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Calendar spread:

The sale of an option with a nearby expiration against the purchase of an option with the same strike price, but a more distant expiration. The loss is limited to the net premium paid, while the maximum profit possible depends on the time value of the distant option when the nearby expires. The strategy takes advantage of time value differentials during periods of relatively flat prices. See TIME SPREAD.

Call option:

An option contract that gives the owner the right to buy 100 shares (usually) of an underlying stock at a specified price (its strike price) for a certain, fixed period of time (until its expiration). For the writer of a call option, the contract represents an obligation to sell 100 shares (usually) of an underlying stock if the option is assigned. E.g.: The owner of an AAA MAR 65 call, would have the right to buy 100 shares of AAA at $65 (strike price) per share between now and the third Friday in March (expiration date).

Call Provision:

Agreement that allows an issuer to redeem a bond before maturity under specified conditions.

Canceled Order:

A buy or sell order that is canceled before it has been executed. In most cases, a Limit Order can be canceled at any time as long as it has not yet been executed. A Market Order may be canceled if the order is placed after market hours and is then canceled before the market opens the following day. A request to cancel can be made at any time before execution.

Capital Gain:

The gains received through buying and selling of a security or other appreciating asset that has increased in value during the time the investor owned it.

Capital Stock:

Stock authorized by a company's charter and having par value, stated value or no par value. It includes all classes of common and preferred stock.

Carry/Carrying Charge:

The interest expense on money borrowed to finance a margined securities position.

Cash Account:

An account in which all transactions must be fully paid.

Cash Available:

The amount that may either be withdrawn in cash, or used to purchase additional securities without creating a debit balance.

Cash Flow:

A statement of net income plus depreciation and other non-cash charges in a company's annual report. A strong cash flow is important for covering interest payments, particularly for highly leveraged companies. Positive cash flow occurs when more money comes in than goes out while the opposite is true of negative cash flow.

Cash Market:

Also known as Spot Market; consisting of transactions between a buyer and seller in which payment is given upon delivery of the physical commodity (grain, meat, metal, etc.).

Cash Percent:

The percentage of a given mutual fund's total assets invested in cash and equivalents.

Cash Settlement:

Settlement in cash on the trade date rather than on the regular settlement date.

Cash Ratio:

A company's ratio of marketable securities and cash to its current liabilities.

Cashiering Department:

Brokerage firm department that is responsible for receiving and delivering securities and money to and from other firms and clients.

Certificate:

The physical document evidencing ownership of a stock or a bond. Not all securities are available in certificate form; e.g., Treasury bills.

Certificate of Deposit:

Investment offered by banks, which pays stated interest at a fixed rate. Principal is returned at maturity subject to penalties for early withdrawal.

Chicago Board Options Exchange (CBOE):

Opened in April 1973, it is the oldest and largest listed options exchange.

Churning:

The excessive trading of a client's account in order to increase the broker's revenues from commissions.

Classified Stock:

Separation of ownership interest into more than one class of stock frequently designated as Class A and Class B. Class A shares usually possess an advantage over Class B shares in terms of voting power and may also possess additional dividend and liquidation privileges.

Class A/Class B Shares:

Shares of stock issued by the same company but having some difference, such as voting rights, or a dividend preference or participation.

Class of options:

A term referring to all options of the same type - either calls or puts -- covering the same underlying stock.

Clearinghouse:

A facility that compares and reconciles both sides of a trade in addition to receiving and delivering payments and securities.

Clearing Corporations:

A central reception and distribution center operated for its membership which is made up of various brokerage firms. Many offer automated systems that expedite trade comparison, settlement and assignment procedures. Among these are the NSCC (National Securities Clearing Corp.) and OCC (Options Clearing Corporation).

Closed-end Fund:

Mutual fund with a fixed number of shares that is traded in the secondary market. Supply and demand determine the market price of the shares as opposed to net asset value.

