Definition of Straddle

Straddle

Purchase or sale of an equal number of puts and calls with the same terms at the same time.
Related: spread

Straddle

A strategy used in trading options or futures. It involves
simultaneously purchasing put and call options with the same exercise price
and expiration date, and it is most profitable when the price of the underlying
security is very volatile.

Long straddle

A straddle in which a long position is taken in both a put and call option.

Short straddle

A straddle in which one put and one call are sold.

Combination strategy

A strategy in which a put and with the same strike price and expiration are either both
bought or both sold. Related: straddle

Long run

A period of time in which all costs are variable; greater than one year.
Long straddle A straddle in which a long position is taken in both a put and call option.

Spread

1) The gap between bid and ask prices of a stock or other security.
2) The simultaneous purchase and sale of separate futures or options contracts for the same commodity for delivery in different months.
Also known as a straddle.
3) Difference between the price at which an underwriter buys an issue from a firm
and the price at which the underwriter sells it to the public.
4) The price an issuer pays above a benchmark fixed-income yield to borrow money.

Strip, strap

Variants of a straddle. A strip is two puts and one call on a stock, a strap is two calls and one put
on a stock. In both cases, the puts and calls have the same strike price and expiration date.

Long

One who has bought a contract(s) to establish a market position and who has not yet closed out this
position through an offsetting sale; the opposite of short.

Long bonds

Bonds with a long current maturity. The "long bond" is the 30-year U.S. government bond.

Long coupons

1) Bonds or notes with a long current maturity.
2) A bond on which one of the coupon periods, usually the first, is longer than the other periods or the standard period.

Long hedge

The purchase of a futures contract(s) in anticipation of actual purchases in the cash market. Used
by processors or exporters as protection against an advance in the cash price. Related: Hedge, short hedge

Long position

An options position where a person has executed one or more option trades where the net
result is that they are an "owner" or holder of options (i. e. the number of contracts bought exceeds the
number of contracts sold).
Occurs when an individual owns securities. An owner of 1,000 shares of stock is said to be "long the stock."
Related: Short position

Long run

A period of time in which all costs are variable; greater than one year.
long straddle A straddle in which a long position is taken in both a put and call option.

Long-term

In accounting information, one year or greater.

Long-term assets

Value of property, equipment and other capital assets minus the depreciation. This is an
entry in the bookkeeping records of a company, usually on a "cost" basis and thus does not necessarily reflect
the market value of the assets.

Long-term debt

An obligation having a maturity of more than one year from the date it was issued. Also
called funded debt.

Long-term debt/capitalization

Indicator of financial leverage. Shows long-term debt as a proportion of the
capital available. Determined by dividing long-term debt by the sum of long-term debt, preferred stock and
common stockholder equity.

Long-term debt ratio

The ratio of long-term debt to total capitalization.

Long-term financial plan

Financial plan covering two or more years of future operations.

Long-term liabilities

Amount owed for leases, bond repayment and other items due after 1 year.

Long-term debt to equity ratio

A capitalization ratio comparing long-term debt to shareholders' equity.

Long bonds

Bonds with a long current maturity. The "long bond" is the 30-year U.S. government bond.

Long coupons

1) Bonds or notes with a long current maturity.
2) A bond on which one of the coupon
periods, usually the first, is longer than the other periods or the standard period.

Long run

A period of time in which all costs are variable; greater than one year.

Other long term liabilities

Value of leases, future employee benefits, deferred taxes and other obligations
not requiring interest payments that must be paid over a period of more than 1 year.

LONG-TERM LIABILITIES

Bills that are payable in more than one year, such as a mortgage or bonds.

Long-term liabilities

Amounts owing after more than one year.

Long position

Outright ownership of a security or financial instrument. The
owner expects the price to rise in order to make a profit on some future sale.

Long rate

The yield on a zero-coupon Treasury bond.

Long-term debt

A debt for which payments will be required for a period of more than
one year into the future.

long position

Purchase of an investment.

Long Term Debt

Liability due in a year or more.

Longer-Term Fixed Assets

Assets having a useful life greater than one year but the duration of the 'long term' will vary with the context in which the term is applied.

