Derivatives

Risk-Neutral Pricing The foundational theorem that derivatives are priced by discounting expected payoffs under a risk-neutral probability measure, not real-world probabilities.

Risk-Neutral Probability vs Real-World Probability in Options Pricing Why options pricing models use artificial risk-neutral probabilities instead of actual statistical forecasts, and what that means for interpreting results.

Risks of the Options Wheel Strategy The options wheel strategy exposes traders to hidden downside risks: assignment on a falling stock, opportunity cost, and dividend gaps that promotional guides omit.

Rolling a Covered Call to Avoid Assignment How to extend or adjust a covered-call position before expiration to prevent forced stock sale and keep shares while collecting additional premium.

Rolling a Derivatives Position Explained What it means to roll a derivatives position forward: closing the near contract and opening a new one before expiration, with costs and timing implications.

Rolling an Option Position Rolling an option means closing one position and opening another with a different strike or expiration. Learn when traders use rolls to extend gains or manage risk.

Rolling an Options Position: Mechanics and When It Makes Sense Learn how to roll an options position by closing and reopening simultaneously, managing expiration, strikes, and net credits or debits.

Rollover Management How traders and funds maintain long-term futures positions by systematically closing expiring contracts and opening equivalent new ones—managing the cost and mechanics of staying invested.

Rough Volatility Model A framework where volatility follows a rough path driven by fractional Brownian motion, matching realized volatility persistence and limiting options smiles.

SABR Model A pricing framework for interest-rate options where both forward rates and volatility follow stochastic processes, capturing the volatility smile in fixed-income markets.

Seagull Option A three-leg options structure that combines a call spread with a short put to reduce cost, popular in forex and emerging markets.

Seagull Spread A three-leg option strategy that buys protection at one strike and sells two options at higher strikes, designed to reduce hedging cost in bullish markets.

Second-Order Greeks Explained Second-order Greeks (vanna, volga, charm, veta) measure how delta, gamma, theta, and vega change. Essential for hedging and portfolio risk management.

Selecting the Right LEAPS for a Poor Man's Covered Call LEAPS selection for poor man's covered calls requires balancing delta, time decay, and intrinsic value. Learn the guidelines for strike and expiry.

Settlement Procedures The detailed mechanics of finalizing futures and forward contracts—from notification through delivery or cash payment—the operational framework that makes derivatives markets work.

Shadow Delta The effective delta of a barrier or exotic option when its payoff becomes discontinuous near the barrier level.

Short Combo A bearish options strategy combining a short OTM call with a long OTM put to create leveraged exposure with minimal net premium.

Short Iron Condor for Small Accounts How to trade an iron condor with limited capital: strike width, buying power reduction, position sizing, and realistic win rates for small accounts.

Short Straddle An options strategy that sells both a call and put at the same strike, collecting premium when the underlying price stays flat, but facing unlimited risk on the upside.

Short Strangle An option strategy selling out-of-the-money calls and puts at different strikes to collect premium while accepting defined risk if the underlying moves sharply.

Short Strangle for Small Accounts: Margin Considerations Why small accounts rarely hold naked short strangles, the margin demands that drive substitution, and how iron condors replicate the payoff with less risk.

Short Volatility An options strategy that profits when realized volatility stays below implied volatility, typically through selling options or collecting time decay.

Shout Option An option that grants the holder a single right to lock in a minimum payoff at any point before expiry.

Shout Option: How the Lock-In Mechanism Works Understand shout option mechanics: lock in gains at any point while retaining upside. Compare cost and payoff with standard lookback options.

Single Stock Futures Standardised futures contracts on individual equities, enabling leverage and short positions on company shares.

Skip-Strike Butterfly A butterfly variant where one wing skips a strike between the body and the long option, creating directional bias and altered payoff characteristics.

Snowball Swap An exotic swap where unpaid interest accumulates and compounds if a coupon cap is exceeded in any period.

SOFR Swap A SOFR swap is an interest-rate swap using SOFR (Secured Overnight Financing Rate) as the floating leg, replacing the deprecated LIBOR standard.

Spark Spread Futures A spread trade between natural gas futures and electricity futures that hedges or speculates on a generator's margin from producing power.

