Close.
Adaptive Price Zone – The Adaptive Price Zone is a technical indicator that creates bands on a price chart; the majority of price action tends to stay within the upper and lower bands of the zone. When price deviates significantly from its average and crosses out of the zone, there is a tendency for price to push back towards the statistical average.
Add/Pare- This means to add shares to a position that initially moves against your initial entry. It is very important that you are only adding shares, because the wider time frames support your trade via trend support. Add/paring means you are weathering the shorter time frames in support of the wider time frames eventually playing out. When played correctly, the added shares result in a better average cost per share, usually accumulating into a panic. It is critical to decrease the position right into the shorter time frame reversals.
All or None – A type of trade order that can be placed to assure the investor receives all shares or option contracts of a potential trade at a specific price set by the investor. If all shares or option contracts cannot be filled at the specific price, then no shares or option contracts will be traded.
American-Style Option – This kind of option contract may be exercised or assigned at any time between the date of purchase/write and the expiration date. All stock (equity) options and all ETF options (including LEAPS on those) are American style options. Some index options are American style.
AM Settlement - Options whose values are based on an index which is settled or determined based on the aggregate market opening price or the price of the first trade of each component of the index on options expiration day.
Annualized Return – Any return from an investment, calculated as though the position were open for exactly one year (for example, a three– month position’s return would be multiplied by four to annualize; and a two– year position would be divided by two).
Anti-Martingale – Betting System An anti– martingale betting system dictates that traders take greater risks when trading with profits than with initial capital. As the account size grows, so does the bet size.
Ask Price – The price that sellers are trying to get for an equity or option on the open market. The ask price will usually be higher than the last trade price, since most investors are trying to sell at the highest price the market will support. The ask price is the most likely price a buyer will pay for an equity or option when placing a market order.
Ask - The ask is the price a seller is willing to accept for an instrument, and is therefore the price that retail traders will pay to buy an instrument. The ask price is always a little higher than the bid price.
Assignment – The action an option seller encounters when the option buyer exercises their rights and the option seller has to fulfill their obligations. For a short call, assignment occurs when the call seller has to deliver shares of stock; for a short put, assignment occurs when the put seller is forced to buy shares of stock at the strike price.
At-the-Money (ATM) – An option whose strike price is equal to the price of its underlying stock. When the stock price is very close to the strike price, but not equal, it is said to be near– the– money. Near– the– money and at– the– money options tend to have the most time premium.
Average Broker Recommendation – Zacks fundamental research provides data on brokers that rate companies from 1 to 5. 1 is a strong buy, 2 is a buy, 3 is a hold, 4 is a sell and 5 is a strong sell recommendation. The average broker recommendation is the sum of all the recommendations divided by the number of brokers that have an opinion.
Average Trade Net Profit – The average trade net profit is a performance metric that measures the expectancy of a trading plan. This metric represents the average amount of money that was won or lost per trade, and is calculated by dividing the total net profit by the total number of trades.
Average True Range (ATR) – The greatest of the absolute value of the current high less the previous close; or the absolute value of the current low less the previous close. ATR is a formula used to determine an appropriate price to avoid selling too soon or too late.
Backfill – A very short-term and limited price action that partially recovers from a quick price panic. Backfills are usually a second chance to take a stop loss on a trade, as long as the trader is aware that the backfill is temporary.
Back Testing – The practice of using historical data in order to analyze past performance of a particular trading methodology. The SmartHistoryXL tool mentioned in Chapter 4 is a useful tool for back testing options strategies.
Backtesting Application – A backtesting application is a type of software that applies trading systems to historical market conditions and calculates performance characteristics.
Base Currency – The currency in which an issuer or a trader maintains its book of accounts. In the FX market, the U.S. dollar is normally the base currency for quoting purposes. This means that quotes are expressed as a unit of $1 USD per the other currency quoted in the pair. The primary exceptions to this rule are the Australian dollar, the British pound, and the euro.
Bear-Call Credit Spread - A neutral-to-bearish strategy entered by selling an at-the-money or out-of-the-money call option, while at the same time purchasing a deeper out-of-the-money call option with the same expiration date.
Bear Market – A prolonged period during which stock or bond market prices decline sharply and investors develop a growing level of pessimism; the opposite of bull market. Stocks are generally considered to be in a bear market when prices fall by 20 percent or more, with the move usually triggered by expectations of a faltering economy and, as a result, shrinking corporate profits. Although generally shorter in duration than bull markets, a bear market may last months–or even years.