CARs (cumulative abnormal returns)

a measure used in academic finance articles to measure the excess returns an investor would have received over a particular time period if he or she were invested in a particular stock.
This is typically used in control and takeover studies, where stockholders are paid a premium for being taken over. Starting some time period before the takeover (often five days before the first announced bid, but sometimes a longer period), the researchers calculate the actual daily stock returns for the target firm and subtract out the expected market returns (usually calculated using the firm’s beta and applying it to overall market movements during the time period under observation).
The excess actual return over the capital asset pricing model-determined expected return market is called an ‘‘abnormal return.’’ The cumulation of the daily abnormal returns over the time period under observation is the CAR. The term CAR(-5, 0) means the CAR calculated from five days before the
announcement to the day of announcement. The CAR(-1, 0) is a control premium, although Mergerstat generally uses the stock price five days before announcement rather than one day before announcement as the denominator in its control premium calculation. However, the CAR for any period other than (-1, 0) is not mathematically equivalent to a control premium.

Average maturity

The average time to maturity of securities held by a mutual fund. Changes in interest rates
have greater impact on funds with longer average life.

Back office

Brokerage house clerical operations that support, but do not include, the trading of stocks and
other securities. Includes all written confirmation and settlement of trades, record keeping and regulatory
compliance.
Back-end loan fund
A mutual fund that charges investors a fee to sell (redeem) shares, often ranging from
4% to 6%. Some back-end load funds impose a full commission if the shares are redeemed within a
designated time, such as one year. The commission decreases the longer the investor holds the shares. The
formal name for the back-end load is the contingent deferred sales charge, or CDSC.

BAN (Bank anticipation notes)

Notes issued by states and municipalities to obtain interim financing for
projects that will eventually be funded long term through the sale of a bond issue.

Bear

An investor who believes a stock or the overall market will decline. A bear market is a prolonged period
of falling stock prices, usually by 20% or more. Related: bull.

Buy

To purchase an asset; taking a long position.

Capital budgeting

The process of choosing the firm's long-term capital assets.

Capital expenditures

Amount used during a particular period to acquire or improve long-term assets such as
property, plant or equipment.

Capital market

The market for trading long-term debt instruments (those that mature in more than one year).

Capital structure

The makeup of the liabilities and stockholders' equity side of the balance sheet, especially
the ratio of debt to equity and the mixture of short and long maturities.

Capitalization table

A table showing the capitalization of a firm, which typically includes the amount of
capital obtained from each source - long-term debt and common equity - and the respective capitalization
ratios.

Clear a position

To eliminate a long or short position, leaving no ownership or obligation.

Closing sale

A transaction in which the seller's intention is to reduce or eliminate a long position in a stock,
or a given series of options.

Corporate financial planning

Financial planning conducted by a firm that encompasses preparation of both
long- and short-term financial plans.

Customized benchmarks

A benchmark that is designed to meet a client's requirements and long-term
objectives.

Debt/equity ratio

Indicator of financial leverage. Compares assets provided by creditors to assets provided
by shareholders. Determined by dividing long-term debt by common stockholder equity.

Debt capacity

Ability to borrow. The amount a firm can borrow up to the point where the firm value no
longer increases.

Depreciation

A non-cash expense that provides a source of free cash flow. Amount allocated during the
period to amortize the cost of acquiring long term assets over the useful life of the assets.

Dividend reinvestment plan (DRP)

Automatic reinvestment of shareholder dividends in more shares of a
company's stock, often without commissions. Some plans provide for the purchase of additional shares at a
discount to market price. Dividend reinvestment plans allow shareholders to accumulate stock over the long
term using dollar cost averaging. The DRP is usually administered by the company without charges to the
holder.

Extension swap

Extending maturity through a swap, e.g. selling a 2-year note and buying one with a slightly
longer current maturity.

Financial lease

long-term, non-cancelable lease.

Fixed asset

long-lived property owned by a firm that is used by a firm in the production of its income.
Tangible fixed assets include real estate, plant, and equipment. Intangible fixed assets include patents,
trademarks, and customer recognition.

Fixed-charge coverage ratio

A measure of a firm's ability to meet its fixed-charge obligations: the ratio of
(net earnings before taxes plus interest charges paid plus long-term lease payments) to (interest charges paid
plus long-term lease payments).

Flat price risk

Taking a position either long or short that does not involve spreading.

Flattening of the yield curve

A change in the yield curve where the spread between the yield on a long-term
and short-term Treasury has decreased. Compare steepening of the yield curve and butterfly shift.

Force majeure risk

The risk that there will be an interruption of operations for a prolonged period after a
project finance project has been completed due to fire, flood, storm, or some other factor beyond the control
of the project's sponsors.

