> For the complete documentation index, see [llms.txt](https://guide.laevitas.ch/llms.txt). Markdown versions of documentation pages are available by appending `.md` to page URLs; this page is available as [Markdown](https://guide.laevitas.ch/guides/glossary.md). # Glossary ## **Annualised Basis** The nominal basis between a futures contract and spot price can be converted into an annual percentage difference, by dividing by the time to expiry of the contract expressed in years.\ \ Annualised Basis = (Future Price/Spot Price - 1)/Time To Expiry ## **At-The-Money (ATM)** At the money (ATM) are calls and puts whose strike price is at or very near to the current market price of the underlying asset. ## **Basis** The difference between the futures price and the spot price of the same asset. Basis can be calculated to the near future, and may represent different time periods. The below calculation expresses basis as a nominal value:\ \ Basis (B) = Future Price (F) - Spot Price (S) ## **Backwardation** A market in backwardation occurs when the forward price of the futures contract is lower than the spot price. This generates a downward sloping forward, or inverted, curve which is in backwardation. Volatility in backwardation is a signal that investors expect more volatility in the near-term. ## **Block Trade** Block Trades are privately negotiated trades in futures, options, or a combination of multiple thereof. ## **Butterfly (BF)** A butterfly is a limited risk, non-directional options strategy that is designed to have a high probability of earning a limited profit when the future volatility of the underlying asset is expected to be lower (when long the butterfly) or higher (when short the butterfly) than that asset's current implied volatility. It is a neutral option strategy that uses four call options contracts with the same expiration but three different strikes. ## **Call** Calls give the buyer the right, but not the obligation, to buy the underlying asset at the strike price specified in the option contract. Investors buy calls when they believe the price of the underlying asset will increase and sell calls if they believe it will decrease. ## **Contango** A market is in contango when the futures contracts are trading at a premium to the spot price. When the spot price is lower than the futures price which has generated an upward sloping forward curve. Volatility is normally in contango. Contango is the options and futures market way of saying that volatility further out in time is higher than volatility in the near-term. ## **Delta** Delta (Δ) represents the rate of change between the option's price and a $1 change in the underlying asset's price. In other words, the price sensitivity of the option is relative to the underlying asset. Delta of a call option has a range between zero and one, while the delta of a put option has a range between zero and negative one. ## **Expiry** Expiration date for derivatives is the final date on which the derivative (options or futures) is valid. After that time, the contract has expired. ## **Funding** Funding consists of regular payments between buyers and sellers, according to the current funding rate. When the funding rate is above zero (positive), traders that are long (contract buyers) have to pay the ones that are short (contract sellers). In contrast, a negative funding rate means that short positions pay longs. The funding rate is based on two components: the interest rate and the premium. The interest rate may change from one exchange to another, and the premium varies according to the price difference between futures and spot markets. ## **Futures contract** Futures contracts are financial derivatives that oblige the buyer to purchase some underlying asset (or the seller to sell that asset) at a predetermined future price and date. ## **Gamma** Gamma (Γ) represents the rate of change between an option's delta and the underlying asset's price. This is called second-order (second-derivative) price sensitivity. Gamma indicates the amount the delta would change given a $1 move in the underlying security. ## Gamma Bands Gamma bands is a calculation of probability on the underlying asset price of a 1 standard deviation move by using options at-the-money implied volatility. Calculation methodology on the link below (source: Macrohedged):\ \ [ Gamma Bands](https://www.youtube.com/watch?v=YcWrkXuaBgc\&list=PLuMyCuTkEGYkkDL_KhEFA95GGXmo2GNTJ\&index=4) ## **Greeks** "Greeks" is a term used in the options market to describe the different dimensions of risk involved in taking an options position. These variables are called Greeks because they are typically associated with Greek symbols. ## **Implied Volatility** Implied volatility is the market's forecast of a likely movement in a security's price. It is a metric used by investors to estimate future fluctuations (volatility) of a security's price based on certain predictive factors. Implied volatility, denoted by the symbol σ (sigma), can often be thought to be a proxy of market risk. It is commonly expressed using percentages and standard deviations over a specified time horizon. ## **In-The-Money (ITM)** "In the money" (ITM) is an expression that refers to an option that possesses intrinsic value. ITM thus indicates that an option has value in a strike price that is favorable in comparison to the prevailing