Bear Phase – A cycle for the overall market or a specific security in which prices achieve a new high, then pull back to level below the mean or moving average for the period being tracked before rebounding back to the initial high. Also known as a high–to–high cycle.
Bearish Engulfing - In an uptrend, there is a small white body, not a doji, followed and enclosed by a bigger black body. Though not necessary, it is better when the black body also encloses the short shadows of the white candle. An exceptional occurrence at the end of an uptrend is a black body followed by a bigger white body, which is called a last engulfing pattern.
Bearish Harami - In an uptrend, a black (but preferably a white) body is followed by a small white or black candle that is completely covered by the first candle body. It is a top reversal signal after confirmation. White-black and white-white combinations are the most common.
Beta – A measure of a security’s price sensitivity to changes in the market. Any stock with a higher than market Beta is more volatile than the market, while any stock with a lower Beta can be expected to rise and fall more slowly than the market. The Beta of the S&P 500 is 1; a stock with a beta of 1 could be expected to move with the same volatility as the S&P 500 average.
Bid – The bid is the price that a buyer is willing to pay for an instrument, and is therefore the price that retail traders will receive for selling an instrument. Often referred to as a quotation or quote.The bid price is always a little less than the ask price.
Bid Price – The price that buyers are trying to get for an equity or option on the open market. This price will usually be lower than the last trade price since buyers would like to pay the lowest amount possible for an equity or option. The bid price is the most likely price a seller will collect for an equity or option when placing a market order.
Bid-Ask Spread – The price spread between the bid price (what a seller is most likely to receive) and the ask price (what a buyer is most likely to pay) for an equity or an option. Both sellers and buyers will try to maximize their trades by entering a limit order for a value that is between the bid–ask spread.
Black-Scholes – Fischer Black and Myron Scholes are considered the founding fathers of Quantitative Finance for their groundbreaking work, published in 1973, in deriving a formula for the pricing of options and other corporate liabilities. Not only did their pricing model specify the method for pricing listed stock options, but it also laid the foundation for the pricing of most other derivative financial instruments, leading to substantial growth in their acceptance and use over the past three decades. Specifically, the Black–Scholes option pricing model is designed to value European–style (exercisable only at expiration) put or call options on a stock that does not pay a dividend, assuming the underlying stock price follows a geometric pattern with constant volatility. In practice, rather than deriving the specific price of a given option, which is actually determined by market supply and demand, the model most often is used to compute the implied volatility of the option.
Black-Scholes Model – The Black–Scholes Model is a theoretical pricing model for options developed by Fischer Black and Myron Scholes. It is based on 5 factors: (1) the underlying stock price; (2) the strike price of the option; (3) days remaining to expiration; (4) current interest rates; and (5) the underlying stock volatility.
Black-Scholes Ratio – By comparing an option’s Black–Scholes theoretical value to its current trading price, an investor can assess whether the option might be overvalued or undervalued. The B–S Ratio is calculated by taking the trading price of the option divided by the Black–Scholes theoretical worth for that option. Therefore, a B–S ratio of 1.2 tells us that the option is overvalued by 20 percent. A B–S Ratio of .8 tells us that the option is undervalued by 20 percent.
Bleed (or Pepper) Out- Means to exit a position into the momentum via small size increments as the price moves. It is the same as paring out or scaling out. Traders who do this want to maximize gains while minimizing market impact.
Bollinger Bands – A device employed by technical analysts to measure the volatility of a market or security and determine levels of support and resistance. A moving average of prices is first plotted on a chart, then additional lines, or “bands,” are plotted two standard deviations above and two standard deviations below that moving average. This defines a trading channel, which is wider when volatility is high and narrower when volatility falls. When current prices approach the upper band, the market or stock is assumed to be overbought, and when they near the lower band, they are said to be oversold.
Bracket Order – Bracket orders are multiple orders placed simultaneously in the market using a combination of stop and limit orders. They allow traders to lock in profits (when a profit target is reached) or limit losses (when a stop loss is reached), without having to constantly follow the position.
Breakdown – A bearish move in which prices penetrate a strong level of support, thereby triggering additional sharp declines. Breakdowns often signal a trend reversal and mark the beginning of a prolonged downward move or outright bear market.
