day.
delta: The theoretical rate of change of an option’s price relative to theprice of its underlying, times the contract multiplier. Delta is positive forcalls and negative for puts. An option with a delta of 25 will move 25 per-cent as much as the underlying asset. The delta of an option changes withthe distance of the strike from the underlying. Delta also measures theequivalent unhedged position in the underlying asset.
divergence: Occurs when two markets, or a market and a benchmarkindex, or a market and an indicator move in opposite directions. Commonexamples include one stock index (e.g., the Dow Industrials) movinghigher while another stock index (e.g., the Dow Transports) moves lower,or when price makes a new high and a momentum oscillator (like the RSIor stochastics) makes a lower high. The implication is that by moving inthe opposite direction, the indicator (or secondary market or index) is notconfirming the price move in the market from which it is diverging. Cor-rections or reversals sometimes result in such circumstances.
Note: Oscillators often produce multiple divergence signals instrongly trending markets before the trend actually reverses; view suchsignals conservatively. See oscillator.
double bottom: A reversal pattern consisting of two price troughs: Themarket declines to a new low, retraces, then falls again to the approxi-mate price level of the first trough and retraces again. The implication isthat by failing to break below the first price low, the market is hittingsupport and the down trend (especially if it has been an extended one)could reverse.
double top: A reversal pattern consisting of two price peaks: The mar-ket rallies to a new high, retraces, then rallies again to the approximateprice level of the first peak and retraces again. The implication isthat by failing to penetrate the first price peak, the market is hittingglossary 211
resistance and the up trend (especially if it has been an extended one)could reverse.
earnings per share: After-tax profits divided by the number of out-standing shares. This is one of the most important fundamental measuresof a stock’s prospects for future price gains.
European-style option: A call or put option that can only be exercisedat the expiration of the contract.
ex-dividend: Without dividends. Stocks purchased on the ex-dividenddate are purchased without rights to the recent dividend. Owners of thestock are entitled to all future dividends.
exercise: The demand of the owner of a call option that the contractsize number of units of an underlying asset be delivered at the exerciseprice. The demand by the owner of a put option contract that the contractsize number of units of an underlying asset be bought from him or her atthe exercise price.
exercise price: The price at which the owner of a call option contractcan buy an underlying asset. The price at which the owner of a put optioncontract can sell an underlying asset.
expiration: The date the option contract becomes void unless previ-ously exercised. All stock and index option contracts expire on the Satur-day following the third Friday of the expiration month.
fair value: The mathematically calculated value of an option. It is de-termined by (1) the strike price of the option, (2) the current price of theunderlying, (3) the amount of time left until expiration, (4) the volatilityof the underlying, and (5) dividends.
farterm: Expiration months further from expiration.
Fibonacci series: A mathematical series in which each consecutivenumber is the sum of the two preceding numbers: 1, 2, 3, 5, 8, 13, 21, 34,55, 89, 144, and so on. As the series progresses, the ratio of a Fibonaccinumber divided by the immediately preceding number comes closer andcloser to 1.618, the Golden Mean, a ratio found in many natural phenom-ena as well as manmade objects like the Parthenon and the Great Pyra-mid. (The inverse, 0.618, has a similar significance.) Traders use variouspermutations of Fibonacci numbers to project retracement levels, amongother things.
fill or kill: Trade orders that are canceled if they are not filled almostimmediately (typically after being bid or offered three times), that is, “Ifit doesn’t get filled, it gets killed,” also (FOK). 
 
 
 
 
 
 
 
 
 