market price of the underlying asset: * An in-the-money call option means the option holder has the opportunity to buy the security below its current market price. * An in-the-money put option means the option holder can sell the security above its current market price. ## IV Rank Implied volatility rank (IV rank) compares an underlying’s current IV to its IV range over the past one year. An IV rank of 25% means that the difference between the current IV and the low IV is only 25% of the entire IV range over the past year, which means the current IV is closer to the low end of historical volatility. Furthermore, an IV rank of 0% indicates that the current IV is the very bottom of the one-year range, and an IV rank of 100% indicates that the current IV is at the top of the one-year range. ## RV Rank Historical volatility rank (RV rank) compares an underlying’s current RV to its RV range over the past one year. An RV rank of 25% means that the difference between the current RV and the low RV is only 25% of the entire RV range over the past year, which means the current RV is closer to the low end of historical volatility. Furthermore, an RV rank of 0% indicates that the current RV is the very bottom of the one-year range, and an RV rank of 100% indicates that the current RV is at the top of the one-year range. ## **Mark Price** The mark price is an estimate of the true value of a contract (fair price) when compared to its actual trading price (last price). ## **Open Interest** Open interest is the total number of outstanding derivative contracts, such as options or futures that have not been settled. ## **Options contract** An option is a derivative, a contract that gives the buyer the right, but not the obligation, to buy or sell the underlying asset by a certain date (expiration date) at a specified price (strike price). ## **Perpetual contract** A perpetual contract is a special type of futures contract, but unlike the traditional form of futures, it doesn’t have an expiry date. So one can hold a position for as long as they like. Other than that, the trading of perpetual contracts is based on an underlying Index Price. The Index Price consists of the average price of an asset, according to major spot markets and their relative trading volume. ## **Put** Puts give the buyer the right, but not the obligation, to sell the underlying asset at the strike price specified in the contract. The writer (seller) of the put option is obligated to buy the asset if the put buyer exercises their option. Investors buy puts when they believe the price of the underlying asset will decrease and sell puts if they believe it will increase. ## **Out-The-Money (OTM)** A term used to describe an option that has no intrinsic value. A call option with a strike price higher (or a put with a strike price lower) than the current market value of the underlying asset. ## **Realised Volatility** Sometimes referred to as the historical volatility, this term usually used in the context of derivatives. While the implied volatility refers to the market's assessment of future volatility, the realized volatility measures what actually happened in the past. Volatility measures the variability of returns of an underlying asset and in some sense provides a measure of the risk of holding that underlying. Below is one method to calculate it: Annualised standard deviation of daily (log) returns calculated from a data set over some fixed period of time. ## **Risk reversal (RR)** A risk reversal is an option strategy that combines the purchase of OTM calls with the sale of OTM puts, similar deltas and same expiration. It can be used as a measure of volatility skew. ## **Term Structure** Futures term structure is the prices of futures contracts on a single underlying asset over all available expiration months. \ \ The term structure of volatility is the curve depicting the differing implied volatilities of options with the same strike price but different maturities. ## **Theta** Theta (Θ) represents the rate of change between the option price and time, or time sensitivity - sometimes known as an option's time decay. Theta indicates the amount an option's price would decrease as the time to expiration decreases, all else equal. ## **Underlying** Underlying asset are the financial assets upon which a derivative’s price is based. ## **Vega** Vega (v) represents the rate of change between an option's value and the underlying asset's implied volatility. This is the option's sensitivity to volatility. Vega indicates the amount an option's price changes given a 1% change in implied volatility. ## **Volatility Skew (Smile)** The volatility skew is the difference in implied volatility (IV) between out-of-the-money options, at-the-money options, and in-the-money options. The volatility skew, which is affected by sentiment and the supply and demand relationship of particular options in the market, provides information on whether fund managers prefer to write calls or puts. ## **Volatility Surface** Combining the ATM term structure of volatility and the skew per expiry date, will render a 3 dimensional graph (time to expiry versus strike versus volatility). This is known as the volatility surface. ## **Volume** The number of contracts in futures or options on futures transacted during a specified period of time, often over the course of a day.