Breakout – A bullish move in which prices break through a strong level of resistance, often a prior high or declining trendline, triggering additional advances. Breakouts often signal a reversal from a bearish trend or the end of a consolidation phase, and mark the beginning of a significant rally or outright bull market.
Bucketing – The unauthorized and illegal use of the customer’s margin deposit. Also, it is accepting orders to buy and sell without executing these orders. Company’s accused of this practice will commonly be referred to as Bucket Shops.
Bull Market – A prolonged period during which stock (or bond) prices are rising at an increasing rate amid a climate of growing investor optimism; opposite of a bear market. Bull marekts for stocks are generally triggered by increasing economic activity or falling interest rates, both of which tend to promote rising corporate earnings and profits.
Bull Phase – A cycle for the overall market or a specific security in which prices make a new low, then rally above the mean or moving average for the period being tracked prior to falling back again to a level near the initial low. Also known as a low–to–low cycle.
Bull-Put Credit Spread - A neutral-to-bullish strategy entered by selling a put option at or out-of-the-money, while at the same time purchasing a deeper out-of-the-money put option with the same expiration date.
Bullish Engulfing - In a downtrend, there is a small black body, not a doji, followed and enclosed by a bigger white body. Though not necessary, it is better when the white body also encloses the short shadows of the black candle. An exceptional occurrence at the end of a downtrend is a white body followed by a bigger black body; this is called a last engulfing pattern.
Bullish Harami - In a downtrend, a white (but preferably a black) body is followed by a small white or black candle that is completely covered by the first candle body. This is a bottom reversal signal after confirmation. Black-white and black-black (called homing pigeon) combinations are the most common.
Buy-Fade- Refers to a stock that is moving higher against falling e-minis futures, indexes and or correlated peer stocks within their sector (for example: MS price rising as GS and S/P 500 e-minis are falling in price). Make sure that you are correctly seeing the divergence evidenced in opposing chart patterns as well. A buy-fade will usually result in a stronger price surge once the futures reverse back up.
Call Option – A contract that offers the owner the right, but not the obligation, to purchase stock at the strike price before the expiration date. One option contract gives the right to control 100 shares of the underlying stock until expiration unless the contract otherwise specifies.
Candlestick Charts – A style of chart used by technical analysts to plot security price movements over a given trading period, ranging from 10 minutes to a full trading day. displaying the high, low, opening, and closing price Originated by Japanese rice merchants, candlestick charts are used both to identify price patterns and construct trend lines, showing a stock’s opening price, high, low, and closing price for the specified time period. The graphic used to pictorially depict the prices on the chart is called a candlestick because it resembles an actual candle, with a rectangular vertical box (or “real body”) that connects the opening and closing prices, and “wicks” (or “shadows”) that extend from the rectangles to show the extreme highs and lows. If the stock moves higher for the period, the candle’s body is white, but if the stock closes lower, the candlestick is plotted in black.
Capitalization Ratio – Any ratio that compares equity and debt sources of capitalization. Equity capitalization is the stockholder’s equity (capital stock and retained earnings); and debt capitalization is the company’s long – term debt (bonds and notes).
Channel Breakout – A channel breakout occurs when price breaks out above or below two parallel (or close to parallel) trendlines. The price will often stall at the trendline that it broke out from before making a dynamic move away from the price channel.
Climactic Buy Set-up – A type of trade that looks for stocks on daily charts that have recently experienced climactic declines on big volume, which renders them oversold and overdue for a strong rebound.
Clusters – Also known as Fibonacci clusters, these are technical indicators used to define major levels of support and resistance on longer – term charts showing a number of distinct price movements, either bullish or bearish, and subsequent retracements of those moves. Clusters are usually found on the side of price charts and are represented by horizontal bars with various degrees of shading, with a new bar created each time a retracement overlaps the level of a prior retracement. As more and more overlaps occur, the shading of the bars grows darker, with the darkest bars of the Fibonacci cluster indicating the most significant levels of support and resistance.
Coil Resistance - The static price resistance area on peaks at sticky 2.50 and 5 upper range levels (e.g., 12.60, 45.60) as well as the .30 and .75 default price resistances on price peaks on tier 1 leaders (e.g., AAPL 188.30, 188.75). These 0.30 and 0.75 levels are support when stock is trading above, and resistance when stock is trading below.
