Trading has its own language, a secret code that must be mastered in order to succeed in the trading industry. There are few places that help new traders learn the trading lingo.
Whether you day trade, swing trade, using stocks, futures or options, there are many specific words that have an entirely different meaning in the trading world. Trader Speak can be overwhelming for any new trader but, Trader Speak is especially important if you trade options.
GETTING STARTED
Let’s look at some of the Trader Speak that is specific to options trading in order to begin to decode this trading language.
| Trader Speak | If you are new to trading you might think it means… | In Trader Speak it actually means… |
|---|---|---|
| Iron Condor | This is not a bird flying over you looking to swoop in and give you profit | This option strategy gets I name from the “wing” that the strategy will create. A trader places a trade by buying or selling a car spread and a put spread. This option strategy will benefit you if your trading assumption is that you believe the stock will stay within a range by the time the option expires. This strategy will benefit you when the market is sideways. |
| Spread | If you are think that this is a topping for your toast, whether it be peanut butter or jam you would be wrong | In options a spread describes a strategy where a trader buys or sells at one strike price and buys or sells back another strike price for protection. This strategy offers smaller gains and conversely smaller losses. |
| Strike | Three strikes and you’re out may benefit a pitcher in baseball, or a good bowling player but it won’t add to your trading score card the same way. | A strike is the price of the option. There are many strike prices for each stock. |
| Naked Puts | No you do not need to actually be naked when you trade naked puts. | When you trade “naked” you are trading without offsetting the position with protection from another strike price. |
| Hedge | Your gardener won’t know how to manage this trade | A hedge is used to limit losses on your investment. A hedge is when you take an opposite position from your initial trade |
| Straddle | Get your mind out of the gutter! This is not a term that references where someone’s legs might be. | A straddle is the combination of purchasing an at the money put and call of the same strike and same expiration date. This trade would be placed if your trading assumption is that the price is going to really move but you aren’t sure of the direction. |
| strangle | Trading does not encourage violence, but this term could certainly make you think it might be dangerous. Don’t worry; you won’t lose your breath with this trade. | The combination of purchasing a strangle is an options trade that is placed when you trade an out of the money put and call with the same expiration. This trade would be placed if your trading assumption has a slight bias of the direction the stock will move. |
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[Editor’s note: These are just a few. Let’s keep the list growing. What are some other words that should be added to this list? Share your thoughts below.]
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