Derivatives

Long Strangle An option strategy buying out-of-the-money calls and puts at different strikes to profit from volatility while limiting upfront cost below a straddle.

Long Volatility An options strategy that profits when realized volatility exceeds implied volatility, typically through buying options or selling variance.

Longevity Derivative Financial instruments that transfer mortality and longevity risk from pension funds and insurers to capital markets through hedging.

Longevity Swap A contract in which a pension fund swaps its mortality risk by exchanging fixed for actual survivor-linked benefit payments, isolating longevity exposure.

Lookback Option An exotic option whose payoff depends on the lowest or highest price the underlying reached during the option's life, not just the final price.

Maintenance Margin Maintenance margin is the minimum account equity required to keep a position open, with a margin call issued if equity falls below it.

Managed Futures A diversified trading strategy where professionals use systematic or discretionary methods to profit from price trends in futures markets.

Mark-to-Market Mark-to-market is the daily revaluation of futures and other derivatives to current market prices, settling gains and losses immediately rather than deferring to maturity.

Mark-to-Market in Derivatives Daily revaluation of derivative positions to current market prices and associated collateral flows that manage counterparty and market risk.

Mark-to-Model Valuation in Derivatives How mark-to-model values illiquid derivatives using mathematical models rather than market prices, and the risks that introduces.

Married Put A strategy of buying stock and a protective put simultaneously, establishing a defined-risk long position from inception.

Maximum Loss for an Option Buyer The maximum loss for an option buyer is the premium paid, regardless of how far the underlying moves against the position.

Mean Reversion in Interest Rate Models Why interest rate models like Vasicek and CIR use mean reversion, what the speed parameter controls, and how it shapes bond prices and yield curves.

Micro Futures One-tenth-sized futures contracts on equity indices and commodities, designed to lower entry barriers and margin requirements for traders.

Minimum Tick Size in a Futures Contract What a tick is, how minimum tick size is defined, and how to convert one-tick moves into dollar profit and loss.

Minimum Variance Hedge Ratio The futures position size that minimises residual portfolio variance, derived from the correlation between spot and futures prices.

Moneyness The relationship between an option's strike price and the current price of the underlying, measured as a ratio or percentage difference.

Monte Carlo Options Pricing Monte Carlo option pricing simulates thousands of random price paths and computes option payoffs on each, then averages to find the expected value.

Naked Option An option position with no hedging position in the underlying, leaving the seller exposed to theoretically unlimited loss.

Naked Put vs Cash-Secured Put: Margin and Risk The key difference between naked puts and cash-secured puts: margin requirements, capital efficiency, and what happens when assignment occurs.

Negative Gamma Risk Explained Negative gamma risk occurs when you are short options and the underlying asset moves sharply. Understand P&L losses and why traders manage this exposure carefully.

Negative Roll Yield in Commodity ETFs Why commodity ETFs holding front-month futures repeatedly sell low and buy high in contango, creating structural drag versus spot prices.

Netting Agreement A contractual provision that offsets multiple derivative exposures between counterparties into a single net payment upon default or termination.

Netting Agreements in OTC Swaps Netting agreements in swap contracts collapse multiple exposures into a single net payment obligation, reducing credit risk and systemic contagion in OTC derivatives.

No-Touch Option A binary option that pays a fixed sum only if the underlying asset never touches a barrier level throughout the option's life.

Non-Deliverable Forward A cash-settled currency forward contract used when capital controls or market restrictions prevent physical delivery of one or both currencies.

Notional Principal in Swaps: What It Is and Why It Matters Notional principal in swap contracts is the underlying amount used to calculate payments; it's never exchanged between parties but forms the basis of all cash flows.

Notional Value The principal amount used to calculate cash flows in derivatives, even though the principal itself is rarely exchanged.

One-Touch Option A binary option that pays a fixed sum if the underlying asset touches a predetermined barrier level at any point before expiration.

Open Interest The total number of outstanding long and short positions in a futures or options contract—a key signal of market health, liquidity, and price conviction.