Coil Support - The static price support area on pullbacks through the sticky 2.50 or 5 levels (e.g., 12.40, 45.40), as well as the 0.30 and 0.75 default price supports on pullbacks on tier 1 leaders. (e.g., AAPL 186.75 coil support)
Collar Spread Strategy – A neutral to bullish option investment strategy consisting of three legs: long stock, long a put option, and short a call option. The put option acts as insurance for the stock and the premium received from selling the call option lowers the cost of insurance. If the stock rises, the call may be assigned and the shares will be delivered at the call strike price.
Commodity Futures Trading Commission (CFTC) – The independent federal agency established by the U.S. Congress under a major revision of the Commodity Exchange Act. The CFTC has an overall responsibility to regulate the futures industry in the United States.
Commodity Trading Advisor (CTA) – An individual or firm who, for compensation or profit, directly or indirectly advises others as to the value of or the advisability of buying or selling. Providing advice indirectly includes exercising trading authority over a customer’s account, as well as giving advice through written publications or other media.
Conditional Trade Orders – Unlike basic market, limit, or stop orders, a conditional trade order will be automatically submitted or canceled only if specified criteria are met. Conditional trade orders must be specified before placing a trade, and are entered directly through the order entry software.
Confirmation Statement – A written notification sent to a customer indicating that a trade has been executed and summarizing the details of the transaction. It must be sent no later than the business day following the execution.
Confirmation – Having more than one market factor agree with one another, for instance two indicators signaling bullish or bearish moves or an indicator and a chart pattern indicating the same bullish or bearish move.
Conversion Security – Descriptive of a LEAPS option, which may be converted to the purchase or sale of stock; or that will be converted to an option when expiration will occur in less than nine months. This term is used infrequently.
Conversion Spread – A type of collar spread in which the sold call and the long put have the same strike price. If a credit is received, the position can only profit by that amount but can never lose that amount. The profit and loss chart for a conversion spread is a straight line. Because the possibility of any reasonable returns is small, retail investors typically do not trade this strategy.
Correction – A temporary drop in the price of a stock or the overall market that interrupts an extended rise in prices. Unlike bear markets or crashes, corrections typically entail relatively small percentage price moves – 10 percent or less – that occur gradually over a moderate length of time. In strong uptrends, corrections are sometimes considered to be healthy, giving the market time to “catch its breath” before resuming its climb. As such, investors often view corrections as an opportunity to buy at more favorable prices.
Corrective Waves – One of the two basic wave patterns practitioners of the Elliott Wave Principle look for in analyzing stock price trends. Corrective waves move counter to the primary trend, which can be either bullish
Cost of Insurance per Day – The time value of the protective put option expressed against the days remaining until expiration. Protective put options that are far out in time will have a much lower cost of insurance per day.
Counterparty – One of the participants in a financial transaction
Covered Call Strategy – A bullish investment strategy where a call option is sold against shares of stock that are owned to generate a cash income. For more information, refer to Covered Call Help section on the PowerOptions website (www.poweropt.com).
Covered Position – An investment strategy where short call contracts are linked to ownership of an equal number of shares of the underlying security (covered call) or an equal number of purchased call contracts at a different strike (credit or debit spread); or, where short put contracts are linked to an equal number of short stock (covered put) or an equal number of purchased put contracts (credit or debit spread).
Credit Spread – An option investment strategy where an investor receives a credit for selling call or put options while buying an equal or different amount of call or put options on the same underlying security. If an investor sells call options and buys an equal number of call options at a higher strike price and receives a credit, the position is a Bear Call Credit Spread. If an investor sells put options and buys an equal number of put options at a lower strike price, the position is a Bull Put Credit Spread.
Cup-and-Handle Pattern – A series of price movements that trace out a chart pattern resembling a cup, with a downward handle extending to the right. The pattern features a short-term top, followed by a gradual retracement that makes a shallow but extended bottom, leading into a modest rally back to the prior short-term high and then another moderate decline. The pattern is usually considered characteristic of base-building periods.
Current Ratio – A comparison between current assets (cash and liquid assets) and current liabilities (payable over the next 12 months). A standard expectation is a 2 to 1 current ratio (two dollars of assets for every dollar of debt).
Dark Cloud Cover - In an uptrend, a bigger white body is followed by a black body with a higher opening price than the high of the white body; however, the black candle closes below the mid-point of the white body. Confirmation is required.
Day Traders – A trader educated in trading strategies and disciplines. Spends a good part of the day with the market and is trained to manage positions that may last from several minutes to several months.