 
212 «glossary
flag: A short-term congestion pattern (perhaps one to three weeks on adaily chart) that appears as a small consolidation within a trend. Theupper and lower boundaries of the flag should be contained in horizontaltrendlines; if the lines converge, forming a small triangle, the pattern isreferred to as a pennant.
follow-up action: The term used to describe the trades an investormakes subsequent to implementing a strategy. Through these trades, theinvestor transforms one option strategy into a different one in responseto price changes in the underlying asset.
gamma: Expresses how fast delta changes with a one point increase inthe price of the underlying asset. Gamma is positive for all options. If anoption has a delta of 45 and a gamma of 10, then the option’s expecteddelta will be 55 if the underlying asset goes up one point. If delta is con-sidered to be the velocity of an option, then gamma is the acceleration.
gap: When the low of the current price bar is higher than the high of thepreceding price bar, or the high of the current price bar is lower than thelow of the preceding price bar. Some traders also use gap to refer to anopening price that is higher than the high (or lower than the low) of thepreceding price bar (an opening gap).
generals: Refers to the major buy side institutions such as MutualFunds.
good-till-canceled (GTC) order: A trade order that remains open untilyou cancel it (in practice, for perhaps 60 days; check with your broker);there is no need to re-enter it day after day.
guts: A strangle made up of in-the-money options with the underlyingasset centered between the strikes.
head-and-shoulders pattern: A reversal pattern consisting of threeprice peaks (in the case of a head-and-shoulders top) where the middlepeak (the head) is higher than the peaks on either side of it (the shoul-ders). A head-and-shoulders bottom is simply the inverse of this pattern.
high-level pattern: A pattern that develops near the top of the recenttrading range. For example, a consolidation that occurs at the top of anup trend could be called a high-level consolidation.
historical volatility: The degree of movement in a market over a pasttime period, typically 100 days. It is normally expressed as an annualizedpercentage. A 100-day historical volatility of 32 percent, for instance,means that over the last 100 days the market has fluctuated in such a waythat it would be expected to fluctuate about 32 percent in a year’s time. 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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212 ~=glossary
flag: A short-term congestion pattern (perhaps one to three weeks on adaily chart) that appears as a small consolidation within a trend. Theupper and lower boundaries of the flag should be contained in horizontaltrendlines; if the lines converge, forming a small triangle, the pattern isreferred to as a pennant.
follow-up action: The term used to describe the trades an investormakes subsequent to implementing a strategy. Through these trades, theinvestor transforms one option strategy into a different one in responseto price changes in the underlying asset.
gamma: Expresses how fast delta changes with a one point increase inthe price of the underlying asset. Gamma is positive for all options. If anoption has a delta of 45 and a gamma of 10, then the option’s expecteddelta will be 55 if the underlying asset goes up one point. If delta is con-sidered to be the velocity of an option, then gamma is the acceleration.
gap: When the low of the current price bar is higher than the high of thepreceding price bar, or the high of the current price bar is lower than thelow of the preceding price bar. Some traders also use gap to refer to anopening price that is higher than the high (or lower than the low) of thepreceding price bar (an opening gap).
generals: Refers to the major buy side institutions such as MutualFunds.
good-till-canceled (GTC) order: A trade order that remains open untilyou cancel it (in practice, for perhaps 60 days; check with your broker);there is no need to re-enter it day after day.
guts: A strangle made up of in-the-money options with the underlyingasset centered between the strikes.
head-and-shoulders pattern: A reversal pattern consisting of threeprice peaks (in the case of a head-and-shoulders top) where the middlepeak (the head) is higher than the peaks on either side of it (the shoul-ders). A head-and-shoulders bottom is simply the inverse of this pattern,
high-level pattern: A pattern that develops near the top of the recenttrading range. For example, a consolidation that occurs at the top of anup trend could be called a high-level consolidation.
historical volatility; The degree of movement in a market over a pasttime period, typically 100 days. It is normally expressed as an annualizedpercentage. A 100-day historical volatility of 32 percent, for instance,means that over the last 100 days the market has fluctuated in such a waythat it would be expected to fluctuate about 32 percent ina year’s time. 
 
 
 
 
 
 
 
 
 
 
 
