New to trading? Trying to figure out what abbreviations such as IV or ITM mean? Don’t worry, all traders have been in the same position, fumbling to figure out what means what. There are a plethora of acronyms that traders use as part of their basic language but we will only look at HV, IV, IC, ATM, ITM, OTM. Detailed definitions can be found here.
HV – Historical Volatility
Every option is affected by volatility which is a measure of price movement for the underlying asset (i.e. stocks, futures). Historical volatility is the past volatility of the underlying asset. Historical volatility is used to estimate the future volatility of the underlying asset.
IV – Implied Volatility
Historical volatility measures the volatility of the underlying asset and implied volatility measures the volatility of the option. Implied volatility is used to value options and when used in a theoretical model will result in a theoretical pricing that matches market pricing.
IC – Iron Condor
An iron condor is a market neutral option strategy where an option writer sells one call credit spread and one put credit spread on the same underlying asset where the distance between the puts and calls are equal and all options expire in the same month.
ATM – At the Money
An option that is at the money represents an option where the strike price is at or near the price of the underlying asset.
ITM – In the Money
An option that is in the money represents an option where the strike price has crossed the price of the underlying assets. For a call option this would be an option that has a strike price that is lower than the underlying asset price. For a put option this would be an option that has a strike price above the underlying asset price. An in the money option has intrinsic value.
OTM – Out of the Money
An option that is out of the money represents an option where the strike price has not reached the price of the underlying asset. For a call option this would be an option that has a strike price that is higher than the underlying asset price. For a put option this would be an option that has a strike price lower the underlying asset price. An out of the money option has no intrinsic value only potential value.
The more you learn about options the better equipped you will be to trade and interact with traders. For more information Mark Wolfinger has published the Rookies Guide to Options.