Closing Commission:

The commission deducted from the proceeds before calculating realized gain or loss. It is the fee charged by your broker to execute your trade. It may be a composite of several fees and charges.

Closing price:

The final price of a security at which a transaction was made. See also SETTLEMENT PRICE.

Closing purchase:

A transaction in which the purchaser's intention is to reduce or eliminate a short position in a given series of options.

Closing sale:

A transaction in which the seller's intention is to reduce or eliminate a long position in a given series of options.

Closing transaction:

A reduction or an elimination of an open position by the appropriate offsetting purchase or sale. An existing long option position is closed by a selling transaction. An existing short option position is closed by a purchase transaction. This transaction will reduce the open interest for the specific option involved.

Collar:

A collar consists of holding an underlying asset and simultaneously buying a put option (long put) and selling a call option (short call) of this underlying asset. Because of the long put, the collar hedges against losses of the underlying asset. But the short call limits the possibility of participation on the gains of the underlying asset. The purchaser of the collar has forfeited some of the potential gains from decreases in the price of the underlying asset for a lower net cost of insurance against price increases.

Collateralized Bond Obligation:

An investment grade bond backed by a pool of bonds with differing degrees of credit quality.

Collateralized Mortgage Obligation:

A mortgage backed corporate bond. These bonds are backed by different classes of securities, or tranches, that vary by risk level, interest rate, mortgage prepayment risk, and average maturity.

Combination:

An option position involving a call and put (either both long or both short) on the same stock with differing expirations, strike prices, or both.

Commercial Paper:

Short-term debt, usually maturing from 2 to 270 days, issued by banks and corporations.

Commission:

Fee charged by a broker to execute a trade. This may be a composite of several fees and charges. Commission rates commonly take into account the quantity of the purchase, the unit price of the security and the type of investment.

Common Shares:

Represents the total number of common shares outstanding, excluding treasury stock (stock issued but re-acquired by the company through buy-backs). This number is usually expressed in thousands, so add three zeros when reading the figures.

Common Stock:

Security representing ownership interest in a corporation, in contrast to a bond which is a debt security.

Compound Interest:

Interest earned on or assessed against, both an original investment and the interest already accrued. When interest is compounded, the value of an investment can increase dramatically over long periods of time. By the same token, if an individual fails to keep up with a loan's interest payments, the total amount to be repaid increases in the same way.

Condor spread:

A strategy involving four options and four strike prices that has both limited risk and limited profit potential. A long call condor spread is established by buying one call at the lowest strike, writing one call at the second strike, writing another call at the third strike, and buying one call at the fourth (highest) strike. This spread is also referred to as a "flat-top butterfly."

Confirmation:

A written notification from a broker to a client specifying the details of securities transaction

Consumer Price Index (CPI):

A measure of price changes in consumer goods and services used to gauge periods of inflation or deflation.

Contingency Order:

Instructions to execute a transaction in one security that depends on the execution price of another security or the completion of another transaction. E.g.: Sell the XYZ June 70 call at 2, contingent upon XYZ stock being at or below $69 1/2.

Contract size:

The number of underlying shares covered by one option contract. This is 100 shares for one equity option unless adjusted for a special event, such as a stock split or a stock dividend.

Conversion:

An investment strategy in which a long put and a short call with the same strike price and expiration are combined with long stock to lock in a nearly risk-less profit. E.g.: Buying 100 shares of XYZ stock, writing 1 XYZ Jan 50 call, and buying 1 XYZ Jan 50 put at desirable prices. The process of executing these three-sided trades is also called "conversion arbitrage." See also REVERSE CONVERSION.

Conversion Price:

The price at which convertible securities, such as bonds and preferred stock, can be converted into common stock at a set conversion ratio.

Convertible Bond:

A debt security that is exchangeable for a set number of shares of another type of security, usually common stock, at a predetermined price. See also BOND.

Corporate Bond:

A debt security investment in obligations of U.S. corporations. Corporate bonds are taxable and have a specific maturity date. They are often traded on major exchanges. See also BOND.

