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Options Trading -- Four Things to Remember About Terminology

Posted July 29, 2010

Topics: Finance & Investing

Anyone new to the options market knows that the jargon and special, complex descriptions of trades make this a difficult field to master. It’s a struggle. When do you get to the point where all of the jargon comes to you easily, when you overcome the confusion? When does it get easy? There is an answer …

Few fields are as complex as options trading. Those involved have a language of their own and, like any language, it takes practice to master it. Four things everyone should keep in mind about this:

1. It’s complicated because it is flexible. The richly flexible nature of options trading demands that special terms are used for every conceivable situation. And there are many. This goes beyond the binary distinctions inherent in options trading: call/put, long/short, bull/bear, buy/sell … the permutations in options strategies run into the hundreds. This creates the need for terms to distinguish one strategy from another.

2. Insiders like jargon. In every highly specialized field, you are going to find that those who know the most enjoy the jargon more than anyone else. It’s an exclusive club in a sense, consisting of those who are comfortable with the words and phrases, versus everyone else. It isn’t fair, but it is human nature.

3. You can learn the language of options. It takes time and it isn’t easy, but anyone can get to a conversational level with options. So when another trader tells you they are going long on August calls in an iron condor, offset by a short bear butterfly, you don’t have to just stare at them in a dazed moment of confusion. You will know the right response (if there is one) - like “Why would anyone want to do that?” for example.

4. Everyone is confused to a degree. No matter how many years you spend trading, the truth is that no one ever gets entirely comfortable with the jargon. New terms are being invented all the time, and no one can remember everything. Like the bookkeeper who secretly has ‘debit’ written on his left hand and ‘credit’ on his right, options traders need reminding now and then. Because the real point to remember is that you’re not alone. Everyone has to struggle with the jargon, and anyone who claims to be completely comfortable probably lost a lot of money on last week’s trade …

Michael C. Thomsett is an options author and has also written for FT Press’ Agile Investor series, which can be viewed on FTPress.com. Thomsett’s latest FT Press books are Put Option Strategies for Smarter Trading and Trading with Candlesticks.