Derivatives, Futures & Options — 65 Terms Defined

Forward Contract Derivatives, Futures & Options qualitative A privately negotiated agreement to buy or sell an asset at a set price on a future date, not traded on an exchange. Test: terms are bilaterally negotiated, the contract is not exchange-traded, and settlement occurs directly between the parties

Futures Contract Derivatives, Futures & Options ₹ A standardised exchange-traded agreement to buy or sell an underlying asset at a set price on a set future date. Contract Value = Futures Price x Lot Size; Profit or Loss = (Exit Price - Entry Price) x Lot Size, sign adjusted for direction

Gamma Derivatives, Futures & Options ratio (x, times) The rate at which an option's delta changes for a one-unit change in the underlying. Gamma = Change in Delta / Change in Underlying Price

Historical Volatility Derivatives, Futures & Options % The realised standard deviation of an underlying's returns over a past period, annualised. Historical Volatility = Standard Deviation of Daily Log Returns x square root of 252, expressed as a percentage

Implied Volatility Derivatives, Futures & Options % The volatility figure that, put into an option pricing model, reproduces the option's current market price. Test: solve the pricing model for the volatility input that makes the model price equal the observed market price

In the Money Derivatives, Futures & Options qualitative An option that would have positive value if exercised immediately. Call: Spot > Strike; Put: Spot < Strike

Index Futures Derivatives, Futures & Options ₹ A futures contract whose underlying is a stock market index rather than a single security. Contract Value = Index Level x Lot Size; settlement is in cash against the final index value

Initial Margin Derivatives, Futures & Options ₹ The deposit required before a derivative position can be opened, held as collateral against potential losses. Initial Margin = SPAN Margin + Exposure Margin, computed by the clearing corporation for the portfolio

Iron Condor Derivatives, Futures & Options ₹ A four-leg position writing an out-of-the-money call and put while buying further out-of-the-money protection on both sides. Net Credit = Premiums Received - Premiums Paid; Maximum Loss = (Width of the Wider Wing - Net Credit) x Lot Size

Long Call Derivatives, Futures & Options ₹ A position created by buying a call option, with loss limited to the premium and gain rising as the underlying rises. Profit at expiry = max(Spot - Strike, 0) x Lot Size - Premium Paid x Lot Size; Break-even = Strike + Premium

Long Put Derivatives, Futures & Options ₹ A position created by buying a put option, with loss limited to the premium and gain rising as the underlying falls. Profit at expiry = max(Strike - Spot, 0) x Lot Size - Premium Paid x Lot Size; Break-even = Strike - Premium

Lot Size Derivatives, Futures & Options shares The fixed number of units of the underlying that one derivative contract represents. Contract Value = Lot Size x Price of the Underlying

Mark to Market Derivatives, Futures & Options ₹ The daily revaluation of open derivative positions at the closing price, with gains and losses settled in cash. Daily Mark-to-Market = (Today's Settlement Price - Yesterday's Settlement Price) x Lot Size x Number of Lots

Max Pain Derivatives, Futures & Options index points The strike at which the total value of in-the-money options outstanding would be smallest at expiry. For each strike, compute the total payoff owed on all open calls and puts if expiry settled there; the minimum is the max pain point

Moneyness Derivatives, Futures & Options ratio (x, times) The relationship between an option's strike price and the current price of the underlying. Moneyness = Spot / Strike for a call, or Strike / Spot for a put; values above 1 indicate in the money

Open Interest Derivatives, Futures & Options shares The total number of derivative contracts that remain open and have not been closed or settled. Open Interest rises when a new buyer and a new seller create a contract, and falls when both sides close

Option Derivatives, Futures & Options qualitative A contract giving its buyer the right, but not the obligation, to buy or sell an underlying at a set price by a set date. Test: the holder may exercise or let the contract lapse; the writer must perform if the holder exercises

Option Chain Derivatives, Futures & Options qualitative A table listing all available strikes for an underlying and expiry, with prices, volumes and open interest for calls and puts. Test: the display lists every listed strike for one expiry, with call data on one side and put data on the other

Option Intrinsic Value Derivatives, Futures & Options ₹ The value an option would have if exercised immediately, which is never less than zero. Call Intrinsic Value = max(Spot - Strike, 0); Put Intrinsic Value = max(Strike - Spot, 0)

Option Premium Derivatives, Futures & Options ₹ The price paid by an option's buyer to its writer for the rights the contract confers. Premium = Intrinsic Value + Time Value; Total Cost = Premium x Lot Size

Option Writer Derivatives, Futures & Options qualitative The party that sells an option and takes on the obligation to perform if the holder exercises. Test: the party received the premium at inception and must deliver or take delivery at the strike if assigned

Out of the Money Derivatives, Futures & Options qualitative An option that would have no value if exercised immediately. Call: Spot < Strike; Put: Spot > Strike

Physical Settlement Derivatives, Futures & Options qualitative Settlement of a derivative by actual delivery of the underlying security against payment, rather than by cash difference. Test: at expiry, an in-the-money contract obliges delivery of Lot Size units against payment of Strike x Lot Size

Protective Put Derivatives, Futures & Options ₹ Buying a put against shares already owned, to place a floor under the holding's value. Maximum Loss = (Purchase Price - Strike + Premium) x Lot Size; Break-even = Purchase Price + Premium