ATM: At-the-money: An option is at-the-money if the strike price, the price the option holder must pay to exercise the option, is the same as the current price of the underlying security on which the option is written. An at-the-money option has no intrinsic value, only time value.


Buy/Write: The term buy-write is used to describe an investment strategy in which the investor buys stocks and writes call options against the stock position. The writing of the call option provides extra income for an investor who is willing to forego some upside potential.


BXM: The CBOE S&P 500 Buy Write Index (BXM) is a hypothetical benchmark index designed to track the performance of a hypothetical buy-write strategy on the S&P 500 Index. The BXM Index was developed by the CBOE in cooperation with Standard & Poor's. The BXM is a passive total return index based on (1) buying an S&P 500 stock index portfolio, and (2) "writing" (or selling) the near-term S&P 500 Index "covered" call option. The SPX call written will have about one month remaining to expiration, with an exercise price just above the prevailing index level (i.e., slightly out of the money). The SPX call is held until expiration and cash settled, at which time a new one-month, near-the-money call is written. The BXM records run from July 1988 to the present.


Call option: Buyer has the right to Buy shares at a fixed price.


Deferred volatility - The implied volatility of a long-duration option, typically the fi rst LEAP expiration month.


Delta: Measure of the relationship between an option price and the underlying futures contract or stock price. As options near expiration, “in the money” contracts approach a delta of 1.


Expiration: Date on which a contract (option contract) or agreement ceases to be effective. It’s the last day on which an option can be exercised. If it is not, traders say it expired worthless.


Implied volatility - The volatility of a stock implied by the value of the stock's option derivative. Intrinsic Value and

Time Value: The intrinsic value (or "monetary value") of an option is the value of exercising it now. Thus if the current (spot) price of the underlying security is above the agreed (strike) price, a call has positive intrinsic value (and is called "in the money"), while a put has zero intrinsic value.


ITM: In-the-money: An in-the-money option has positive intrinsic value as well as time value. A call option is in-the-money when the strike price is below the current trading price. A put option is in-the-money when the strike price is above the current trading price. Another characteristic of In-the-money options is that when the current price is much higher than the strike price, for a call option, this option behaves like the underlying security because the probability of exercise is very high.


Option Duration: The length of time until the date of expiration of the option. Capstone typically has an option duration of 4-6 months as an average in the portfolio. We seek to stagger the life of the options so that they are not all expiring in the same month. This contributes to more constant cash fl ow and less possibility that a majority of the portfolio could be called away leaving too much cash not invested.


Option Premium: Amount per share paid by an option buyer to an option seller for the right to buy (call) or sell (put) the underlying security at a particular price within a specifi ed period. A premium of $5 per share means an option buyer would pay $500 for an option on 100 shares to the option seller. Capstone is a seller of options and the premiums contribute to the cash flow in the account.


OTM: Out-of-the-money: An out-of-the-money option has no intrinsic value. A call option is out-of-the-money when the strike price is above the current trading price of the underlying security. A put option is out-of-the-money when the strike price is below the current trading price of the underlying security.


Prompt Volatility - The implied volatility of a short-duration option, typically, the current expiration month.


Put Option: Buyer has the right to sell shares at a fi xed price.


Stock Option: A contract giving its owner the right to buy or sell a fi xed number of shares at a fi xed price at a fixed time in the future.


Strike Price / Exercise Price: Price at which a stock or commodity underlying a call or put option can be purchased or sold over a specified period.


Theta: The change in the option price caused by a change in the time value (time decay).


VIX: The ticker symbol for the Chicago Board Options Exchange Volatility Index, a popular measure of the implied volatility of S&P 500 index options. Referred to by some as the fear index, it represents one measure of the market's expectation of volatility over the next 30 day period.