11. Glossary

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  1. Delta : Measure of option price sensitivity to changes in stock price.
  2. Gamma: Measure of option price sensitivity to changes in Delta.
  3. Theta: Measures the time decay of an option as we move towards expiry.
  4. Vega: Measures the sensitivity of the option price to changes in volatility.
  5. Volatility: It is used in option pricing formulas to gauge the fluctuations in the returns of the underlying assets.
  6. Options: Contracts that give the right to buy or sell an amount of an underlying asset at a predetermined price before the contract expires.
  7. Call Option: This gives the holder the right to buy a stock
  8. Put Option: This gives the holder the right to sell a stock.
  9. Daily Volatility Formula: The formula for daily volatility is computed by finding out the square root of the variance of a daily stock price. Daily Volatility formula = √Variance
  10. Debit: the amount of money you paid to purchase a new long position, or the amount of money paid to close an existing short position.
  11. Defined Risk: This is a situation where you know precisely the maximum amount of money you can lose in any trade or spread.
  12. In-the-money (ITM): this refers to the strike price of the option relative to the current market price of the underlying.
  13. Out-of-the-money (OTM): this refers to the strike price of the option relative to the current market price of the underlying.
  14. Spread: any position that involves a combination of two or more unique options.
  15. Theta Decay: This describes the natural tendency for the value of options to lose a little bit of value every day.
  16. Daily Volatility Formula: The formula for daily volatility is computed by finding out the square root of the variance of a daily stock price. Daily Volatility formula = √Variance
  17. Annualized Volatility Formula: Annualized Volatility Formula = √252 * √Variance
  18. Historical volatility: It is based on past and concrete data, institutional investors follow a thumb rule when calculating it. It is measured using a variance.

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