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Just for Newbies: What on Earth Are We Talking About? Common Terms Used on the OptionInvestor Site

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When I was studying physics in high school, the teacher explained an easy method for determining the direction of the torque. If you curled your fingers in the direction of the rotation, he explained, your extended thumb pointed in the direction of the torque. I got that, no problem, and grasped much more complicated concepts later in college physics, but the next part of my high school teacher's explanation--the easy part, as it turned out--stumped me. He talked about torque being directed "into the board" and "out of the board." What board?

The board was the blackboard, of course, a term he expected us to grasp with no explanation needed. I was trying for a more complicated explanation. Writers on investing websites freely use terms that might seem more complicated than they are to those new to trading. Heres a listing of some common terms used on the OptionInvestor website and a brief explanation of the terms:

BoE: Bank of England.

BoJ: Bank of Japan.

ECB: European Central Bank. This central bank serves functions similar to those of our FOMC (see below), such as setting discount rates. Global market watchers do pay attention to the statements coming out of meetings by the leaders of this central bank and the others listed above. Those statements concern interest rates, risks to the economies of the various regions, and currencies issues, among others. Links to the websites of these central banks can be found below:

http://www.bankofengland.co.uk
http://www.boj.or.jp/en
http://www.ecb.int

Studying press releases by these central banks can give insight into global economic developments.

FIB: Traders use this term as shorthand for Fibonacci numbers. University courses have been devoted to the background and uses of Fibonacci numbers, but the short version is that these are the series of numbers (1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144 . . . .), with each new number in the series, after the first two, calculated by adding the previous two numbers. This series of numbers has been used to predict everything from the number of rabbits born to a single pair n months after they begin breeding, to the number of petals on a flower. Turns out that flowers have 3, 5, 8, 13, 21, 34, etc. petals. Fascinating, right?

Something else proceeds from a study of the numbers. After the first five numbers of the series, the ratio of one number to the next in the series is 0.618, making each number 61.8 percent of the number that will follow it. This number and proportions of this number (one-half, for example) turn out to have relationships to all kinds of thing, too, including to movements of the stock market. Market watchers find that after a big rally or big decline, prices sometimes reverse and retrace part of the prior movement before resuming the rally or decline. Often those retracements turn out to be based on Fib numbers or the ratios between the numbers. For example, a 61.8 percent retracement is sometimes seen.

Dont worry: you dont have to memorize the numbers. Most charting services have a snap-on Fibonacci bracket with the most commonly watched retracement values already calculated as default values. It's tempting to believe that movements around Fib numbers become self-fulfilling and that's all that's behind the importance of the Fib numbers. Because so many traders watch them, many sell or buy near a Fib number. However, those flower petals and breeding rabbits argue against that conclusion. Something else appears to be at work, although now that the Fib numbers are so widely known, that self-fulfillment factor now must play a part.

EMA: Exponential moving average. You don't need to know how to calculate it to use it. Unlike simple moving averages that give equal weight to all price points in a given period of time, an exponential moving average gives greater weight to the most recent prices. Some technicians prefer to use ema's when studying longer-term moving averages such as a 200-period moving average. Others stick with simple moving averages. Experiment and make your own observations.

FOMC: Federal Open Market Committee. This committee consists of twelve members, with its best-known current member being Board of Governnors Chairman Alan Greenspan. The committee has three duties, with most Americans being most familiar with its duty to set the discount rate, usually reported on news services as "the interest rate," as in "the Fed hiked the interest rate." The FOMC also conducts daily open market operations, useful to watch in gauging whether the FOMC is adding to liquidity on any given day.

The FOMC typically sets those discount rates during two-day meetings eight times a year. For more information about the FOMC, check the site: http://www.federalreserve.gov/FOMC

HOD: High of the day.

H&S: Head-and-shoulders formation. Sometimes traders refer to inverse or reverse H&S's, too. A H&S formation is typically a bearish formation that looks like a head and two shoulders, with an inverse or reverse formation typically a bullish formation that looks like an upside-down head and two shoulders. Each requires confirmation by a thrust through the neckline. Formerly more reliable whether than they appear to be in recent years, confirmation can not be considered guaranteed. More information about this formation and others such as triangles and wedges can be found in technical analysis texts.

LOD: Low of the day.

MAX PAIN: This term becomes important during option expiration week. Max pain describes a settlement number for a stock or index that would cause maximum pain to owners of options, from the most options expiring worthless. Max pain can be determined from studying option chains, observing open interest numbers. Some feel that stocks or indices are often maneuvered to max pain numbers and pinned there, if possible. Some investors plan options plays based around the likely settlement value for a stock or index, while others feel the numbers have little value in predicting settlement values. Make your own observations.

