Glossary of Derivatives Terms – A

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American-style Exercise
An option contract that may be exercised at any time between the date of purchase and the expiration date. Most exchange-traded options are American-style. American-style binary options are more often referred to as ‘Touch Options’.

The process in which professional traders simultaneously buy and sell the same or equivalent securities for a riskless profit.

Ask Price
The price at which a seller is offering to sell an option or stock.

An option is at-the-money if the strike price of the option is exactly equal to the market price of the underlying security.  In common day parlance, one might be asked “What is the at-the-money volatility?” and in this instance it would be the implied volatility of the conventional options strike nearest nearest to the asset price. Asking the same question of digital options causes a problem as the vega of the at-the-money digital option is zero.

Automatic Exercise
A ‘Touch Option’ is, in functional terms, an American option which can be exercised at any time. In the case of the touch option the holder has won as soon as the strike/barrier has been hit.  In this case the holder would immediately exercise as there is nothing to be benefited from not doing so. In this instance, the option is automatically deemed to have been exercised so that the trader can carry on trading without having to wait until expiry for their winnings.

Average Down
To buy more of a security at a lower price, thereby reducing the holder’s average cost. (Average Up: to buy more at a higher price.)


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