Foreign exchange risk

The risk that a long or short position in a foreign currency might have to be closed out
at a loss due to an adverse movement in the currency rates.

GNMA-II

Mortgage-backed securities (MBS) on which registered holders receive an aggregate principal and
interest payment from a central paying agent on all of their certificates. Principal and interest payments are
disbursed on the 20th day of the month. GNMA-II MBS are backed by multiple-issuer pools or custom pools
(one issuer but different interest rates that may vary within one percentage point). Multiple-issuer pools are
known as "Jumbos." Jumbo pools are generally longer and offer certain mortgages that are more
geographically diverse than single-issuer pools. Jumbo pool mortgage interest rates may vary within one
percentage point.

Going-private transactions

Publicly owned stock in a firm is replaced with complete equity ownership by a
private group. The shares are delisted from stock exchanges and can no longer be purchased in the open
markets.

Hedged portfolio

A portfolio consisting of the long position in the stock and the short position in the call
option, so as to be riskless and produce a return that equals the risk-free interest rate.

Homemade leverage

Idea that as long as individuals borrow (or lend) on the same terms as the firm, they can
duplicate the affects of corporate leverage on their own. Thus, if levered firms are priced too high, rational
investors will simply borrow on personal accounts to buy shares in unlevered firms.

Interest coverage test

A debt limitation that prohibits the issuance of additional long-term debt if the issuer's
interest coverage would, as a result of the issue, fall below some specified minimum.

LEAPS

long-term equity anticipation securities. long-term options.

Lease

A long-term rental agreement, and a form of secured long-term debt.

Lifting a leg

Closing out one side of a long-short arbitrage before the other is closed.

Liquidation

When a firm's business is terminated, assets are sold, proceeds pay creditors and any leftovers
are distributed to shareholders. Any transaction that offsets or closes out a long or short position. Related:
buy in, evening up, offsetliquidity.

Liquidity diversification

Investing in a variety of maturities to reduce the price risk to which holding long
bonds exposes the investor.

Margin call

A demand for additional funds because of adverse price movement. Maintenance margin
requirement, security deposit maintenance
Margin of safety With respect to working capital management, the difference between 1) the amount of longterm
financing, and 2) the sum of fixed assets and the permanent component of current assets.

Monetary / non-monetary method

Under this translation method, monetary items (e.g. cash, accounts
payable and receivable, and long-term debt) are translated at the current rate while non-monetary items (e.g.
inventory, fixed assets, and long-term investments) are translated at historical rates.

Moving average

Used in charts and technical analysis, the average of security or commodity prices
constructed in a period as short as a few days or as long as several years and showing trends for the latest
interval. As each new variable is included in calculating the average, the last variable of the series is deleted.

Naked option strategies

An unhedged strategy making exclusive use of one of the following: long call
strategy (buying call options ), short call strategy (selling or writing call options), long put strategy (buying
put options ), and short put strategy (selling or writing put options). By themselves, these positions are called
naked strategies because they do not involve an offsetting or risk-reducing position in another option or the
underlying security.
Related: covered option strategies.

Net assets

The difference between total assets on the one hand and current liabilities and noncapitalized longterm
liabilities on the other hand.

Offset

Elimination of a long or short position by making an opposite transaction. Related: liquidation.

Open position

A net long or short position whose value will change with a change in prices.

Opening purchase

A transaction in which the purchaser's intention is to create or increase a long position in
a given series of options.

Opinion shopping

A practice prohibited by the SEC which involves attempts by a corporation to obtain
reporting objectives by following questionable accounting principles with the help of a pliable auditor willing
to go along with the desired treatment.

Other capital

In the balance of payments, other capital is a residual category that groups all the capital
transactions that have not been included in direct investment, portfolio investment, and reserves categories. It
is divided into long-term capital and short-term capital and, because of its residual status, can differ from
country to country. Generally speaking, other long-term capital includes most non-negotiable instruments of a
year or more like bank loans and mortgages. Other short-term capital includes financial assets of less than a
year such as currency, deposits, and bills.

Planned financing program

Program of short-term and long-term financing as outlined in the corporate
financial plan.

Policy asset allocation

A long-term asset allocation method, in which the investor seeks to assess an
appropriate long-term "normal" asset mix that represents an ideal blend of controlled risk and enhanced
return.