212 = glossary
flag: A short-term congestion pattern (perhaps one to three weeks on adaily chart) that appears as a small consolidation within a trend. Theupper and lower boundaries of the flag should be contained in horizontaltrendlines; if the lines converge, forming a small triangle, the pattern isreferred to as a pennant.
follow-up action: The term used to describe the trades an investormakes subsequent to implementing a strategy. Through these trades, theinvestor transforms one option strategy into a different one in responseto price changes in the underlying asset.
gamma: Expresses how fast delta changes with a one point increase inthe price of the underlying asset. Gamma is positive for all options. If anoption has a delta of 45 and a gamma of 10, then the option’s expecteddelta will be 55 if the underlying asset goes up one point. If delta is con-sidered to be the velocity of an option, then gamma is the acceleration.
gap: When the low of the current price bar is higher than the high of thepreceding price bar, or the high of the current price bar is lower than thelow of the preceding price bar. Some traders also use gap to refer to anopening price that is higher than the high (or lower than the low) of thepreceding price bar (an opening gap).
generals: Refers to the major buy side institutions such as MutualFunds.
good-till-canceled (GTC) order: A trade order that remains open untilyou cancel it (in practice, for perhaps 60 days; check with your broker);there is no need to re-enter it day after day.
guts: A strangle made up of in-the-money options with the underlyingasset centered between the strikes.
head-and-shoulders pattern: A reversal pattern consisting of threeprice peaks (in the case of a head-and-shoulders top) where the middlepeak (the head) is higher than the peaks on either side of it (the shoul-ders). A head-and-shoulders bottom is simply the inverse of this pattern.
high-level pattern: A pattern that develops near the top of the recenttrading range. For example, a consolidation that occurs at the top of anup trend could be called a high-level consolidation.
historical volatility: The degree of movement in a market over a pasttime period, typically 100 days. It is normally expressed as an annualizedpercentage. A 100-day historical volatility of 32 percent, for instance,means that over the last 100 days the market has fluctuated in such a waythat it would be expected to fluctuate about 32 percent in a year’s time.glossary 213
If the market is currently priced at exactly 100, one would expect to seevalues between 68 (100 percent — 32 percent) and 132 (100 percent + 32percent).
implied volatility: A calculated value of the options pricing model. Tocalculate the implied volatility, an investor would use the last sale (bidprice or asked price) as the theoretical value of the option and solve themodel to determine what volatility would have been required to calculatethat value.
in-the-money (ITM): An option whose strike price is below the currentprice of the underlying stock or future (for call options) or above the cur-rent price of the underlying stock or future (for put options). With IBMtrading at $110, both the $100 call options and $120 put options are in-the-money.
inside day: A day with a higher low and lower high than the precedingprice bar.
intrinsic value: What an option’s premium would be if the price of theunderlying asset would remain at its current level until expiration. For anin-the-money option, it is the difference between its striking price and theprice of the underlying asset. The intrinsic value of an at-the-money orout-of-the-money option is zero dollars.
key reversal: A one-day reversal pattern that occurs when a marketmakes a new high (or low), preferably a spike high (or low), and then re-verses to close at or near the low (or high) of the price bar. The implica-tion is that the market has experienced an extreme intraday sentimentchange and a reversal is likely.
legging: The term used to describe a risky method of implementing orclosing out a spread strategy one side (leg) at a time. Instead of utilizinga spread order to insure that both the written and the purchased optionsare filled simultaneously, the investor gambles that a slightly better dealcan be obtained on the price of the spread by implementing it as two sep-arate orders.
limit move: The largest one-day price move allowed in a future con-tract, up or down. During limit up and limit down days, it is impossiblefor traders to trade at a price above a limit up move or at a price below alimit down move.
limit order: A trade order with a specified execution price, for example,“Buy 100 shares of Microsoft at 14734,” or “Sell 10 June T-bonds at 118!%2limit.” Your broker cannot pay more than 147% for your shares or sell forless than 118!742 for your contracts. A standard limit order is good for the214 «glossary
