Options Glossary: C

C2

C2 Options Exchange

Calendar spread

An option strategy which generally involves the purchase of a farther-term option (Call or put) and the writing of an equal number of nearer-term options of the same type and strike price. Example: buying 1 XYZ May 60 call (Far-term portion of the spread) and writing 1 XYZ March 60 call (Near-term portion of the spread). See also Horizontal spread.

Call option

An option contract that gives the owner the right to buy the underlying security at a specified price (Its strike price) for a certain, fixed period of time (Until its expiration). For the writer of a call option, the contract represents an obligation to sell the underlying stock if the option is assigned.

Carry / carrying cost

The interest expense on money borrowed to finance a securities position.

Cash settlement amount

The difference between the exercise price of the option being exercised and the exercise settlement value of the index on the day the index option is exercised. See also Exercise settlement amount.

CBOE

Chicago Board Options Exchange

Class of options

A term referring to all options of the same type - either calls or puts - covering the same underlying stock.

Close / Closing transaction

A reduction or an elimination of an open position by the appropriate offsetting purchase or sale. An existing long option position is closed by a selling transaction. An existing short option position is closed by a purchase transaction. This transaction will reduce the open interest for the specific option involved.

Closing price

The final price of a security at which a transaction was made. See also Settlement price.

Collar

A protective strategy in which a written call and a long put are taken against a previously owned long stock position. The options may have the same strike price or different strike prices and the expiration months may or may not be the same. For example, if the investor previously purchased XYZ Corporation at $46 and it rose to $62, a 'collar' involving the purchase of a May 60 put and the writing of a May 65 call could be established as a way of protecting some of the unrealized profit in the XYZ Corporation stock position. The reverse - a long call combined with a written put - might also be used if the investor has previously established a short stock position in XYZ Corporation. See also Fence.

Collateral

Securities against which loans are made. If the value of the securities (Relative to the loan) declines to an unacceptable level, this triggers a margin call. As such, the investor is asked to post additional collateral or the securities are sold to repay the loan.

Combination

A trading position involving out-of-the-money puts and calls on a one-to-one basis. The puts and calls have different strike prices, but the same expiration and underlying stock. A long combination is when both options are owned, and a short combination is when both options are written. Example: a long combination might be buying 1 XYZ May 60 call, and buying 1 XYZ May 55 put.

Condor spread

A strategy involving four strike prices that has both limited risk and limited profit potential. A long call condor spread is established by buying one call at the lowest strike, writing one call at the second strike, writing another call at the third strike, and buying one call at the fourth (Highest) strike. This spread is also referred to as a 'flat-top butterfly.'

Contingency order

An order to execute a transaction in one security that depends on the price of another security. An example might be: 'Sell the XYZ May 60 call at 2, contingent upon XYZ stock being at or below $59.50.'

Contract size

The amount of the underlying asset covered by the option contract. This is 100 shares for 1 equity option unless adjusted for a special event.  See also Adjustments.

Conversion

An investment strategy in which a long put and a short call with the same strike price and expiration are combined with long stock to lock in a nearly riskless profit. For example, buying 100 shares of XYZ stock, writing 1 XYZ May 60 call, and buying 1 XYZ May 60 put at desirable prices. The process of executing these three-sided trades is sometimes called 'conversion arbitrage.' See also Reversal / Reverse conversion.

Cover

To close out an open position. This term is used most frequently to describe the purchase of an option or stock to close out an existing short position for either a profit or loss.

Covered call / Covered call writing

An option strategy in which a call option is written against an equivalent amount of long stock. Example: writing 2 XYZ May 60 calls while owning 200 shares or more of XYZ stock. See also Buy-write and Overwrite.

Covered combination

A strategy in which one call and one put with the same expiration, but different strike prices, are written against each 100 shares of the underlying stock. Example: writing 1 XYZ May 60 call and writing 1 XYZ May 55 put, and buying 100 shares of XYZ stock. In actuality, this is not a fully 'covered' strategy because assignment on the short put would require purchase of additional stock.

Covered option

An open short option position that is fully offset by a corresponding stock or option position. That is, a covered call could be offset by long stock or a long call, while a covered put could be offset by a long put or a short stock position. This insures that if the owner of the option exercises, the writer of the option will not have a problem fulfilling the delivery requirements. See also Buy-write.

Covered put / Covered cash-secured put

Cash secured put is an option stategy in which a put option is written against a sufficient amount of cash (Or T-bills to pay for the stock purchase if the short option is assigned).

Covered straddle

An option strategy in which one call and one put with the same strike price and expiration are written against each 100 shares of the underlying stock. Example: writing 1 XYZ May 60 call and 1 XYZ May 60 put, and buying 100 shares of XYZ stock. In actuality, this is not a fully 'covered' strategy because assignment on the short put would require purchase of additional stock.

Credit

Money received in an account either from a deposit or a transaction that results in increasing the account's cash balance.

Credit spread

A spread strategy that increases the account's cash balance when it is established. A bull spread with puts and a bear spread with calls are examples of credit spreads.

Curvature

A measure of the rate of change in an option's delta for a one-unit change in the price of the underlying stock. See also Delta.

Cycle

The expiration dates applicable to the different series of options. Traditionally, there were three cycles:

Today, equity options expire on a hybrid cycle which involves a total of four option series: the two nearest-term calendar months and the next two months from the traditional cycle to which that class of options has been assigned. For example, on January 1, a stock in the January cycle will be trading options expiring in these months: January, February, April, and July. After the January expiration, the months outstanding will be February, March, April and July.