MOC: Market on Close. This refers to an order to buy or sell at market price as near the market close as possible, with these orders often coming from the big boys and girls of the stock market. We usually get a look at what MOC orders are like about twenty minutes before the close, with exchanges and the SEC setting rules for when those MOC orders have to be entered. NYSE Rule 123C, "Market on The Close Policy And Expiration Procedures" (SIC), states that in order to avoid large imbalances at the close, all MOC orders must be entered by 3:40 p.m. Exceptions exist, of course, such as when a stock is halted for trading and with different procedures employed on expiration days. Once those MOC orders are made known to the specialist and placed, they cannot be revoked until 3:50 unless the order was wrongly entered or because of a regulatory halt.

Rule 123C also relates how MOC buy and sell orders must be treated in relationship to limit orders. You can read the rule for yourself by following this link: http://www.nyse.com/Frameset.html?displayPage=http://rules.nyse.com/NYSE/Help/Map/rules-sys248.html

The Amexs rule 118 governs Nasdaq National Market Securities' MOC orders, saying that imbalances of 25,000 shares or more must be published in a manner specified by the Exchange. As of April, 2004, SEC rules state that "Beginning at 3:50 p.m., Nasdaq shall disseminate by electronic means and Order Imbalance Indicator every 30 seconds until 3:55 and then more frequently afterwards. Information on the Nasdaq's Net Order Imbalance Indicator (NOII) can be found here: https://noii.nasdaqtrader.com/public/

Why do we care about MOC orders? The easiest explanation is that knowing whether buying or selling pressure is highest helps make end-of-day decisions. At least one article recently concluded that MOC imbalances tended to be reversed in after-hours trading and early the next morning, information that has not been corroborated by this author, so it may be that the imbalances should help one make exit decisions only. For example, if a trader were planning on exiting a bearish position by the close and MOC orders showed selling pressure, that trader might decide to wait until as late as possible to sell. If the MOC orders showed buying pressure, that trader might decide to sell as soon as possible.

Subscription services offer MOC order information, but they tend to be expensive. Check with your charting service or online broker as to the best way to view MOC orders.

MOF: Minister of Finance

OPEX: Option expiration. Traders often refer to opex week, or the week of options expiration. As explained on the CBOE site, stock options typically expire the Saturday immediately following the third Friday of the expiration month. This is also the expiration date for the OEX. SPX settles differently, on Friday morning. Holidays result in expirations one day ahead, and, obviously, options stop trading the day before expiration.
Option expiration becomes important because it sometimes results in volatility as options positions are unwound prior to expiration. That volatility used to take place mostly during opex week, but now often happens the Thursday and Friday preceding opex week. The tendency for a while has been for markets to get nailed down from about noon on the Thursday of opex week. Volatility can be exacerbated when a month also sees expiration of other securities, such as futures.

For options traders, opex week and the few days immediately following opex can produce changes in options pricing. Options for the next month can lose value quickly in the Monday and Tuesday following opex week.

To learn more about options expiration, check the Learning Center on the CBOE site at http://www.cboe.com/

P&F: Point and figure charting. This type of charting method employs columns of X's and O's, with the X columns representing uptrends and the O columns representing downtrends. Because of the method employed in their construction, they tend to filter out choppy movements and show the underlying trend because prices have to move a specified reversal distance before a new column is begun. A unique characteristic of these charts is that the movement from one column to the next is dependent only on price action and not on time. To learn more about P&F charting, refer to the P&F bible, POINT & FIGURE CHARTING by Thomas J. Dorsey, or get an overview at this site: http://stockcharts.com/support/pnfCharts.html

SPREAD: Traders referring to "the" spread usually reference the difference between the bid and ask on a stock or option price. If an OEX call option shows a bid price of $1.70 and an ask price of $1.95, the spread is $0.25. Traders referring to "a" spread usually reference a type of combination play in which one call or put option is bought and another sold. These spreads can be used to establish bullish or bearish positions, depending on the combination of options employed. Lawrence G. McMillan in OPTIONS AS A STRATEGIC INVESTMENT tells all you want to know about spreads of either type.

TRIANGLE: When prices coil, they sometimes coil into a triangle or wedge shape. One technical analysis guru distinguishes the two by noting that with a wedge, the converging trendlines both head up or both head down, while with a triangle, the converging trendlines do not both head the same direction. With a triangle, the bottom trendline can be flat and the top descending, or the top can be descending and the bottom ascending, or the top flat and the bottom ascending. In the first case, the triangle is sometimes called a bearish right triangle; in the second, a neutral triangle; and in the third, a bullish right triangle. The names are self explanatory.

WEDGE: See the explanation of "triangle" for the distinguishing characteristics of triangles and wedges. Wedges can also be bullish or bearish. Technicians deem a rising wedge a bearish one, with gains unsupported and the wedge likely to break to the downside. They deem falling wedges bullish, with the wedge likely to break to the upside.

Perhaps you found your personal "board" among this list of frequently used terms, or perhaps it wasn't included. For explanations of words not included, try these sites:
http://www.investorwords.com
http://www.investopedia.com
 

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