remainder of the day it is entered unless you give specific instructions tocancel the order. At the end of the day, your broker will cancel the orderautomatically, and you will have to place it again the next day if necessary.
liquidity: The amount of trading activity, and thereby the ease withwhich you can get in and out of a market. Measured by volume (and openinterest in the case of futures markets).
long: Purchasing an asset with the intention of selling it at some time inthe future. An asset is purchased long given the expectation of an in-crease in its price. ,
low-level pattern: A pattern that develops near the bottom of the re-cent trading range. For example, a consolidation that occurs at the bot-tom of a downtrend could be called a low-level consolidation.
margin: See collateral.
market order: A trade order executed immediately at the best possibleprice currently available, that is, at the market. If you wanted to buy Mi-crosoft using a market order, you could tell your broker, “Buy 100 sharesof Microsoft at the market.”
market-on-close (MOC): Trade orders executed as market orders, butonly during the closing of a particular market.
market-on-open (MOO): Trade orders executed as market orders, butonly during the opening of a particular market.
marking a position to market: The act of comparing the historic costof a position to its current market value.
McClellan oscillator: Measures the momentum of market breadth bycalculating the difference between the 40- and 20-day exponential mov-ing averages of daily advancing issues minus declining issues on the NewYork Stock Exchange. The idea behind the indicator is that more stockswill advance than decline in bull markets and vice-versa in bear markets.Generally, markets are considered oversold when the oscillator is below—100, and overbought when it is above +100.
The McClellan oscillator is not a stand-alone indicator. It measuresthe trend strength of advancing and declining issues, and not necessarilymarket turns. Leadership in a handful of stocks has characterized manybull markets, defying the premise that the broad market must advance forstock indexes to hit new highs.
measured move: A price projection based on previous price swings.The idea is that different legs of a price move will be roughly the samelength. For example, if a stock trading at 100 rallies 20 points to 120, thenglossary 215
pulls back 5 points to 115, a measured move projection would set a priceobjective of 135 if and when the rally resumes—another 20 point movefrom the low of the pullback.
momentum: Refers to the speed or strength of price movement. It alsois the name of a specific technical study that measure the difference be-tween today’s closing price and the closing price N days ago. See alsorate of change.
moving average: Calculations that smooth price action to reveal theunderlying trend.
There are several types of moving averages. The most basic is thesimple moving average (SMA), which is the sum #f closing prices over aparticular period divided by the number of days in that period. For ex-ample, a 5-day simple moving average would be the sum of the closingprices of the 5 most recent trading days, divided by 5; a 20-day movingaverage would be the sum of the 20 most recent closing prices divided by20, and so on. Each day the most recent closing price is added to theequation and the most distant day is dropped off.
A weighted moving average (WMA), the most simple of which is re-ferred to as a linearly weighted moving average, multiplies closingprices by a weighting factor that emphasizes recent price action. Theoldest price in the calculation is multiplied by 1, the second oldest by 2,the third oldest by 3, and so on. For example, a standard 5-day weightedmoving average would multiply the closing price of the fifth most re-cent trading day (5 trading days ago) by one, the fourth most recenttrading day by 2, the third most recent trading day by 3, the secondmost recent trading day by 4, and the most recent trading day by 5:These products would be summed and then divided by the sum of theweighting factors (in this case, 1+2+3+4+5=15) to derive the lin-early weighted moving average value for the current day. Other weight-ing schemes can be used to increase or decrease the emphasis of morerecent prices.
An exponential moving average (EMA) is actually a specific type ofweighted moving average. It uses a constant (a smoothing factor) be-tween 0 and 1 in the following manner: the current closing price (C) mul-tiplied by the smoothing constant (S) added to the product of theprevious day’s exponential moving average value (PEMA) and 1 minusthe smoothing factor, or:
Today’s EMA = S*C + (1 —- S)*PEMA
While the description and formula seem somewhat confusing, theapproach is actually simpler to calculate than other moving averages be-cause all you need is today’s closing price and yesterday’s EMA value. 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
