At the money (ATM)
“At the money” (ATM) refers to an option contract that may extrinsic or time value prior to expiration. A call or put option is ATM if the strike price is at or very near to the current market price of the underlying security. ATM options are most attractive when a trader expects a large movement in a stock.
A negative market sentiment when prices are falling.
A Bollinger Band is a type of technical indicator defined by a set of trendlines plotted two standard deviations (positively and negatively) away from a simple moving average (SMA) of an asset’s price, but which can be adjusted to user preferences. Bollinger Bands were designed to discover opportunities that give investors a higher probability of properly identifying when an asset is oversold or overbought.
A positive market sentiment when prices are rising.
A call option becomes more valuable as the price of the underlying asset increases and loses its value as the price of the underlying asset decreases. Call options may be purchased for speculation, tax management, or sold for income purposes.
Cash flow refers to the net amount of cash and cash equivalents being transferred in and out of a company. Cash received represents inflows, while cash spent represents outflows. A company’s ability to create value for shareholders is determined by its ability to generate positive cash flows.
Consolidation is a technical analysis term used to describe a stock’s price movement between a support and resistance range within a given time frame. It is generally caused due to trader indecisiveness. A consolidation pattern could be broken for several reasons, such as the release of materially important news or the triggering of a succession of limit orders.
Consumer Price Index
The Consumer Price Index (CPI) is a measure that examines the weighted average of prices of a basket of consumer goods and services, such as transportation, food, and medical care. It is the most widely used measure of inflation. Changes in the CPI are used to assess price changes associated with the cost of living.
Downtrends are characterized by lower peaks and troughs than the ones found earlier in the trend. As long as the price is making these lower swing lows and lower swing highs, the downtrend is considered intact. Downtrends imply bearish sentiment among investors.
Exchange-traded fund (ETF)
An exchange-traded fund (ETF) is a basket of securities that trades on an exchange just like a stock does. ETFs can contain all types of investments, including stocks, commodities, or bonds. Some offer U.S.-only holdings, while others are international. ETFs offer low expense ratios and fewer broker commissions than buying the stocks individually.
Exchange-traded notes (ETN)
An exchange-traded note (ETN) is an unsecured debt security that tracks an underlying index of securities. ETNs are similar to bonds but do not pay periodic interest payments. Investors can buy and sell ETNs on major exchanges such as stocks and profit from the difference, subtracting any fees.
Face value describes the nominal value or dollar value of an asset. The face value is stated by the issuing party. A stock’s face value is the initial cost of the stock, as indicated on the certificate of the stock in question; a bond’s face value is the dollar figure due to be paid to the investor, once the bond reaches maturity.
A hedge is an investment that is made with the intention of reducing the risk of adverse price movements in an asset. Normally, a hedge consists of taking an offsetting or opposite position in a related asset. Other types of hedges can be constructed via other means like diversification. An example could be investing in both cyclical and counter-cyclical stocks.
In the money (ITM)
“In the money” (ITM) refers to an option contract that has intrinsic value. A call option is ITM if the option holder can buy the security below its current market price. A put option is ITM if the option holder can sell the security above its current market price. ITM options have higher premiums than OTM or ATM options.
Long selling is a bullish strategy that involves the purchase of an asset with the expectation it will increase in value. In options, being long can refer to either outright ownership of an asset or being the holder of an option on the asset. Long selling is also known as going long.
Market capitalization or “market cap”, is the total dollar value of all outstanding shares of a company at the current market price. Market cap is used to size up corporations and understand their aggregate market value.
Market sentiment refers to the overall attitude of investors toward a particular security or financial market. It is the feeling or tone of a market, or its crowd psychology, as revealed through the activity and price movement of the assets traded in that market.
Mean reversion suggests that various phenomena of interest such as asset prices and volatility of returns, eventually revert to their long-term average levels. The mean reversion theory has led to many investment strategies, from stock trading techniques to options pricing models. Mean reversion trading tries to capitalize on extreme changes in the price of a particular asset, assuming that it will revert to its previous state.
The moving average is a type of technical indicator that uses an asset’s past prices to identify its trend direction, support levels, and its resistance levels. The reason for calculating the moving average of an asset is to produce a constantly updated, average price. A rising moving average indicates the asset is in an uptrend, while a declining moving average indicates that it’s in a downtrend.
Out of the money (OTM)
“Out of the money” (OTM) refers to an option contract that has extrinsic value. A call option is OTM if the underlying price is trading below the strike price of the call. A put option is OTM if the underlying’s price is above the put’s strike price. OTM options are less expensive than ITM or ATM options.
Overbought is a term used when an asset is believed to be trading at a level above its intrinsic or fair value. An overbought asset may be a good candidate for sale.
Oversold is a term used when an asset is believed to be trading at a level below its intrinsic or fair value. An oversold asset has the potential for a price bounce.
