This is the term given to a stock or market that one believes will drop in price.
This refers to a stock market which is down-trending, and has fallen 20% or more.
The spread refers to the difference in the buy/sell price of an option or stock.
This is a completely different kind of option to what we trade at Trading with Zach. Binary options have a win or lose outcome, whereas conventional options can be bough or sold at any time for their current open market value. We do not trade binary options at all.
Buy to Close
Traders make this selection when they are closing an options position they have shorted. We do not short options at Trading with Zach.
Buy to Open
We select this option when entering an options trade, as we are buying to open our position.
This is the term given to a stock or market that one believes will increase in price.
An option which gives you the right to BUY an underlying stock at a given strike price. We buy CALL options on stocks we believe will rise in value.
An ETF is an exchange traded fund that trades like a stock, and on which we can buy options. So for example, USO is the ETF that tracks crude oil, GDX is a fund of the largest gold mining stocks, SPY is the ETF that tracks the S&P 500 index etc.
This means you are buying a position and wanting it to go higher to sell for a profit– conventional investing.
Going ‘short’ or ‘short selling a stock’
This allows one to profit when a stock goes DOWN in value. However, at Trading with Zach we don’t physically short stocks. If we think a stock will go down in value, we simply profit by buying put options. But for your understanding, shorting stocks is done by borrowing shares in a stock, e.g. borrowing 100 shares of Apple (AAPL). You then immediately sell the stock at the current price, e.g. AAPL is at $100, so you raise $10k. AAPL then falls 20% to $80, and you want to close the trade. You have to ‘pay back’ the 100 shares in AAPL, so you then buy 100 shares of AAPL at the current price of $80 for a total of $8,000 and return the shares. You have $2,000 left over, which is your profit. Physically shorting stocks can be extremely risky, especially with smaller valued stocks, because if a short position goes against you, you could lose significantly more than amount of capital in your trading account. An extreme example of this DRYS. In November 2016 this stock rose 2,000% in just 4 trading days!! There were lots of traders who were short the stock, thinking it would go down in value. Those traders would have more than blown up their accounts as they would then have to buy DRYS at over 20 times the value they shorted it at, just to close their position!! Imagine shorting just $10k worth of DRYS, then having to close the trade by buying it back for $200k and returning those shares – a loss of $180k. Ouch! Buying put options is the safest way to short… your maximum loss is whatever you invested in the puts.
In the money
See Intrinsic Value of an option section below.
Intrinsic Value of an option
This is the term used to describe an option that has actual real value, so, in the case of a call option, this is an option where one has the right to buy a stock at a lower price (the strike price) than the current price. In the case of a PUT option, it has intrinsic value if the strike price is higher than the actual current value of the stock. i.e. one has the right to sell a stock at a higher price than the current price.
Such options are known as being ‘in the money’. Options which have no intrinsic value are known as ‘out of the money’.
This is the maximum price you specify you are willing to pay when buying a stock or option, and is the minimum price you are willing to accept when selling.
This is an order where you don’t specify a limit price, and are willing to accept whatever price the ‘market’ will give you when buying or selling. Always use a limit order.
This are the colored lines on stock charts which indicate the average price points where the prior candles closed. At Trading with Zach, we use the 200MA, the 50MA, and the 20MA, which are red, yellow and blue respectively. As the moving averages measure the average closing level of the previous (200, 50, or 20) candles, the moving averages will appear at different levels on different time frames, as the closing prices for each candle will be different on the daily, weekly and monthly charts.
Options give you the right (but not the obligation) to buy or sell an underlying stock at a specified price – known as the strike price any time until the option expires. At Trading with Zach we buy options and aim to sell them for profit when the underlying stock we are trading hits our target. We do not exercise options. See the Options Made Easy section.
Options Strike Price
When buying an option, the Strike Price is the price at which you have the right to buy or sell an underlying stock, should you exercise the option. Remember, at Trading with Zach we very rarely exercise our options. We simply buy options, aiming to sell them on at a higher price, without ever exercising them.
Out of the money
See Intrinsic Value of an option section above.
An option which gives you the right to SELL an underlying stock at a given strike price. We buy PUT options on stocks we believe are going to fall in value.
The term given to a stock or market that is rising in price.
Sell to Close
We select this option when closing an options trade, as we are selling the options to close the position
Sell to Open
Traders select this when they are selling options to open a position. i.e. shorting or writing option. We do not short options at Trading with Zach.
Short percentage of float
This refers to the percentage of the total number shares in a stock which are currently being held short. This is important to us as swing traders, as the higher the percentage, the more likely the stock will increase significantly in price over a short period of time, causing a short covering rally. A short covering rally is caused by investors rushing to close their short positions at the same time, to avoid a position going against them. By necessity, they have to cover their short position by buying the underlying stock back. A high number of market participants covering their short at the same time, i.e. buying the stock en masse, can cause spectacular spikes in price of a stock. Good examples are SDRL in March and DRYS in November, 2016. Generally, the higher the short percentage in a stock, the bigger the potential gains can be for traders who have a long position in the stock.
This is the term referring to shares in a company, which can be and traded. Generally at Trading with Zach we don’t buy stocks, we trade the option on the underlying stock itself. Occasionally, where options aren’t available on a particular stock, we may trade the stock directly.
This is the time to expire premium accounted for in the price of an option. The more time to expiry an option has, the more expensive the option will be. This is especially pronounced for options out of the money, which do not have intrinsic value – their value being solely ‘time value’. Deep in the money options will have significant intrinsic value and although it will have time value, this will be less significant.