Dead Cross - A dead cross occurs when a shorter moving average crosses below a longer moving average. This signifies an increase in momentum to the downside and is given the sobriquet of “dead.” [see also golden cross]
Deadzone - The time period usually from 11:30 a.m. to 2:00 p.m. EST where the lightest volume of the day resides. This period usually has a lot of chop on light volume. While deadzone may produce some trending moves, it’s much tougher to find liquidity and solid follow-through consistently during this period. Try to avoid this time period.
Debit Spread – An option investment strategy where an investor pays a debit for selling call or put options while buying an equal or different amount of call or put options on the same underlying security. If an investor sells call options and buys an equal number of call options at a lower strike price and pays a debit, the position is a Bull Call Debit Spread. If an investor sells put options and buys an equal number of put options at a higher strike price, the position is a Bear Put Debit Spread.
Debt Ratio – A percentage derived to demonstrate the level of a company’s dependence on debt versus equity. The total of long-term debts is divided by the sum of long-term debts plus stockholders’ equity to find this ratio.
Delta – Delta is a measure of the sensitivity the option value has to changes in the underlying equity price. For every dollar of movement in the stock price, the price of the option can be expected to move by delta points. Puts have a negative delta. If the delta is -.5 then a one point increase in the underlying equity price will cause the put to lose $0.50 in value. A put option that is deep out-of-the-money (OTM) will have a delta close to zero. A put option that is deep in-the-money (ITM) will have a delta close to -1.
Deviation – A statistical measure of the historical volatility of a security, portfolio of securities or derivative instruments related to those securities. More specifically, the standard deviation of a security is the extent to which its price can be expected to move up or down from its present level during a given period of time. The deviation of a given security can be represented visually by a so-called distribution curve. For example, securities that have a very high standard deviation are evidenced by distribution curves that spread out rapidly from the peak or “mean” (usually the current price), while those that have a low standard deviation have curves that are very tall and narrow.
Diagonal Spread – A spread with options of different strike and expiration.
Distribution – The range of potential prices a security or derivative instrument, such as an option, might be expected to reach over a given period of time. The most likely price outcomes define the so-called “standard deviation,” while more extreme outcomes are measured in multiples of the standard deviation. Prices outside the range of normal expectations, though not impossible, generally are considered to be so unlikely as to be excluded from a so-called “normal distribution.”
Distribution Curve – A visual representation of the range of expected prices for a security or option over a given period of time. In the case of stocks or other perpetually trading securities, the distribution normally takes the shape of a classic bell curve. In other words, it peaks in the middle (at the current price, or “mean”), then follows a uniform curve that becomes flatter and flatter as it moves outward to the extremes on both sides of the mean. Distribution curves for options tend to have an upward bias (for calls) or a downward bias (for puts) because the distribution possibilities on the opposite side are limited by the option’s striking price.
Divergence – Having more than one market factor disagree with each other. The divergence may develop between two price series or a price series and oscillator. Divergences are usually seen as warnings of a trend reversal.
Doji - A doji is a candlestick pattern that occurs when the opening price and closing price are very close together with upper and lower shadows. Dojis are part of many candlestick patterns and dojis with bigger shadows are more important.
Double Bottom – A chart pattern created when a downward trending stock makes a low, rebounds, then falls near the same low and rebounds once again. A double bottom pattern, which resembles a “W,” is viewed by technical analysts as a sign that a stock has tested an important support level and, having made a low, is now poised for a strong upward move. However, a break below the support line created by a double bottom pattern is considered extremely bearish. Opposite of a bearish double top pattern, in which prices movements trace out an “M’ on the chart.
Dow E-mini – An electronically traded futures contract created and administered by the Chicago Board of Trade. The futures price tracks the movements of the Dow Jones Industrial Average, but the contract is valued by multiplying the current DJIA index level by $5–making it one-fifth the size of the standard DJIA future, which is valued by multiplying the index level by $25.
Dow Jones Industrial Average (DJIA) – The oldest continuing U.S. stock market index and the most widely quoted–though not the most representative–indicator of market performance. The DJIA is composed of 30 large, well-known industrial stocks with leadership positions in various market sectors, all of which trade on either the New York Stock Exchange or Nasdaq Stock Market. Created by Wall Street Journal editor and Dow Jones & Co. founder Charles Dow in 1896, the DJIA is a price-weighted average, meaning an $80 stock has more impact on the index than a $25 stock.
