Volatility Glossary
Volatility trading can sometimes seem to have a language entirely of its own. Our glossary will hopefully help explain all the technical terms involved.
Hi-Lo
A Hi-Lo binary concerns whether the day's high or low will be a given distance from the previous closing level.
Ladder
A Ladder binary concerns whether the underlying market will finish above a stated level. For example, a 'FTSE® to be above 5400 Ladder' will settle at 100 if the FTSE® finishes the day above 5400 and will settle at 0 if the FTSE® finishes the day below 5400.
OneTouch
A OneTouch binary concerns whether the market will touch or go through the barrier level at any time before the stated expiry. The market will settle at 100 if the level in question is breached before expiry time and will settle at 0 if the level is not breached before expiry time.
Target
A Target binary concerns whether a market will close the day in a certain range. For example, 'FTSE® to Finish Up 10-20' will close at 100 if the FTSE® finishes up between 10 and 20 points from the previous day's closing level.
Tunnel
A Tunnel binary concerns whether the market will stay within two given barrier levels for the full period up to expiry. For example a 'FTSE® 100 Tunnel' will settle at 100 if the FTSE® stays within the +100 / -100 range for the whole trading day, but if it hits up 100 or down 100 at any point during the trading day the binary will settle at 0. Therefore when you buy a Tunnel you are 'selling volatility' and when you sell a tunnel you are 'buying volatility'.
Break even
Break even is the point at which no profit is realised on an option position on expiry. A 5300 FTSE® call bought at 14 means you will have a break even of 5314 (5300 + 14). Similarly, a 5300 FTSE® put bought at 16 has a break even point of 5284 (5300 – 16), as the market has to fall for the put to make money.
Call
A Call is the right, but not the obligation, to buy at a fixed price.
Premium/Price
The term 'premium' refers simply to the price of an option or the net cost of a particular options strategy such as a Straddle or Strangle.
Put
A Put is the right, but not the obligation, to sell at a fixed price.
Settlement/Expiry
All options with IG Markets are cash-settled. This means that there is no physical exercise and therefore no exposure after the settlement. There is also no need to exercise your options if they are in the money - they will be settled automatically. For daily options, the settlement is always on the relevant cash market for indices, spot market for forex, and futures contract for commodities.
Straddle
A Straddle is a combination of a Call and Put of the same strike. Someone who has bought the Straddle (and therefore bought both the call and put) has 'bought volatility', and so is backing a relatively significant move, in either direction, in the underlying asset. Conversely. someone who sells the Straddle is saying there is unlikely to be a significant move.
Strangle
A Strangle is very similar to a Straddle, the only difference being that it involves the buying or selling of options with distinct strikes.
Strike
All options have a strike. The strike is the price at which calls allow the holder to, effectively, go long, or at which puts allow the holder to go short.
