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Stock Option Glossary

Hedge:

No, this is not that green growing fence in front of your house that needs trimming every year.  Instead, a hedge is a method of reducing risk by putting on one option position and simultaneously selling another that contradicts what you hoped would happen with the first option.  Sounds like something a schizophrenic might do.  But it does make sense even to a rational investor. 

With a hedged bet, you give up some possible gain in exchange for a reduced loss if the market does not behave as you expected it to do.  A good example of a hedge is any option spread you might buy.  Common examples are the calendar spread, a butterfly spread, or a vertical spread.

Intrinsic Value:

In the option’s world, intrinsic value is the difference between the current selling price of the underlying stock and the strike price of the option.  If an underlying stock is trading at $45 and a call option with a strike price of 40 is trading at $6, the intrinsic value of the option is $5.  The other $1 is called the time premium of the option.  It is the extra amount you have to spend to enjoy the benefit of having the right to buy the stock at $40 without having to come up with all the cash.

Maintenance Requirement:

This is something your broker will charge when you sell a credit spread with options.  There is no interest charged on a maintenance requirement but cash in your account is set aside by the broker.  You can’t use this cash to buy other options or stock.

The requirement is calculated by the maximum amount that you could theoretically lose on the spread you place.   For some silly reason, the broker wants to make sure that you end up with enough cash to cover that potential loss so that he doesn’t have to cough up the money himself.  It doesn’t really sound fair, does it?  With all the commissions the broker is collecting on your trades, you would think he would be willing to take a little risk once in a while.  But that’s not the way it works.  They insist that you take the entire risk.

One neat thing about selling a credit spread is that the cash you collect from selling a credit spread is used by the broker to offset any margin loan you might have on stock that you have purchased.  So if you break even on the credit spread, you might save a little in interest on your stock margin loan.  It probably won’t change your way of living, but it beats a stick in the eye (as my mother used to tell me whenever I complained about something that was a positive, but only slightly so).

TERRY’S TIPS STOCK OPTIONS TRADING BLOG

November 8, 2024

November 8, 2024 Terry’s Tips Trade Alert #3 – Rising Tide Portfolio


We continue chasing delta higher
:    

BTC 1 COST 15Nov24 905 put (COST 241115P905)
STC 1 COST 20Dec24 905 put (COST 241220P905) for a credit of $13.20 (selling a calendar) (100%)

BTC 1 COST 15Nov24 935 call (COST 241115C935)
STO 1 COST 15Nov24 960 call (COST 241115C960) for a debit of $12.15 (buying a vertical) (100%)

Be prepared to change this (these) price limit(s) by $.05 or more in order to get an execution.

Happy trading.

Jon

June 6, 2024

June 5, 2024 Terry’s Tips Trade Alert – Wiley Wolf Portfolio


We are closing put spreads to increase delta:  

BTC 1 MSFT 21Jun24 402.5 put (MSFT240621P402.5)
STC 1 MSFT 19Jul24 435 put (MSFT240719P435) for a credit of $15.35 (selling a diagonal) (100%) 

BTC 1 MSFT 21Jun24 405 put (MSFT240621P405)
STC 1 MSFT 19Jul24 430 put (MSFT240719P430) for a credit of $11.90 (selling a diagonal) (100%) 

Be prepared to change this (these) price limit(s) by $.05 or more in order to get an execution.

Happy trading.

Jon

June 1, 2024

May 31, 2024 Terry’s Tips Trade Alert #3 – Rising Tide Portfolio


This completes rolling out and adds two call spreads
:    

BTC 1 COST 31May24 795 put (COST 240531P795)
STO 1 COST 21Jun24 800 put (COST 240621P800) for a credit of $13.45 (selling a diagonal) (100%)

BTO 1 COST 19Jul24 830 call (COST 240719C830)
STO 1 COST 21Jun24 830 call (COST 240621C830) for a debit of $7.00 (buying a calendar)

BTO 1 COST 19Jul24 810 call (COST 240719C810)
STO 1 COST 21Jun24 810 call (COST 240621C810) for a debit of $8.70 (buying a calendar)

Be prepared to change this (these) price limit(s) by $.05 or more in order to get an execution.

Happy trading.

Jon

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Options are not suitable for all investors as the special risks inherent to options trading my expose investors to potentially rapid and substantial losses. Please read Characteristics and Risks of Standardized Options before investing in options

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