Regulation T - Reg T
The Federal Reserve Board regulation that governs
customer cash accounts and the amount of credit that brokerage firms and dealers may extend to customers for the purchase of securities.
According to Regulation T, you may borrow up to 50% of the purchase price of securities that can be purchased on margin. This is known as the initial margin.
A type of security that signifies ownership in a corporation and represents a claim on part of the corporation's assets and earnings.
There are two main types of stock: common and preferred. Common stock usually entitles the owner to vote at shareholders' meetings and to receive dividends. Preferred stock generally does not have voting rights, but has a higher claim on assets and earnings than the common shares. For example, owners of preferred stock receive dividends before common shareholders and have priority in the event that a company goes bankrupt and is liquidated.
Also known as "shares" or "equity".
A privilege, sold by one party to another, that gives the buyer the right, but not the obligation, to buy (call) or sell (put) a stock at an agreed-upon price within a certain period or on a specific date.
In the U.K., it is known as a "share option".
American options can be exercised anytime between the date of purchase and the expiration date. European options may only be redeemed at the expiration date. Most exchange-traded stock options are American.
An option contract giving the owner the right (but not the obligation) to buy a specified amount of an underlying security at a specified price within a specified time.
A call becomes more valuable as the price of the underlying asset (stock) appreciates.
An option contract giving the owner the right, but not the obligation, to sell a specified amount of an underlying asset at a set price within a specified time. The buyer of a put option estimates that the underlying asset will drop below the exercise price before the expiration date.
A class of ownership in a corporation that has a higher claim on the assets and earnings than common stock. Preferred stock generally has a dividend that must be paid out before dividends to common stockholders and the shares usually do not have voting rights.
There are certainly pros and cons when looking at preferred shares. Preferred shareholders have priority over common stockholders on earnings and assets in the event of liquidation and they have a fixed dividend (paid before common stockholders), but investors must weigh these positives against the negatives, including giving up their voting rights and less potential for appreciation.
A security that represents ownership in a corporation. Holders of common stock exercise control by electing a board of directors and voting on corporate policy. Common stockholders are on the bottom of the priority ladder for ownership structure. In the event of liquidation, common shareholders have rights to a company's assets only after bondholders, preferred shareholders and other debtholders have been paid in full.
In the U.K., these are called "ordinary shares".
If the company goes bankrupt, the common stockholders will not receive their money until the creditors and preferred shareholders have received their respective share of the leftover assets. This makes common stock riskier than debt or preferred shares. The upside to common shares is that they usually outperform bonds and preferred shares in the long run.
A security that tracks an index, a commodity or a basket of assets like an index fund, but trades like a stock on an exchange. ETFs experience price changes throughout the day as they are bought and sold.
Because it trades like a stock, an ETF does not have its net asset value (NAV) calculated every day like a mutual fund does.
By owning an ETF, you get the diversification of an index fund as well as the ability to sell short, buy on margin and purchase as little as one share. Another advantage is that the expense ratios for most ETFs are lower than those of the average mutual fund. When buying and selling ETFs, you have to pay the same commission to your broker that you'd pay on any regular order.
One of the most widely known ETFs is called the Spider (SPDR), which tracks the S&P 500 index and trades under the symbol SPY.
Narrow based index
A futures contract on a small group of stocks, typically under ten, in a specific industry sector, such as airlines, pharmaceuticals, semiconductors, or energy.
An index designed to reflect the movement of the entire market. The smallest broad-based index is the Dow Jones Industrial Average with 30 industrial stocks and the largest is the Wilshire 5000 Total Market Index. Other examples include the S&P 500, Russell 3000 Index, AMEX Major Market Index and the Value Line Composite Index.
Investors who want the maximum benefit of diversification can invest in securities that have as their underlying tracking instrument an index or other financial product made up of several, well-diversified stocks. Securities based on broad-based indices allow investors to effectively own the same basket of stocks contained in a major index while committing a small amount of financial resources.
Stress Testing
A simulation technique used on asset and liability portfolios to determine their reactions to different financial situations.
Notes:
Stress-testing is a useful method of determining how a portfolio will fare during a period of financial crisis. The Monte Carlo simulation is one of the most widely used methods of stress testing.
Making an investment to reduce the risk of adverse price movements in an asset. Normally, a hedge consists of taking an offsetting position in a related security, such as a futures contract.
An example of a hedge would be if you owned a stock, then sold a futures contract stating that you will sell your stock at a set price, therefore avoiding market fluctuations.
Investors use this strategy when they are unsure of what the market will do. A perfect hedge reduces your risk to nothing (except for the cost of the hedge).
A financial contract obligating the buyer to purchase an asset (or the seller to sell an asset), such as a physical commodity or a financial instrument, at a predetermined future date and price. Futures contracts detail the quality and quantity of the underlying asset; they are standardized to facilitate trading on a futures exchange. Some futures contracts may call for physical delivery of the asset, while others are settled in cash. The futures markets are characterized by the ability to use very high leverage relative to stock markets.
Futures can be used either to hedge or to speculate on the price movement of the underlying asset. For example, a producer of corn could use futures to lock in a certain price and reduce risk (hedge). On the other hand, anybody could speculate on the price movement of corn by going long or short using futures.
The primary difference between options and futures is that options give the holder the right to buy or sell the underlying asset at expiration, while the holder of a futures contract is obligated to fulfill the terms of his/her contract.
In real life, the actual delivery rate of the underlying goods specified in futures contracts is very low. This is a result of the fact that the hedging or speculating benefits of the contracts can be had largely without actually holding the contract until expiry and delivering the good(s). For example, if you were long in a futures contract, you could go short the same type of contract to offset your position. This serves to exit your position, much like selling a stock in the equity markets would close a trade.