216 glossary
The preceding descriptions use daily closing prices. Moving aver-ages can be constructed on intra-day, weekly, or monthly timeframes,and substituting the open, low, high, or average price of a bar for the clos-ing price.
One distinct type of moving average is the adaptive moving average(AMA), which dynamically adjusts the number of days in the moving av-erage calculation to current market volatility: In high-volatility periodsthe number of days would increase (making the average less sensitive andless prone to whipsaws), and in low volatility periods the number of dayswould decrease (making the average more sensitive to smaller priceswings).
naked: An uncovered option strategy. It is an investment in which op-tions sold short are not matched with either a long position in the under-lying or a long position in another option of the same type which expiresat the same time or later than the options sold. The loss potential withnaked writing is virtually unlimited.
near term: Expiration month closest to expiration.
offer (asked): The lowest price at which anyone is willing to sell asecurity.
one-eighties (180s): A two-day reversal pattern for strongly trendingstocks described by Jeff Cooper in his book Hit and Run Trading. Forbuys, on day one, the stock must close in the bottom 25 percent of itsdaily range. On day two, the stock must close in the top 25 percent of itsrange. The pattern is reversed for sells.
open (or opening price): The first trade price of the day (or other timeperiod). In futures markets, the open is a representative price of the firstminute of trading. In stocks, the open is the first recorded trade price.
opening transaction: The implementing of a new position.
open interest: The cumulative total of all option contracts of a particu-lar series sold but not repurchased or exercised.
option premium: The price of an option.
oscillator: A technical indicator that measures (usually) the velocity ofshorter term price action to determine whether a market is overbought oroversold. Well-known oscillators include the relative strength index (RSI)and stochastics. See also momentum and rate of change.
out-of-the-money (OTM): An option whose strike price is above thecurrent price of the underlying stock or future (for call options) or belowthe current price of the underlying stock or future (for put options). Withglossary 217
IBM trading at $110, both the $100 put options and $120 call options areout of the money. Out-of-the-money options have no intrinsic value.
outside day: A day with a high price higher than the previous day’shigh and a low price lower than the previous day’s low.
overbought: When a market has presumably risen too far too fast and isdue for at least a short-term correction. See oscillator.
oversold: When a market has presumably fallen too far too fast and isdue for at least a short-term correction. See oscillator.
par: Refers to a price of 100, for example, “Stock XYZ rallied over partoday, closing at 10158,” ‘
pennant: A short-term congestion pattern (perhaps one to threeweeks) that narrows into the form of a small triangle. (Pennants are es-sentially shorter duration triangle patterns.) See also flag.
pivot: When a market is rallying and today’s low is lower than the low ofthe highest day in the rally, that high becomes a pivot, or swing high.When a market is declining and today’s high is higher than the high of thelowest day, then that low becomes a pivot, or swing low.
point-and-figure chart: Differs from other price charts in that its timeaxis is not constant—prices are not plotted day by day or week by week.Instead, point-and-figure charts use columns of ascending Xs and de-scending Os to portray up moves and down moves (of a certain magni-tude), respectively, in a market. For example, every X might represent a-5 point rise (referred to as the box size) in the stock’s price. Price de-clines would only be denoted by a column of Os if price fell, say, 1.5points (three boxes, referred to as the reversal amount). In this case, ifthe stock rose from 25 to 25.5 to 26 to 26.5, you would add three Xs toyour column of Xs, one for each .5 point rise from 25 to 26.5. If it rose onlya quarter point or a half-point, or declined only a point, you would donothing. Only when price dropped by 1.5 points or more would you stopadding ascending Xs and start a column of descending Os immediately tothe right.
The larger the box size and reversal amount you use, the less sensi-tive your chart will be to smaller price fluctuations. Because a one-pointmove (or whatever increment you use for your box size) may occur in onehour or two days, the price action depicted in a point-and-figure chart isindependent of time.
position: The specific instance of a chosen strategy. An option positionis an investment comprised of one or more options. 
 
