BACK MONTHS: Refers to the classes of options with the expiration months that are further dated than the option class with the nearest expiration month.

BACKSPREAD: A type of options spread in which a trader holds more long positions than short positions. The options are all on the same stock and usually of the same expiration. An example of a backspread using call options would be selling one $45 call option for $5 and purchasing two $50 call options for $2.10 each. The trader in this case would benefit from a large move past $50 because he/she is holding more long options than short.

BANK GUARANTEE LETTER: This is a guarantee from a lending institution ensuring that the liabilities of a debtor will be met. In other terms, if the debtor fails to settle a debt, the bank will cover it.

BASIS POINT: This is a unit that is equal to 1/100th of 1%, and is used to denote the change in a financial instrument. The relationship between percentage changes and basis points can be summarized as follows:  1% change = 100 basis points and 0.01% = 1 basis point.

BASIS RISK: The risk that offsetting investments in a hedging strategy will not experience price changes in entirely opposite directions from each other. This type of strategy can create excess potential for profits or losses. 

BASIS: It is the difference between the cash price of the underlying commodity and the price of a futures contract based on that underlying commodity. More simply put it is the cash price subtracted from the futures price.

BEAR MARKET: This is a market in which prices are trending lower.

BEAR SPREAD: Generally speaking, it is any spread that theoretically profits when the market moves down. In particular it refers to a vertical spread.

BEAR: This is an investor who believes that a particular security or market is headed downward. Bears attempt to profit from a decline in prices. 

BETA: This is defined as a measure of the return on a stock relative to the return of an index. Beta is calculated using regression analysis, and you can think of beta as the tendency of a security's returns to respond to swings in the market. A beta of 1 indicates that the security's price will move with the market, a beta of less than 1 means that the security will be less volatile than the market. A beta of greater than 1 indicates that the security's price will be more volatile than the market.

BID/ASK (OFFER) SPREAD: The difference between the bid and ask prices for a particular stock or option. 

BID: Defined as the price at which someone is willing to buy a security. 

BINOMIAL MODEL: Most often used for American-style options, the model creates a binomial network to price an option, based on the stock price, days until expiration, strike price, interest rate, dividends, and the estimated volatility of the stock. This can also be defined as a mathematical model used to price options. 

BLACK SCHOLES MODEL: A mathematical model used to price options. Mostly used for European-style options, the model prices options using a probability-weighted sum of stock and a bond. The model assumes that the price of heavily traded assets follow a geometric Brownian motion with constant drift and volatility. When applied to a stock option, the model incorporates the constant price variation of the stock, the time value of money, the option's strike price and the time to the options expiry.

BLOCK or BLOCK TRADE: A large amount of the same security bought or sold by institutional or other large investors. There is no official size designation constituting a block of securities, but a commonly used threshold is more than 10,000 equity shares or more than $200,000 of debt securities.

BLUE SKY LAWS: State regulations designed to protect investors against securities fraud by requiring sellers of new issues to register their offerings and provide financial details. 

BOND: A debt investment in which an investor loans money to an entity (corporate or governmental) that borrows the funds for a defined period of time at a fixed interest rate. Bonds are often used by companies, municipalities, states and U.S. and foreign governments to finance projects and activities. Bonds are commonly referred to as fixed-income securities and are one of the three main asset classes, along with stocks and cash equivalents.

BOX SPREAD: A dual option position involving a bull and bear spread with identical expiry dates. This investment strategy provides for minimal risk. A box spread is a complicated strategy for the more advanced options trader.

BREAK-EVEN POINT(S): In general, the point at which profits equal losses. An option position's break-even point(s) are calculated for the options' expiration date. Option pricing models can be used to compute a position's break-even point before the options' ending date.

BROKER LOAN RATE: An interest rate charged to brokerage firms from banks to finance the brokerage firm's customers' positions.

BROKER: An individual or firm that charges a fee or commission for executing buy and sell orders submitted by an investor. The role of a firm is to act as an agent for a customer and charge the customer a commission for its services. 

BROKER-DEALER: Technically, a broker is only an agent who executes orders on behalf of clients, whereas a dealer acts as a principal and trades for his or her own account. When a broker acts in the capacity of a dealer, he may buy and sell stocks and options for his own account, which can generate profits or losses. 

BULL MARKET: This is defined as any specific market in which prices are trending higher as a whole.

BULL SPREAD: This is a spread that profits when the market moves up. Also defined as an option strategy in which maximum profit is attained if the underlying security rises in price. Either calls or puts can be used. The lower strike price is purchased and the higher strike price is sold. The options have the same expiration date.

BULL: This is someone who believes that the price of a particular security or the market as a whole will rise.

BULLISH: This can be a person who anticipates higher prices in a particular security or the market.

BUTTERFLY SPREAD: An option strategy combining a bull and bear spread. It uses three strike prices. The lower two strike prices are used in the bull spread, and the higher strike price in the bear spread. Both puts and calls can be used.

BUY ON CLOSE: This is defined as buying at the end of a trading session.

BUY ON OPENING: This is defined as buying at the beginning of a trading session at a price within the opening range.

BUYING POWER: The money an investor has available to buy securities. In a margin account, the buying power is the total cash held in the brokerage account plus maximum margin available. This can also be referred to as "excess equity."

BUY-TO-COVER: This is a buy order that closes or offsets a short position.

BUY-WRITE: A trading strategy that consists of writing call options on an underlying position to generate income from option premiums. Because the options position is covered by the underlying position, the downside risk is minimized.

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