Russell A. Stultz - The Option Strategy Desk Reference: An Essential Reference for Option Traders

Thanks to the many members of the North Texas Investment Strategies Club who regularly critique option, futures, and forex strategies that are described in the clubs monthly investment and trading strategy presentations. In particular, I wish to thank long-time, professional option traders and instructors Mo Fatemi, Mark Armstrong, and Michael Marquardt. My thanks to Dr. Donald Pearson, MD, who became an active options trader after reading the first draft of my first options book. Don used my trading rules and setups, chose several strategies, and proved the value of my book within a matter of weeks. Thank you, Don!

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Russell A. Stultz has been writing technology, management, and investment books for several years, many distributed in 18 languages. This is his 59th book and third options book. The second edition of his highly successful The Only Options Book Youll Ever Need will be released in early 2019.

Stultz worked in the electronics industry including Dallas-based Texas Instruments Incorporated while attending St. Petersburg Junior College, the University of Texas at Arlington, and the University of Texas at Austin. While at TI, he worked as a technical writer, instructional designer, and manager. He wrote several management and technology books for Prentice-Hall, Inc.s college textbook and trade divisions. He founded Wordware Publishing, Inc., a successful three-division, fully staffed book and software publishing company, and served as Wordwares CEO for 27 years. Wordware was sold in 2009. Russell took formal trading courses from the Online Trading Academy and TD Ameritrades Investools educational division. He became a full-time market trader specializing in options and futures. He founded the 450-member North Texas Investment Strategies Club to network with other regional market traders.

Alert . A trader-established notification based on a preset value sent to inform the trader by e-mail and/or text messaging when a specified condition occurs. For example, if the price of the underlying security pierces an established price, the trader receives an alert for either information or in order to take action.

Ask Price . The buying price, or option premium, in dollars and cents, to be paid for each share of the underlying optionable security within an option contract (most often 100 shares per option contract). When trading shares of stock, ask is used to sell and bid is used to buy.

At the money ( ATM ). An option strike price (or exercise price) that is closest to the current price of the underlying optionable security.

Backwardation (or Normal Backwardation) . See Contango.

Base or Basing . A term used to describe a sideways movement on a price chart. Rally, base, and drop describe a sequence of upward, sideways, and downward price moves.

Bearish . A negative bias held by a trader who expects a security or market to decline in value.

Bearish Spread . An option spread designed to be profitable if the underlying security declines in price. A common bearish spread consists of buying an in-the-money put and selling an out-of-the money put. This is called a bear put spread .

Beta . A measure of how closely the movement of the market price of a stock corresponds to the movement of the financial index to which it belongs. For example, the beta value of AAPL stock is a comparison to its market price volatility to that of the S&P 500 financial index.

Bid Price . Option sell orders are initiated using the Bid cell on the selected strike price row of an option chain. The default price is the Mark, which is midway between the Bid and Ask prices.

Bid-to-Ask Spread . The difference in price between the Bid and Ask values on an option chain. An option chains Mark value is midway between the Bid and Ask values. Narrow bid-to-ask spreads reflect brisk trading activity and minimize slippage in the premium paid or received for a trade.

Bracketed Trade . A trade that includes a limit entry, a protective stop, and a profit target. Typically used when buying shares of stock or exchange-traded funds (ETFs).

Breakout . As applied to market price, a breakout refers to a strong price rally or drop. Traders look for entry opportunities when their analysis signals a possible price breakout.

Brokerage Account . An account held by the client of a brokerage firm that includes securities and cash. The value of the account may be used as collateral (or margin ) to finance the purchase of stocks, options, futures contracts, and other marketable securities.

Bullish . A positive bias held by a trader who expects a security or market to increase in value.

Bullish Spread . An option spread designed to be profitable if the underlying security rises in price. A common bullish spread consists of buying an at-the-money call and selling an out-of-the money call. This spread is called a bull call spread .

Buy-to-Close Order . A buy order placed by an option trader who originally sold one or more option contracts. The buy-to-close order requires the option trader to pay premium to close an active position.

Calendar ( or Time Spread ). An option spread created by selling one option and buying another on the same security. The option sold expires sooner than the option bought. This spread is named calendar spread because the two contracts have different expiration dates. The goal of a calendar spread is to receive more income from the sold option compared with the option that is purchased. If sufficient time remains in the option bought, another option may be sold for additional premium income.

Call . A call option contract entitles the buyer to acquire (or call away) 100 shares per contract of the underlying security from the seller, who is contractually obligated to deliver the stock to the buyer. Of course, this transaction must occur prior to contract expiration.