Downside Protection – For a covered call strategy, downside protection is the percentage that the stock can drop before the investor is losing money on the transaction. For covered calls it is calculated by dividing the option premium received by the underlying stock price.
Downtrend – A series of declines in the price of a security or the market as a whole. The pattern can be short term, lasting less than a day, or extended, covering days, weeks, or even months. Regardless of the duration, the trend is defined by a series of lower closing prices, as well as a zigzag pattern of successively lower highs and progressively lower lows. An extremely prolonged and severe downtrend–bleeding away 20 percent or more of the market’s value–may be classified as a bear market. Opposite of an uptrend.
Dual Mini Pups or Dual Mini Inverse Pups - Two different time frame charts that both have a mini pup pattern. The key is to use these as a foreshadowing tool and time the trigger for entry on the shorter time frames.
Earnings per Share (EPS) – Corporate earnings expressed on a per – share basis. Net earnings are divided by the average outstanding shares during the year, with the result expressed in dollars and cents.
Earnings per Share Growth – Earnings per share growth is a company’s change in earnings from last year to the estimate for the next year divided by the earnings from last year, expressed as a percent. It is the expected earnings growth from year to year.
Economic Indicator – A government – generated statistic that reflects current economic growth and stability of a country. Such indicators include employment rates, Gross Domestic Product (GDP), inflation, retail sales, etc.
Electronic Communication Network (ECN) – A system that brings together buyers and sellers. One of the downsides to these networks is that there is no guarantee that a trade will be executed, nor at a fair market price. Traders often must wait until the market opens the following day to receive a tighter spread.
Elliott Methodology – A system of analysis of investment market cycles based on Elliott Wave Theory, which was devised in the 1920s by Ralph Nelson Elliott based on social science trends and the study of mass psychology, which was popular at that time. Elliott’s goal was to find an organizing methodology that would explain and predict the otherwise chaotic movement of the stock market. According to his findings, every bullish market cycle–regardless of length–progresses in a price pattern featuring five upward–and three downward–moving waves, although no two patterns are ever exactly alike. In a bear market the dominant trend is downward, so the pattern is reversed–five waves down and three up. Wave Theory has gone in and out of favor numerous times in the years since Elliott’s work, but its popularity has risen somewhat with the advent of more effective computer analysis of pricing patterns.
Ending Diagonal Triangle – Part of the Elliott methodology, this pattern is created by drawing trendlines along a price range that gets narrower over time because of lower tops and higher bottoms, this giving it the shape of a wedge. It is the only pattern in Elliott Wave analysis that is still considered an impulse wave even though it allows an overlap in price movements.
ETF – An acronym for Exchange Traded Fund. Each ETF is a basket of securities that is designed to generally track an index (stock or bond, stock industry sector, or international stock), yet trades like a single stock. The most common are the QQQ, SPY, and DIA.
Evening Star - An evening star is a bigger white body, followed by one or more small black or white bodies with a rising window above the closing price of the first white body. The black candle that follows ideally sits 50% or more within the first white body and has a falling window with the previous candle body.
Exchange Traded Fund (ETF) – A type of mutual fund with a predetermined portfolio, which trades directly between investors and exchange (through brokerage services), just like stocks. ETFs also can be sold short and options can be written on ETFs.
Exercise – The action an option buyer takes to force the option seller to fulfill their obligations. When a call owner exercises his or her contract, the call owner will purchase shares of stock from the call seller. When a put owner exercises his or her contract, the put seller is forced to buy shares of stock.
Exhaustion - A price peaking point resulting in a reversal back to support levels. Countertrend scalps tend to short exhaustion peaks and buy exhaustion bottoms via shooting stars and hammer candles. Exhaustions are simply a reversion back to the mean and initially, counter trend action. Be careful not to overstay an exhaustion trade after the trend support (usually the 5-period moving average) is tested and resumes (usually resulting in a mini pup).
Expectancy – Expectancy expresses the average amount that a trader can expect to win (or lose) per unit of risk. In order for traders to have any chance of making money, their system must have a positive expectancy.
Expiration Date – The date on which an option and the right to exercise it or have it assigned, cease to exist. For most equity options the expiration date is the third Friday of the designated expiration month.
Extrinsic Value – Also called time value, that portion of an option premium excluding intrinsic value. Extrinsic value also includes volatility value, or the variable based on the volatility of the underlying stock; The price of an option less its intrinsic value. An out – of – the money option’s worth consists of nothing but extrinsic or time value.
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