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Options Trading: Struggling with the Maze of Jargon

Posted March 11, 2010

Topics: Finance & Investing

Most people struggle with the jargon involved with options trading. It does have a language of its own, partly from necessity but partly because insiders like to have their own language. So all of the specialized language used in the stock market pales in comparison.

When I wrote “The Options Trading Body of Knowledge” (FT Press, 2010), I wanted to include everything options traders would find useful. So I decided to include a glossary. At first I thought I’d limit it to only the “essential” options definitions. But then I realized that to comprehend the entire range of terminology, I needed to go beyond the basics, so the glossary grew a little bit. By the time I was done, it took up 74 pages of the book.

That’s the problem all traders face. Mastering the jargon is not easy, and even experienced traders and investors have to look up terms regularly. If you’re not sure about the meaning of the “iron butterfly" or “pinning the strike,” you’re not alone. If you still confuse straddles and strikes, don’t be ashamed. Novices might have trouble retaining the meaning of strike, expiration, underlying stock, and cycle, but once they get into the field, they discover that the more they know the more they need to define.

Strategies account for the lion’s share of terminology and, by the way, those 75 pages don’t include any strategy. They’re listed but then refer to another part of the book, the 110 pages on alphabetically listed, explained and illustrated option strategies. So mastering options is not just a matter of memorizing and applying words and phrases. It also demands that you apply those terms to dozens of different situations.

The solution is to avoid getting overwhelmed. Just remember to keep your focus and track the specific strategies, reminding yourself about the meanings of terms as you proceed. Once you get going with this, you will soon gain a working knowledge in the maze of jargon.

Finally, remember that you’re not alone. Different phrases often overlap and have confusing meanings, so everyone struggles with the terminology. In the market, some of it is very graphic (let’s not forget the “dead cat bounce”). Options terms tend to be a little more on the dry side, but even that trader you know who has been working options for 20 or 30 years still has to look up words now and then. That trader might not admit it, but believe me, it’s true.