A financial derivative that represents a contract sold by one party (option writer) to another party (option holder). The contract offers the buyer the right, but not the obligation, to buy (call) or sell (put) a security or other financial asset at an agreed-upon price (the strike price) during a certain period of time or on a specific date (excercise date).
The sale of a borrowed security, commodity or currency with the expectation that the asset will fall in value.
In the context of options, it is the sale (also known as "writing") of an options contract.
For example, an investor who borrows shares of stock from a broker and sells them on the open market is said to have a short position in the stock. The investor must eventually return the borrowed stock by buying it back from the open market. If the stock falls in price, the investor buys it for less than he or she sold it, thus making a profit.
For example, selling a call (or put) options contract to a buyer entitles the buyer the right, not the obligation to buy from (or sell to) you a specific commodity or asset for a specified amount at a specified date.
The buying of a security such as a stock, commodity or currency, with the expectation that the asset will rise in value.
2. In the context of options, the buying of an options contract.
Opposite of "short" (or short position).
Options Clearing Corporation (OCC)
A clearing organization that acts as both the issuer and guarantor for option and futures contracts.
The Options Clearing Corporation is regulated by both the SEC and the CFTC.
Automated Clearing House (ACH)
An electronic funds-transfer system run by the National Automated Clearing House Association. This payment system deals with payroll, direct
deposit, tax refunds, consumer bills, tax payment, and many more payment services.
Comment
The use of electronic clearing houses to facilitate electronic transfers of money has increased efficiency and timeliness of government and
business transactions.
Comment
Option
A financial derivative that represents a contract sold by one party (option writer) to another party (option holder). The contract offers the
buyer the right, but not the obligation, to buy (call) or sell (put) a security or other financial asset at an agreed-upon price (the strike price)
during a certain period of time or on a specific date (excercise date).
Comment
The Options Clearing Corporation (OCC) Theoretical Intermarket Margin System (TIMS) file will be used as the backup file for theoretical
profit/loss (P/L) values used in the Portfolio Margin methodology. There will be a nightly
Portfolio Margin
There is a new method available for certain accounts for computing margin for stock and option positions that is based on the risk of
the position rather than the fixed percentages of Regulation T and FINRA Rule 2520. The new method uses theoretical pricing models
to calculate the loss of a position at different price points above and below current stock or index price. The largest loss identified
is the margin of the position. The result is often lower margin requirements than would be calculated from the old method.
Stock and option positions are tested with +/- 15% price changes. Small cap broad-based indices are tested with +/- 10% price changes.
Large cap broad-based indices are tested with +6%/-8% price changes. The high to low range is divided into eight equidistant points,
and the loss on the position is calculated at each of the eight points and the two high and low points.
Beyond the margins computed by this method, there are adjustments:
* OTCBB stocks, bonds, etc. margins do not change under portfolio margining so these need to be added.
* $37.50 per contract minimum (assuming the standard multiplier of 100).
* Similar classes such as OEX and SPX make up product groups and are offset against each other by designated percentages.
* Similar product groups like growth indices, small cap indices, etc. constitute portfolio groups and are offset against each
other by their designated percentages.
These adjustments can increase the calculated margin requirement which is then adjusted for additional risk parameters. Stocks and
indices with high implied volatility, an individual position that is highly concentrated, or positions that have large vega or other
risk will have their margin requirements increased.
HEDGE:
A position in stock or options that is established to offset the risk of another position in stock or options.
Naked Call
An options strategy in which an investor writes (sells) call options on the open market without owning the underlying security.
This stands in contrast to a covered call strategy, where the investor owns the security shares that are eligible to be exercised under
the options contract.
This strategy is sometimes referred to as an "uncovered call" or a "short call".
Naked Put
A put option whose writer does not have a short position in the stock on which he or she has written the put.
Sometimes referred to as an "uncovered put."
ASK or OFFER:
The price of a stock or option at which a seller is offering to sell a security, that is, the price that investor may purchase a stock or option.
BID:
The price of a stock or option at which a buyer is willing to purchase a security; the price at which a customer may sell a security.
STRADDLE:
An option position composed of calls and puts, with both calls and puts at the same strike. The options are on the same stock and of the same expiration,
and either both long or both short with the quantity of calls equal to the quantity of puts (with the exception of a ratioed straddle).
For example, a long 50 straddle is long 1*50 call and long 1*50 put. A long straddle requires a large move in the stock price, an increase
in implied volatility or both for profitability, while a short straddle performs well when the stock is in during a tight trading range,
decreased implied volatility or both.
STRANGLE:
An option position composed of calls and puts, with both out-of-the-money calls and out-of-the-money puts at two different strikes.
The options are on the same stock and of the same expiration, and either both long or both short with the quantity of calls equal to
the quantity of puts (with the exception of a ratioed strangle). For example, a short 50/70 strangle is short 1*50 put and short 1*70 call.
A long strangle requires a large move, an increase in implied volatility or both for profitability, while a short strangle performs well during
a tight trading range, decreased implied volatility or both.
MARRIED PUT:
The purchase of a put option and the underlying stock on the same day. Special tax rules may apply to this position.
Hedge Ratio
A ratio comparing the value of a position protected via a hedge with the size of the entire position itself.
Say you are holding $10,000 in foreign equity, which exposes you to currency risk. If you hedge $5,000 worth
of the equity with a currency position, your hedge ratio is 0.5 (50 / 100).
This means that 50% of your equity position is sheltered from exchange rate risk.
while a short straddle performs well when the stock is in during a tight trading range, decreased implied volatility or both.
No comments:
Post a Comment