Position sizing refers to the number of units an investor or trader invests in a particular security. Determining appropriate position sizing requires an investor to consider their risk tolerance and the size of the account.
Price-to-earnings ratio (P/E)
The price-to-earnings ratio (P/E) is a ratio that values a company by measuring its current share price relative to its earnings per share. P/E may also be used to compare a company against its own historical record or to compare aggregate markets against one another. The price-to-earnings ratio is sometimes known as the price multiple or the earnings multiple.
A pullback is a pause or moderate drop in a stock or commodities pricing chart from recent peaks that occur within a continuing uptrend. Pricing drops during a pullback are relatively short in duration. Pullbacks can provide an entry point for traders when other technical indicators remain bullish.
A put option becomes more valuable as the price of the underlying asset decreases and loses its value as the price of the underlying asset increases. Put options are typically used for hedging purposes or to speculate on downside price action.
A rally is a period of rapid, sustained increases in the prices of stocks, bonds, or related indexes over a short time frame. Rallies can happen in either a bull or bear market. In general, a rally is caused by positive surprises or economic policies that make asset prices more attracting in the near term. However, a rally will typically follow a period of flat or declining prices.
Relative Strength Index
The relative strength index (RSI) is a type of technical indicator that measures the magnitude of recent price changes to evaluate overbought or oversold conditions in the price of an asset. The RSI is displayed as a line graph that moves between two extremes and has a reading from 0 to 100. RSI values of 70 or above indicate overbought conditions. RSI values of 30 or below indicate oversold conditions.
The resistance level represents a price point that an asset has had trouble exceeding within a given time frame. These levels are created when sellers enter the market anytime an asset rises to a pressure-point price. Resistance levels are drawn with a line connecting the highest highs of a given time frame.
Short selling is a bearish strategy that involves the sale of an asset that is not owned by the seller but has been borrowed and then sold in the market. A trader will short sell if they believe the underlying asset will take a significant move downward in the future. Short selling is also known as going short.
A sideways market, or sideways drift, occurs when the price of a security trades within a fairly stable range without forming any distinct trends over some period of time. Price action instead oscillates in a horizontal range or channel, with neither the bulls nor bears taking control of prices.
Speculating is the act of putting money into bets that can go one way or the other. Speculators bet on future price movements in the hope of making gains that are large enough to offset the risk. Contrary to longer-term investors, speculators seek to make high returns within a shorter time frame. Trading strategies such as futures, options, and short selling are all used to speculate.
Standard deviation measures the dispersion of a dataset relative to its mean. It is calculated as the square root of the variance. The more spread out the data, the higher the standard deviation. A volatile stock has a high standard deviation, while the deviation of a stable blue-chip stock is usually rather low.
A stop-loss order specifies that an asset be bought or sold when it reaches a specified price known as the stop price. Once the stop price is met, the stop order becomes a market order and is executed at the next available opportunity. Stop-loss orders are designed to prevent investor losses when the price of an asset drops.
A strike price is a set price at which a derivative contract can be bought or sold when it is exercised. For call options, the strike price is where the security can be bought by the option holder. For put options, the strike price is the price at which the security can be sold.
The support level represents a price point that an asset has had trouble falling behind within a given time frame. These levels are created when buyers enter the market anytime an asset dips to a lower price. Support levels are drawn with a line connecting the lowest lows of a given time frame.
The S&P 500 is an equity index made up of 500 of the largest companies traded on either the NYSE, Nasdaq, or Cboe. The S&P 500 is calculated by adding each company’s float-adjusted market capitalization. In order to be included in the S&P 500, a company must meet certain requirements, including achieving a specific market cap, having most of its shares in public hands, and being a public company for at least a year. Investors who want to invest in the S&P 500 index can purchase an index fund or exchange-traded fund that seeks to match the performance of the S&P 500.
Technical indicators are pattern-based signals produced by the price, volume, and/or open interest of a security or contract. They are commonly used by active traders to analyze short-term price movements.
A trailing stop is designed to protect gains by enabling a trade to remain open and continue to profit as long as the price is moving in the investor’s favor. The order closes the trade if the price changes direction by a specified percentage or dollar amount. A trailing stop is more flexible than a fixed stop-loss order, as it automatically tracks the stock’s price direction and does not have to be manually reset like the fixed stop-loss.
Uptrends are characterized by higher peaks and troughs than the ones found earlier in the trend. As long as the price is making these higher swing lows and higher swing highs, the uptrend is considered intact. Uptrends imply bullish sentiment among investors.
In the securities markets, volatility is often associated with big swings in either direction. For example, when the stock market rises and falls more than one percent over a sustained time frame, it is called a “volatile” market. An asset’s volatility is a key factor when pricing options contracts. Volatile assets are often considered riskier than less volatile assets because the price is expected to be less predictable.