Position

A market commitment; the number of contracts bought or sold for which no offsetting transaction
has been entered into. The buyer of a commodity is said to have a long position and the seller of a commodity
is said to have a short position . Related: open contracts

Preferred habitat theory

A biased expectations theory that believes the term structure reflects the
expectation of the future path of interest rates as well as risk premium. However, the theory rejects the
assertion that the risk premium must rise uniformly with maturity. Instead, to the extent that the demand for
and supply of funds does not match for a given maturity range, some participants will shift to maturities
showing the opposite imbalances. As long as such investors are compensated by an appropriate risk premium
whose magnitude will reflect the extent of aversion to either price or reinvestment risk.

Prepackaged bankruptcy

A bankruptcy in which a debtor and its creditors pre-negotiate a plan or
reorganization and then file it along with the bankruptcy petition.

Private Export Funding Corporation (PEFCO)

Company that mobilizes private capital for financing the
export of big-ticket items by U.S. firms by purchasing at fixed interest rates the medium- to long-term debt
obligations of importers of U.S. products.

Purchase

To buy, to be long, to have an ownership position.

Redemption charge

The commission charged by a mutual fund when redeeming shares. For example, a 2%
redemption charge (also called a "back end load") on the sale of shares valued at $1000 will result in payment of $980 (or 98% of the value) to the investor. This charge may decrease or be eliminated as shares are held for
longer time periods.

Riding the yield curve

Buying long-term bonds in anticipation of capital gains as yields fall with the
declining maturity of the bonds.

Round-turn

Procedure by which the long or short position of an individual is offset by an opposite
transaction or by accepting or making delivery of the actual financial instrument or physical commodity.

Short

One who has sold a contract to establish a market position and who has not yet closed out this position
through an offsetting purchase; the opposite of a long position. Related: long.

Short hedge

The sale of a futures contract(s) to eliminate or lessen the possible decline in value ownership of
an approximately equal amount of the actual financial instrument or physical commodity.
Related: long hedge.

Single-premium deferred annuity

An insurance policy bought by the sponsor of a pension plan for a single
premium. In return, the insurance company agrees to make lifelong payments to the employee (the
policyholder) when that employee retires.

Statement-of-cash-flows method

A method of cash budgeting that is organized along the lines of the statement of cash flows.

Steepening of the yield curve

A change in the yield curve where the spread between the yield on a long-term
and short-term Treasury has increased. Compare flattening of the yield curve and butterfly shift.

Target payout ratio

A firm's long-run dividend-to-earnings ratio. The firm's policy is to attempt to pay out a
certain percentage of earnings, but it pays a stated dollar dividend and adjusts it to the target as base-line
increases in earnings occur.

Technical condition of a market

Demand and supply factors affecting price, in particular the net position,
either long or short, of the dealer community.

Term Fed Funds

Fed Funds sold for a period of time longer than overnight.

Term repo

A repurchase agreement with a term of more than one day.
Term structure of interest rates
Relationship between interest rates on bonds of different maturities usually
depicted in the form of a graph often depicted as a yield curve. Harvey shows that inverted term structures
(long rates below short rates) have preceded every recession over the past 30 years.

Term premiums

Excess of the yields to maturity on long-term bonds over those of short-term bonds.

Total debt to equity ratio

A capitalization ratio comparing current liabilities plus long-term debt to
shareholders' equity.

Warrant

A security entitling the holder to buy a proportionate amount of stock at some specified future date
at a specified price, usually one higher than current market. This "warrant" is then traded as a security, the
price of which reflects the value of the underlying stock. Warrants are issued by corporations and often used
as a "sweetener" bundled with another class of security to enhance the marketability of the latter. Warrants are
like call options, but with much longer time spans -- sometimes years. In addition, warrants are offered by
corporations whereas exchange traded call options are not issued by firms.

Yield curve

The graphical depiction of the relationship between the yield on bonds of the same credit quality
but different maturities. Related: Term structure of interest rates. Harvey (1991) finds that the inversions of
the yield curve (short-term rates greater than long term rates) have preceded the last five U.S. recessions. The
yield curve can accurately forecast the turning points of the business cycle.

Yield curve option-pricing models

Models that can incorporate different volatility assumptions along the
yield curve, such as the Black-Derman-Toy model. Also called arbitrage-free option-pricing models.

Zero coupon bond

Such a debt security pays an investor no interest. It is sold at a discount to its face price
and matures in one year or longer.

BOND

A long-term, interest-bearing promissory note that companies may use to borrow money for periods of time such as five, ten, or twenty years.

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