Open Interest vs Volume in Derivatives Markets Open interest vs volume derivatives: understand the difference between the number of open contracts and daily trading activity.

Option An option is a derivative contract that gives the holder the right, but not the obligation, to buy or sell an underlying asset at a fixed price on or before a set date. Calls are bullish; puts are bearish. Options have limited downside for the buyer but are complex and risky.

Option Assignment Risk The risk that a short option holder will be forced to settle the underlying position early when the option holder exercises their right.

Option Break-Even Price The underlying asset price at which an option position reaches zero profit or loss at expiration; critical for trading decisions.

Option Buyer The holder of an option contract who pays a premium for the right—not obligation—to buy or sell an underlying asset at a fixed strike price.

Option Chain A table showing all available call and put options for a stock, organized by strike price and expiration date.

Option Collar A strategy combining a protective put (long), held shares, and a covered call (short) to limit both downside loss and upside gain.

Option Contract Multiplier: Why One Contract Controls 100 Shares An option contract multiplier of 100 is the U.S. standard—one call or put contract grants the right to buy or sell 100 shares. Premiums are quoted per share but paid per contract.

Option Contract Size Explained The standard 100-share multiplier for equity options, how it affects cost and leverage, and when non-standard sizes arise.

Option Expiration Cycle The standardised schedule of months and expiration dates governing when options contracts terminate and settle.

Option Lot Size The standard contract multiplier in equity options—one contract controls 100 shares—and how it translates quoted premiums into real dollar exposure.

Option Moneyness at Expiration What happens to an in-the-money option at expiration: automatic exercise, pin risk, cash settlement, and holder outcomes.

Option Open Interest The count of outstanding option contracts still held by traders, revealing market positioning and liquidity conditions.

Option Open Interest vs Volume Distinguish open interest (total outstanding contracts) from daily volume; learn what each metric reveals about liquidity and market participation.

Option Payoff Diagram A graph showing profit and loss across different prices of the underlying asset at option expiration.

Option Pin Risk at Expiration Option pin risk occurs when the underlying closes near a strike at expiration, creating uncertainty about assignment and leaving position managers unable to act decisively.

Option Premium The option premium is the price paid by the buyer and received by the seller for the right (but not obligation) to exercise the option.

Option Premium Components Explained How an option premium breaks into intrinsic value and time value, and how each component changes as expiration approaches and the underlying moves.

Option Premium Costs for Small Accounts How contract size and minimum premiums affect small traders, and which option strategies remain accessible with limited capital.

Option Series A class of options sharing the same underlying, expiration date, and strike price; contracts in a series trade and settle as a single security.

Option Time Decay by Days to Expiration: The Theta Curve How option time decay accelerates as expiration nears, with decay rates for 90-, 30-, and 7-day contracts and the non-linear theta curve explained.

Option Volume The daily count of option contracts traded, distinct from open interest and signalling market activity and sentiment.

Option Writer The seller of an option contract who receives a premium and assumes the obligation to buy or sell the underlying asset if the buyer exercises.

Options Greeks The Greeks are five key metrics that measure how an option's price changes in response to different market factors: delta, gamma, theta, vega, and rho.

Options Greeks in an Iron Condor Strategy An iron condor sells near-the-money puts and calls, leaving a net-delta neutral position with short gamma, positive theta, and short vega. Learn how each Greek shifts as the underlying moves.

Options Greeks in Credit Spreads vs Debit Spreads Credit spreads and debit spreads have inverse Greeks profiles. Credit spreads benefit from time decay and falling volatility; debit spreads profit from directional moves and rising volatility.

Options Wheel Strategy Explained Master the repeating cycle of selling cash-secured puts and writing covered calls on assigned shares, with mechanics, break-even logic, and risk scenarios.

OpVol The Greek measuring an option's sensitivity to changes in the underlying asset's volatility.

Out-of-the-Money Out-of-the-money describes an option with no intrinsic value because exercising it would be immediately unprofitable.

Out-of-the-Money Expiration Option expiring worthless because underlying price doesn't exceed strike price.