Speed Third-order derivative measuring the sensitivity of gamma to changes in underlying asset price.

Split-Strike Synthetic An options strategy that uses a purchased call and sold put at different strikes to replicate stock ownership while reducing upfront cost and accepting defined gap risk.

Spread Derivative A contract that pays off based on the difference between two underlying prices or rates, enabling hedging or speculation on relative movements.

Spread Option An option whose payoff depends on the difference between two underlying prices or rates, useful for hedging relative price movements.

Spread Position A paired long-short options trade that reduces net premium paid and limits both profit and loss.

Spread Trading (Futures) A strategy betting on the relative change between two futures prices—buying one contract and shorting another—to profit from mean reversion or exploitable mispricing between related contracts.

Step-Up Swap An interest-rate swap where the fixed coupon rises on a pre-set schedule, matching the step-up structure of many corporate debt facilities.

Stochastic Local Volatility Model A hybrid pricing framework that combines local and stochastic volatility to match the volatility smile while preserving realistic spot and variance dynamics.

Stock Index Futures Standardised futures contracts tracking equity indices, enabling leveraged broad market exposure without owning individual stocks.

Straddle An option strategy combining a long call and long put at the same strike and expiration, profiting from large price moves in either direction.

Straddle A long call and put at the same strike price and expiration, betting on large price volatility regardless of direction.

Straddle Before an Earnings Announcement Buying a straddle before earnings bets on volatility expansion, but implied volatility crush after earnings often decimates long positions. Here's why.

Straddle vs Strangle: Breakeven Points and Cost Tradeoffs Compare at-the-money straddles and out-of-the-money strangles: how breakeven distances and premium costs differ for the same move expectation.

Strangle An option strategy combining out-of-the-money call and put options at different strikes, betting on large price moves at lower upfront cost than a straddle.

Strangle A long call and long put, both out-of-the-money, that profits from large price moves while limiting loss to premium paid.

Strap Strategy A volatility options strategy buying two call options and one put at the same strike to profit from large moves with upside bias.

Strike Price The strike price is the fixed price at which the holder of an option can buy (call) or sell (put) the underlying asset, set when the option contract is issued.

Strip Strategy A volatility options strategy buying two put options and one call at the same strike to profit from large moves with downside bias.

Structured Product A security combining a bond with embedded derivatives, engineered to deliver custom risk-return payoffs linked to underlying assets.

Swap A swap is an agreement between two parties to exchange cash flows based on different terms, most commonly used to manage interest-rate or currency risk.

Swap Compression Explained How swap compression reduces notional outstanding and counterparty risk by consolidating offsetting derivative positions without altering net market exposure.

Swap Curve The yield curve constructed from par interest-rate swap rates across maturities, used as a benchmark for corporate and institutional pricing.

Swap Dealer Role Explained How swap dealers act as OTC market-makers in interest rate, currency, and credit swaps—managing exposure, setting pricing, and meeting Dodd-Frank registration and hedging rules.

Swap Duration and DV01 Explained Swap DV01 and duration explained: how to calculate basis-point sensitivity in interest rate swaps and use it for hedging.

Swap Novation Explained Novation is the replacement of one party to a swap contract with a new counterparty, requiring consent of the original party and transferring all rights and obligations.

Swap Spread The difference between a fixed interest-rate swap and a Treasury yield of equivalent maturity, reflecting credit and liquidity premia.

Swap Tenor Explained What is swap tenor in derivatives? Learn how maturity dates affect swap pricing, duration, and hedge effectiveness across interest rate and currency swaps.

Swap Upfront Fee vs Par Swap: How Off-Market Swaps Work Off-market swap upfront payment explained: why swaps are structured with cash at inception instead of at-market rates, how the fee is calculated, and when they're used.

Swap vs Forward Rate Agreement: Key Differences Compare a single-period FRA with a multi-period interest rate swap to understand when each instrument hedges floating-rate exposure.

Swaption A swaption is an option to enter a swap contract at a future date, allowing the holder to lock in swap terms conditionally.

Synthetic Covered Call An options strategy that replicates a covered call payoff using long deep-in-the-money call and short out-of-the-money call, without holding the underlying stock.