Glossary

Glossary

Short Selling: Investors who “short” shares borrow them and sell them, betting the price will fall and they will be able to buy the shares later at a lower price for return to the lender. (Source: WSJ)

Put Option: An option that gives the option buyer the right, but not the obligation, to sell the underlying investment instrument (e.g., stock, futures contract, etc.) at the strike price on or before the expiration date. (Source: CBOT)

Call Option: An option that gives the buyer the right, but not the obligation, to purchase the underlying (e.g., stock, futures contract, etc.) at the strike price on or before the expiration date. (Source: CBOT)

Option Premium: When you buy an option, the purchase price is called the premium. An option’s premium has two parts: an intrinsic value and a time value. Intrinsic value is the amount by which the option is in-the-money. Time value is the difference between whatever the intrinsic value is and what the premium is. The longer the amount of time for market conditions to work to your benefit, the greater the time value. (Source: The Options Industry Council)

In and Out-of-the-Money: What a particular options contract is worth to a buyer or seller is measured by how likely it is to meet their expectations. In the language of options, that’s determined by whether or not the option is, or is likely to be, in-the-money or out-of-the-money at expiration. A call option is in-the-money if the current market value of the underlying stock is above the exercise price of the option, and out-of-the-money if the stock is below the exercise price. A put option is in-the-money if the current market value of the underlying stock is below the exercise price and out-of-the-money if it is above it. If an option is not in-the-money at expiration, the option is assumed to be worthless. (Source: The Options Industry Council)

Exchange Traded Fund (ETF): 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, thus experiencing price changes throughout the day as it is bought and sold. (Source: Investopedia)

Hedge Funds: Like mutual funds, hedge funds pool investors’ money and invest those funds in financial instruments in an effort to make a positive return. Many hedge funds seek to profit in all kinds of markets by pursuing leveraging and other speculative investment practices that may increase the risk of investment loss.

Unlike mutual funds, however, hedge funds are not required to register with the SEC. Hedge funds typically issue securities in “private offerings” that are not registered with the SEC under the Securities Act of 1933. In addition, hedge funds are not required to make periodic reports under the Securities Exchange Act of 1934. But hedge funds are subject to the same prohibitions against fraud as are other market participants, and their managers have the same fiduciary duties as other investment advisers. (Source: SEC)