Translating the Lingo of Options - TheStreet

Options traders sometimes use a unique vocabulary. To outsiders, the expressions, terms and analogies might make some options folks seem like they're from another planet. Have you ever heard traders talk about a leg plant, the Vixen, vols or the Qs and wondered what the heck they were talking about? To help newer traders make sense of some of these expressions, let's define some of the more frequently used options-related jargon.

The Leg Plant:

This one sounds painful, and it often is. It refers to the process of moving into a complex trade one side at a time. For example, say you decide to buy a put and call with the same strike prices and the same expiration dates on the same stock. This, of course, is a straddle. Rather than establishing the trade as one transaction, however, you decide to buy the call first because you strongly believe the stock is going to move higher in the short term. In this case, you are planting a leg. You will plant the other leg when you buy the second part of the straddle, which is the put. By planting a leg, strategists are trying to establish a complex trade at a better price. Many times, however, the stock will move against the trader and defeat the entire purpose of a complex trade like the straddle.

The CBOE:

Sometimes called the "see-bo," the Chicago Board Options Exchange is the first and largest U.S.-based options exchange.

ISE:

The International Securities Exchange is the newest U.S.-based exchange. It is an all-electronic exchange that has grown into the second-largest options market in the U.S.

Felix:

Options lingo for the third-largest options exchange, the Philadelphia Stock Exchange, or PHLX. Some traders also talk about the

Amex

, or the American Stock Exchange, and the P-coast, or the Pacific Stock Exchange.

Euro-Style:

This refers to the settlement feature of many index options. Although stock options settle American-style and can be exercised at any time before expiration, most index options settle European-style and can only be exercised at expiration. Therefore, if you are holding Euro-style options, you can only exercise them at expiration.

The Greeks:

Options traders aren't referring to Plato and Aristotle when they talk about the Greeks. Vega, Theta, Gamma and Delta are risk measurements derived from options prices and an options-pricing model such as the one developed by Fisher Black and Myron Scholes, a.k.a. the Black-Scholes Model. Each Greek provides a different look at an option's price sensitivity to different factors like time, volatility and price movements of the underlying asset.

Vols:

This is trader talk for the implied volatility of an option. Vols are calculated using an options pricing model. When "vols are off the charts," the option premiums are rich or expensive. Options are cheap when vols are low.

Actuals:

This is another term for historical volatility, which is generally computed using the annualized standard deviation of past stock prices. Therefore, it looks at the actual volatility of a stock's past price movements.

VIX:

The CBOE Volatility Index is a measure of the volatility in the options market. Specifically, it measures the vols of S&P 100 index options. It is known as the market's "fear gauge" because implied volatility tends to rise during periods of market angst. Its sister index, the Nasdaq 100 Volatility Index, also known as VXN or Vixen, gauges the vols in the tech sector.

Buy-Write:

This is another term for the covered call. The strategy involves buying stocks and selling (or writing) calls -- hence the name: buy-write.

Fill:

It's the price at which an order is executed. If you bought XYZ calls for $1.50, you were filled at a buck-fifty.

Wasting Assets:

That's another term for derivatives that lose value due to time decay. Options are wasting assets because they have fixed expiration dates, they lose value as expiration approaches and they are worthless after expiration.

ETFs:

Exchange-traded funds are pooled investments that trade like stocks on the exchanges but represent ownership in a basket of stocks.

Qs:

The QQQ is a type of ETF that mirrors the performance of the Nasdaq 100 index. Because most components of the Nasdaq 100 are large technology companies, many traders use the Qs to place trading strategies on the tech sector.

Diamonds:

This is a type of ETF that allows traders to participate in the rise and fall of the

Dow Jones Industrial Average

. It's named the Dow Jones Diamonds, or DIA, but most traders simply call them Diamonds -- somewhat paradoxically, given their rather dull performance lately.

By Frederic Ruffy, senior writer and index strategist at

Optionetics.com.