Cost Basis:

The original price paid for an asset, including any commissions or fees, used to determine capital gains or losses at the time of sale. If an asset is inherited, the asset value is appraised at the donor's time of death and this becomes the new or "stepped up" basis.

Coupon Bond:

See BEARER BOND.

Cover:

To close out an open position. This term is used most frequently to describe the purchase of an option or stock to close out an existing short position.

Covered Call/Covered Call Writing:

An option strategy in which a call option or options is sold against equivalent amounts of long stock or long calls. E.g.: Writing (selling) 3 XYZ March 50 calls while owning 300 shares of XYZ stock.

"Covered" Combination:

A strategy in which one call and one put with the same expiration, but different strike prices, are written against each 100 shares of the underlying stock. E.g.: Writing 1 XYZ Jan 50 call and 1 XYZ Jan 55 put, and buying 100 shares of XYZ stock. In actuality, this is not a fully "covered" strategy because assignment on the short put would require purchase of additional stock.

Covered Option:

An open short option position that is offset by a corresponding stock or option position. That is, long stock or a long call with a more distant expiration could offset a covered call, while a long put with a more distant expiration or a short stock position could offset a covered put. This insures that if the owner of the option exercises, the writer of the option will not have a problem fulfilling the delivery requirements. See also UNCOVERED OPTION.

Covered put option writing:

A strategy in which one sells put options and simultaneously is short an equivalent position in the underlying security.

"Covered" Straddle:

An option strategy in which one call and one put with the same strike price and expiration are written against each 100 shares of the underlying stock. E.g.: Writing 1 XYZ Jan 55 call and 1 XYZ Jan 55 put, and buying 100 shares of XYZ stock. In actuality, this is not a fully "covered" strategy because assignment on the short put would require purchase of additional stock.

Cox-Ross-Rubinstein:

An option-pricing logarithm developed by J. Cox, S. Ross and M. Rubinstein which can be adapted to include effects not included in the Black-Scholes Model (e.g.: early excercise and price supports). This model is used because dividend payments in the early exercise possibility associated with the American exercise style can be taken into account. The model uses a binomial process to calculate option value.

Credit:

Money received in an account either from a deposit or a transaction that results in increasing the account cash balance.

Credit Balance:

In a cash account, the credit balance is the amount of money in a customer's account after all debts have been paid and all proceeds from sales received. In a margin account, a credit balance would include the proceeds held from a short sale which would be held in escrow for the borrowed securities for these sales.

Credit spread:

Difference in the value of two options, where the value of the one sold exceeds the value of the one purchased. A bull spread with puts and a bear spread with calls are examples of credit spreads.

Cumulative Dividends:

A feature of preferred stocks whereby owners are still entitled to their dividends (before common stockholders) after a pay period has been skipped due to poor company performance, when the company improves its finances enough to pay. The dividend amount that was skipped will be made up cumulatively during the following dividend pay period.

Current Ratio:

A company's current assets divided by its current liabilities. It is a measure of a company's liquidity.

Current Year High & Low Price:

The highest and lowest price for a given asset during the current calendar year.

Current Yield:

For stock, the annual dividend divided by the current price per share. For bonds, the annual interest payment divided by the current price divided by 100 times quantity. A measure in percentage terms of how much income can be derived from the security. Of great importance to fixed income investors and of minimal importance to growth investors. See YIELD TO MATURITY.

Curvature:

See GAMMA.

CUSIP Number:

Committee on Uniform Securities Identification Procedures. An industry code, which uniquely identifies all traded stocks and bonds.

Custodian:

A person or institution responsible for managing the property of another.

Cycle:

See EXPIRATION CYCLE.

Cyclicals:

Stocks that move up or down in sync with the business cycle. Examples include the housing industry and industrial equipment companies. These stocks will experience fluctuation that reflects the seasonal characteristics of a business or industry.