Basis Risk
The residual risk that remains when a hedge does not perfectly offset the underlying exposure due to price differences between related instruments.
Binomial Model
An options pricing model that builds a discrete-time tree of possible asset prices to derive the fair value of an option.
Calendar Spread
An options strategy that sells a near-term option and buys a longer-dated option at the same strike price to profit from time decay.
Cash Settlement
A derivatives settlement method in which the profit or loss is paid in cash rather than by delivering the underlying asset.
Collar
An options strategy that caps both the upside gain and downside loss of a stock position by combining a protective put with a short call.
Commodity Futures
Standardized contracts to buy or sell a specific quantity of a commodity at a set price on a future date.
Covered Put
An options strategy that pairs a short stock position with a short put option to generate income or set a buy-back price.
Currency Forward
An over-the-counter contract to exchange a set amount of one currency for another at a fixed rate on a specified future date.
Currency Swap
A swap in which two parties exchange principal and interest payments denominated in different currencies.
Delta Hedging
A risk management technique that offsets an option's price sensitivity to the underlying asset by holding a position in the underlying equal to the option's delta.
Derivative
A financial contract whose value is derived from an underlying asset, rate, or index.
Exotic Option
A non-standard derivative with payoff conditions or structures that differ from plain vanilla put and call options.
Forward Contract
A private, customizable agreement to buy or sell an asset at a fixed price on a future date.
Futures Contract
A standardized agreement to buy or sell an asset at a fixed price on a specified future date.
Futures Margin
The good-faith deposit required to open and maintain a futures position, distinct from the leverage-based margin used in securities accounts.
Futures Price
The theoretical no-arbitrage price of a futures contract based on the cost of carry.
Interest Rate Swap
A swap in which one party pays a fixed interest rate and receives a floating rate on a notional principal.
Iron Butterfly
A four-legged options strategy that sells an at-the-money straddle and buys out-of-the-money options for protection, profiting from low volatility.
Iron Condor
A four-legged options strategy that combines a bull put spread and a bear call spread to profit when the underlying stays within a defined range.
Long Straddle
An options strategy that buys both a call and a put at the same strike and expiration to profit from a large price move in either direction.
Long Strangle
An options strategy that buys out-of-the-money calls and puts to profit from a large directional move at a lower cost than a straddle.
Naked Option
A short option position written without any offsetting position in the underlying asset, creating theoretically unlimited risk.
Option Chain
A table listing all available options contracts for a security, organized by expiration date and strike price.
Option Expiration
The date on which an options contract expires and must be exercised, sold, or allowed to lapse worthless.
Option Moneyness
The relationship between an option's strike price and the current market price of the underlying asset, indicating intrinsic value.
Option Premium
The market price of an options contract, consisting of intrinsic value and time value.
Protective Put
An options hedge that buys a put option on an owned stock position to limit downside loss while preserving upside potential.
Short Straddle
An options income strategy that sells both a call and a put at the same strike and expiration, profiting when the underlying stays near the strike.
Swap
A derivative contract where two parties exchange cash flows based on a notional principal amount.
Synthetic Position
A combination of options and other instruments that replicates the payoff profile of a different asset or strategy.
Total Return Swap
A derivative in which one party receives all cash flows from a reference asset and pays a floating interest rate in return.