 
 
 
 
 
 
218 glossary
premium: The price of an option contract.
pullback: A shorter-term countertrend move. Pullbacks offer opportu-nities to enter existing trends. See also correction.
put: This option contract conveys the right to sell a standard quantityof a specified asset at a fixed price per unit (the striking price) for a lim-ited length of time (until expiration).
put/call ratio: Used by many as a leading indicator. Computed by divid-ing the four-day average of total put volume by the four-day average oftotal call volume.
rate of change: A momentum calculation that divides today’s closingprice by the closing price N days ago. Except for the scale, this study isvirtually identical to the momentum technical study, which measures thedifference between today’s close and the close N days ago.
resistance: A price level that acts as an overhead barrier to furtherprice gains. Prices will frequently rally to these levels and then retreat.Resistance (like support) is rarely a specific price; it is more often a rela-tively contained price range, frequently in the vicinity of past technicalpatterns. One of the basic precepts of support and resistance is that oncea support level is violated it becomes a likely new resistance level andwhen a resistance level is penetrated, it becomes a new support level.
reversal: A short underlying asset position protected by a syntheticlong underlying asset position. The synthetic long underlying asset posi-tion consists of the combination of a long call option and a short put op-tion. Both options have the same strike price and expire the same month.
reversal patterns: Price patterns that suggest a trend reversal ratherthan a continuation of the current trend. Double and triple tops/bottoms,head-and-shoulders patterns, cup-and-handle patterns, and V tops andbottoms are some examples of reversal patterns.
rollover: When one futures contract expires and the next contract inthe cycle becomes the new front month.
runaway: A strongly trending stock or future.
running cup-and-handle pattern: Occurs in an existing up trend. Inthis context, the pattern functions as a continuation pattern (a pause inthe trend) rather than a reversal pattern. See cup-and-handle pattern.
short: An obligation to purchase an asset at some time in the future. Anasset is sold short given the expectation of a decline in its price.glossary 219
slim jim: A narrow-range, intraday consolidation pattern that forms ator near the high or low of the day. Generally, the longer and tighter theconsolidation, the more explosive the eventual breakout.
spike: A price bar that extends much higher or lower than the sur-rounding price bars.
spread order: A type of order for the simultaneous purchase and sale oftwo options of the same type (calls or puts) on the same underlyingasset. If placed with a limit, the two positions must be traded for a spe-cific price difference or better.
stochastics: An oscillator based on the position of the current close rel-ative to the absolute price range over the last N days. Consists of twolines: %K, which is the basic calculation, and %D, which is a moving aver-age (typically three days) of the %K line. Usually, stochastics refers to anadditionally smoothed version of the formula, whereby the original %Dbecomes the new %K line and a moving average of this line becomes thenew %D line (this version is sometimes called “slow” stochastics, whilethe original calculation is called “fast” stochastics).
stop order: A trade order placed above or below the market's currentprice level that is intended either to liquidate a losing trade (a stop-lossorder) or to establish a new market position.
Stop orders become market orders as soon as their prices are
touched. A stop-limit order specifies the worst price at which a stop canbe filled, for example, “sell 100 shares of DAL at 45 on a stop, 43 limit.”
straddle: A long or short position in both call and put options. The op-tions share the same exercise price, expiration month and the same un-derlying asset. A short straddle means that both call and put options aresold short. A long straddle means that both call and put options arebought long.
strategy: One of various kinds of option investments, (i.e., long call,covered write, bull spread).
strike price: The fixed price per unit, specified in the option contract.
support: A price level that acts as a floor to further price declines.When a market repeatedly declines to a particular level and then rallies,the market is said to be offering support at that level.
Support (like resistance) is rarely a precise price; it is more often arelatively contained price range, frequently in the vicinity of past techni-cal patterns. 
 
 
 
 
 
 
 
 
 
 
220 = glossary
One of the basic precepts of support and resistance is that once asupport level is violated it becomes a likely new resistance level andwhen a resistance level is penetrated it becomes a new support level.
tail: A new high bar that opens and closes near its low, or a new low barthat opens and closes near its high.
theta: The daily drop in dollar value of an option due to the effect oftime alone. Theta is dollars lost per day per contract. Negative thetasignifies long option positions or debit spreads; positive theta signifiesshort options or credit spreads.
the “Turk”: A reference to what appears to be a calculated market sta-bilizing action by the Federal Reserve or its appointed ally, such as largebroker-dealers who do program trading and are active in the futures. TheTurk has had a tendency to “save the day” during many potential crisisoccasions, such as when it looks like the market is about to crash.
tick: The minimum price increment a stock, future, or option can tradein. For example, in a stock that trades in minimum increments of “eth ofa point, a move of 16 up or down would be a one-tick move. In the S&P 500futures, a tick is .10, in crude oil futures, a tick is .01, and so on.
tick indicator: Measures the difference between the number of up-tick-ing NYSE stocks ‘vs. the number of down-ticking NYSE stocks throughoutthe day. (Do not confuse with the term tick, used to describe a minimumprice fluctuation.)
time spreads: A long time spread is created by selling a near term op-tion and by buying a longer term option. Both options are on the same un-deriying asset, are of the same type, and have the same exercise price.
time value: This is the amount that the premium of an option exceedsits intrinsic value. If an option is out-of-the-money then its entire pre-mium consists of time value.
trading range: Nontrending, sideways price action with fairly definedupper and lower boundaries.
trailing stop: A stop order that is raised (in a rising market) or loweredC