What Does Implied Volatility - IV Mean? The estimated volatility of a security's price.

In general, implied volatility increases when the market is bearish and decreases when the market is bullish. This is due to the common belief that bearish markets are more risky than bullish markets. Implied volatility is sometimes referred to as "vols." Investopedia explains Implied Volatility - IV In addition to known factors such as market price, interest rate, expiration date, and strike price, implied volatility is used in calculating an option's premium. IV can be derived from a model such as the Black-Scholes Model. What Does Forward Premium Mean? When dealing with foreign exchange (FX), a situation where the spot futures exchange rate, with respect to the domestic currency, is trading at a higher spot exchange rate then it is currently. A forward premium is frequently measured as the difference between the current spot rate and the forward rate, but any expected future exchange rate will suffice. Investopedia explains Forward Premium It is a reasonable assumption to make that the future spot rate will be equal to the current futures rate. According to the forward expectation's theory of exchange rates, the current spot futures rate will be the future spot rate. This theory is routed in empirical studies and is a reasonable assumption to make in the long term. What Does Volatility Smile Mean? A common graphical shape that results from plotting the strike price and implied volatility of a group of options with the same expiration date.

Investopedia explains Volatility Smile A volatility smile is used by investors to price options in the foreign currency market and the equity option market. What Does Strangle Mean? An options strategy where the investor holds a position in both a call and put with different strike prices but with the same maturity and underlying asset. This option strategy is profitable only if there are large movements in the price of the underlying asset. This is a good strategy if you think there will be a large price movement in the near future but are unsure of which way that price movement will be.

Investopedia explains Strangle The strategy involves buying an out-of-the-money call and an out-of-the-money put option. A strangle is generally less expensive than a straddle as the contracts are purchased out of the money.

What Does Straddle Mean? An options strategy with which the investor holds a position in both a call and put with the same strike price and expiration date.

Investopedia explains Straddle Straddles are a good strategy to pursue if an investor believes that a stock's price will move significantly, but is unsure as to which direction. The stock price must move significantly if the investor is to make a profit. As shown in the diagram above, should only a small movement in price occur in either direction, the investor will experience a loss. As a result, a straddle is extremely risky to perform. Additionally, on stocks that are expected to jump, the market tends to price options at a higher premium, which ultimately reduces the expected payoff should the stock move significantly. What Does Short Straddle Mean? An options strategy carried out by holding a short position in both a call and a put that have the same strike price and expiration date. The maximum profit is the amount of premium collected by writing the options. Investopedia explains Short Straddle If a trader writes a straddle with a strike price of $25 and the price of the stock jumps up to $50, the trader would be obligated to sell the stock for $25. If the investor did not hold the underlying stock, he or she would be forced to buy it on the market for $50 and sell it for $25. The short straddle is a risky strategy an investor uses when he or she believes that a stock's price will not move up or down significantly. Because of its riskiness, the short straddle should be employed only by advanced traders due to the unlimited amount of risk associated with a very large move up or down. What Does Long Straddle Mean? A strategy of trading options whereby the trader will purchase a long call and a long put with the same underlying asset, expiration date and strike price. The strike price will usually be at the money or near the current market price of the underlying security. Investopedia explains Long Straddle The strategy is a bet on increased volatility in the future as profits from this strategy are maximized if the underlying security moves up or down from present levels. Should the underylying security's price fail to move or move only a small amount, the options will be worthless at expiration.

What Does Vega Mean? The measurement of an option's sensitivity to changes in the volatility of the underlying asset. Vega represents the amount that an option contract's price changes in reaction to a 1% change in the volatility of the underlying asset. Volatility measures the amount and speed at which price moves up and down, and is often based on changes in recent, historical prices in a trading instrument. Vega changes when there are large price movements (increased volatility) in the underlying asset, and falls as the option approaches expiration. Vega is one of a group of Greeks used in options analysis, and is the only one not represented by a Greek letter. Investopedia explains Vega One of the primary analysis techniques utilized in options trading is the Greeks measurements of the risk involved in an options contract as it relates to certain underlying variables. Vega measures the sensitivity to the underlying instruments volatility. Delta measures the sensitivity to the underlying instrument's price. Gamma measures the sensitivity of delta in response to price changes in the underlying instrument. Theta measures the time decay of the option. What Does Gamma Mean? The rate of change for delta with respect to the underlying asset's price. Gamma is an important measure of the convexity of a derivative's value, in relation to the underlying. In a delta-hedge strategy, gamma is sought to be reduced in order to maintain a hedge over a wider price range. A consequence of reducing gamma, however, is that alpha too will be reduced. Investopedia explains Gamma Mathematically, gamma is the first derivative of delta and is used when trying to gauge the price movement of an option, relative to the amount it is in or out of the money. When the option being measured is deep in or out of the money, gamma is small. When the option is near or at the money, gamma is at its largest. Gamma calculations are most accurate for small changes in the price of the underlying asset. What Does Delta Mean? The ratio comparing the change in the price of the underlying asset to the corresponding change in the price of a derivative. Sometimes referred to as the "hedge ratio". Investopedia explains Delta For example, with respect to call options, a delta of 0.7 means that for every $1 the underlying stock increases, the call option will increase by $0.70. Put option deltas, on the other hand, will be negative, because as the underlying security increases, the value of the option will decrease. So a put option with a delta of -0.7 will decrease by $0.70 for every $1 the underlying increases in price. As an in-the-money call option nears expiration, it will approach a delta of 1.00, and as an in-the-money put option nears expiration, it will approach a delta of -1.00.