Options, Futures & ETFs Terms

Financial products whose value depends on the price of an underlying asset such as a stock, index, interest rate or commodity. Futures and options are the best-known examples. Because they let you trade a large amount with a small sum, they can be used both to reduce risk and to increase it.

A contract to buy or sell at a set price on a set future date, agreed today. Index futures such as KOSPI 200 and S&P 500 futures trade heavily, and their moves before and after regular hours are used to gauge the mood for the next session.

A contract that trades a 'right' to buy or sell at a set price by a set date. The buyer can walk away if it is unfavorable and pays a premium for that right. Single-stock options trade very actively in the U.S.

A call option is the right to buy at a set price, and a put option is the right to sell. Investors expecting a rise often buy calls, while those expecting a decline, or wanting protection against one, often buy puts.

The preset price at which an option lets you buy or sell the stock. Even for the same stock, many separate options trade at different strike prices and expiration dates.

e.g. A call option with a $100 strike lets you buy at $100 even if the stock rises to $120

The day a futures or options contract ends. U.S. stock options usually expire monthly on the third Friday, and many also expire weekly. Korean index options expire monthly on the second Thursday, and weekly options also exist. Trading tied to expiry tends to pile up just beforehand, which can make prices swing.

The price paid to buy the option right. It depends on the gap between the strike and the stock price, the time remaining and expected volatility (implied volatility). The most an option buyer can lose is this premium.

An option that would be profitable to exercise right now is in the money (ITM), one that would not is out of the money (OTM), and one whose strike is about equal to the stock price is at the money (ATM). Out-of-the-money options are cheap but have a high chance of expiring worthless.

e.g. With the stock at $100, a $90-strike call is in the money and a $110-strike call is out of the money

The size of future price swings the market expects, as built into option prices. It tends to rise sharply just before earnings and fall quickly afterward.

Values that show how sensitive an option's price is to different factors. Delta measures sensitivity to the stock price, gamma how fast delta changes, theta the value lost as time passes, and vega sensitivity to changes in volatility.

As an option nears expiration, the value tied to the time left shrinks. Even if the stock price stays put, the option loses a little value each day, and the loss speeds up right before expiry. It works against option buyers and in favor of sellers.

Put option volume divided by call option volume. A reading above 1 means relatively more investors are protecting against or betting on a decline.

The number of futures or options contracts still outstanding, neither closed out nor expired. Rising open interest means new money is coming in, and large option positions piled at a particular strike can affect the stock price near expiry.

A chain reaction in which heavy call buying makes the brokers (market makers) who sold the options buy shares to hedge, which lifts the price and forces them to buy even more. It can cause sharp rises over a short period.

The day when index futures, index options, single-stock futures and single-stock options all expire together. In the U.S. it falls on the third Friday of March, June, September and December (it is also called 'triple witching' because single-stock futures no longer exist), and in Korea on the second Thursday of those months. Position-closing trades pile up, so volume jumps and prices can swing.

A measure, calculated from S&P 500 option prices, of how much the market expects U.S. stocks to swing over the next 30 days. It jumps when stocks plunge or the mood turns anxious, which is why it is called the fear index. Korea has a similar measure, the VKOSPI.

Investing more than your own money by using borrowed funds or derivatives. Gains are multiplied when prices rise, but losses are multiplied just as much when they fall.

Margin is the collateral you must put up to trade futures, options or borrowed funds. If losses push it below the required level, you get a demand to add money (a margin call), and if you cannot, the position is closed out by force.

Taking an opposite position to reduce the risk of loss on an asset you own, such as holding a stock while buying a put option or selling index futures. Like insurance, it costs something but guards against big losses.

Closing a futures or options contract near expiry and moving to the next contract. ETFs that hold commodity futures roll every month, and the price difference between contracts affects their returns.

A fund built to track an index or a particular asset and listed on an exchange like a stock. It spreads your money across many holdings at once and can be bought and sold during the trading day like a stock.

e.g. Buying one share of an S&P 500 ETF spreads your money across 500 large U.S. companies

A security issued and listed by a brokerage that promises to pay the return of an index. It trades like an ETF, but it is the issuer's promise rather than a fund, so if the issuing firm fails you may not get your money back.

Leveraged ETFs aim for 2x or 3x an index's daily return, and inverse ETFs aim for the opposite direction (such as -1x). Because the target is a daily return, holding them for a long time through ups and downs can leave results far from a simple multiple of the index's return.

e.g. If the index rises 10% one day and falls 10% the next, it is down 1%, but a 2x ETF is down about 4%

An ETF that holds stocks or an index and sells call options on them, paying out the premium it collects as distributions. Steady monthly payouts are the appeal, but gains are capped when prices rise sharply.

How far an ETF's return strays from the index it tries to follow. It comes from fees, trading costs and the fund's methods, and the smaller it is, the better the ETF tracks its index.

The percentage by which an ETF or ETN's market price is above or below its actual value (net asset value, or NAV). A large gap means you could overpay or sell too cheaply, so it is worth checking before placing an order.

The annual cost taken from fund assets for managing an ETF or fund. It is not billed separately but built gradually into the price, so it is easy to miss, yet the longer you hold, the bigger its effect on returns.

e.g. Putting 10 million won in an ETF with a 0.5% expense ratio costs about 50,000 won a year