GLOSSARY

Annualized gain vs. average gain: The average gain is frequently used to measure popular stock market investments and averages. However, "average" is misleading. You cannot average several year's returns together and end up with a realistic computation of your monies. 
Example: Let's say you start out with $10,000 and make 100% the first year then lose 50% the next year. Averaging out the returns, you should end up with a 50% total gain for the 2 years, or 25% per year. 
However, in the real world, if you start out with $10,000 and make 100% the first year, you end up with $20,000. Then, if you lose 50% of that $20,000 the next year, you end up with...your original $10,000. So you actually broke even for the two years. Ah, the mystery of math.
Two great books on the subject: How to Lie With Statistics and Facts from Figures.

"Beat the numbers:" A game played in the 1990s by companies, analysts, and mutual funds as a way to hype stocks. Let's say you're a salesperson for Universal Tenhernia Consolidated Enterprises, Ltd. Every month you and the other sales people have to meet with the sales manager to discuss prospects. You hate it. Everybody gets put on the carpet. In order to get an idea of how well business is developing, your sales manager asks each person to make an estimate of what their sales will be in the coming month - and woe to the poor schmuck who fails to meet his goals. The other salespersons (deadheads, you think) give accurate estimations of their business prospects, but you, being a bright bulb, decide to under estimate what you know you can produce. Let's say you undercut it by 10%. Then out you all go to meet the prospects.
Next month, everybody comes in close to their estimates, that is everybody but you. Somehow, you report, you have been able to exceed your forecast by better than 10%. Who gets the kudos for the month? You do, you old star player, you. 
It works so well that you begin to regularly under estimate your production, and you guessed it...every month you're the standout performer, exceeding expectations by that magic 10%. Your promotions put you up in the executive suite...until you've created such a reputation that when that inevitable day comes when you can't live up to your hype, you fall flat on your face and take the one-way elevator down to the garage.
That's how it happened in the 90s. It was just magic that so many companies "beat the numbers" by one cent. The analysts, the companies, the media, they all loved it. And that good news drove stock prices higher and higher. The story sold. Everybody was getting rich...until one day, some kid shouted that the emperor didn't have any clothes. Then the market took the elevator ride, along with trillions of "inflated" value, down to the bottom floor. A sad tale, but a true tale.

Book Value: A financial/accounting term used to designate how much a company would be worth if all its assets were sold and used to pay off all liabilities. Whatever is leftover would be considered the true "breakup" value of the company. In the 1980s, Leveraged Buy Outs (LBOs) were the rage. Raiders (Pickens, Boesky, Icahn, Davis, Perlman, Dunlap, etc.) would look at a company whose stock was cheap compared to what it could be worth if broken up and sold off in pieces. 
This is the only way Wall Streeters can talk of true "worth." If broken up, a company is really worth so many dollars and cents. Anybody else talking of "worth" is simply giving their opinion of what other people should pay for a company based on what some theoretical numbers add up to. The LBO raiders of the 1980s cleaned up corporate America and helped usher in the digital age by getting rid of a lot of dead wood in corporate offices. 

Business Cycle/Profit Cycle: It is something which a lot of people would like to believe doesn't exist. Maybe they believe it's been legislated out of existence. Or maybe some benevolent force has removed it from the earth and replaced it with peace and good will to everyone. However, this concept of boom and bust is part of the path of progress. Nothing gets better without it. We all would like to believe that its misery-causing affects can be ameliorated through some sort of government administrative counsel.  But history shows that the heavy hand of control always makes the situation worse. Progress grinds to a halt. People slip backward into a more "natural world" that is nasty, brutish, and short, to borrow from Thomas Hobbs. 
Why was the Chrysler Building completed in 1929 and the Empire State Building in 1931 - just as the hubris of the 1920s dissolved into the Depression? And the Sears Building completed in 1973, just as the Dow Jones Industrial Average topped out at 1053 prior to dropping to half that lofty height in the next several years of Watergate and the Arab Oil Embargo? And wasn't modern-day Houston built during the oil boom of the 1970s and 1980s only to watch see-through buildings sit empty for many years?
Simply stated, the business cycle or profit cycle works like this: Let's say you discover a cure for cancer in your garage, borrowing from Mom's old formula for whooping cough. It works on your neighbor's lung cancer, your daughter's skin cancer, and your cousin's pancreatic cancer. It only costs you $5 to whip up a bottle and you can sell it for $10 a bottle. You're in business.
Since you've got a day job, the only time you can manufacture the stuff is on the weekend. Saturday and Sunday sees you making 100 bottles. During the week, you get your kids and friends to go out and sell your discovery. Your fame grows. Newspapers broadcast the new cure for cancer.
After a few weeks, you realize that at $5 of profit per bottle, you're wasting your time working at the office. You turn in your resignation at Worldwide WIdgets and start producing Cancer Stuff fulltime. Business is so good you have to hire a couple of production helpers, then a few outside salespersons. You get interviewed on nationwide TV. Magazine reporters knock on your door. You get nominated businessperson of the year in your hometown of Hamlet City.
Within the year, you're moving to more spacious surroundings. You need expanded staff and facilities to keep up with the demand. Your logo-ed building is the jewel of a new commercial park. These additional business expenses drive up the cost of producing a bottle to $15, so you raise the price of Cancer Stuff to $25. Business keeps growing. You keep expanding. You sponsor a little league, a veteran's parade, a tennis tournament. You're person-of-the-year!
But one day you notice an ad on TV for something that sounds mysteriously like what you're producing, and they're selling it at $20 a bottle. It's made way out west somewhere you've never heard of so you don't pay much attention to it until your production manager requests an emergency meeting to discuss falling demand. You huddle with staff and plan a new, revamped marketing plan: Cancer Stuff Plus. More money goes out the window for promotion. The accounting department sends you a note that there's not much more money coming in than is going out. That happens the same day your top two salespersons announce they're leaving. You learn you've just been raided by the competition. You get a call at midnight from the head accountant informing you that you are now operating at a net loss. You need to find some money fast just to make payroll next month. 
You institute a new marketing plan and cut the price of Cancer Stuff Plus by 25% in a desperate attempt to win back customers. A business reporter shows up to discuss the prospects for Cancer Stuff Plus in light of at least a dozen manufacturers now competing for business worldwide. You cut prices again and push production, flooding the market. You'll show them who's top dog.
The price for Cancer Stuff on Ebay is now $2.95 a bottle and you're losing money faster than a piggy bank with a hole in it. You hire a consulting firm to assess your market. They report that of a total of 32 companies who were once producing Cancer Stuff Plus, 27 of them have closed or are in financial straits. That's small comfort to you who just had to plead with your banker to increase your credit line.
Your employees stage a strike for more health coverage and shorter working hours. You visit your doctor to complain about frequent chest pains and a numb left arm.
Sometime later, you sit on your son's front porch, staring out into a field. What happened? You had a good product that benefited mankind. You sold it for a fair profit. Why did so many others try to horn in on your business? Why did they screw up a good thing? What were they, stupid? Didn't they know that too many cooks spoil the stew?
You take out your dusty briefcase and finger the stock certificates that  Big Drugs, Inc. gave you for you company. It's a pittance compared to what you were once worth. You just can't figure out what happened to something that started out so good.
And so it goes. As soon as a product or service proves there's a healthy demand for it, competition arises to get in on the easy money. Eventually, the market gets flooded and prices drop, profits disappear, and weak companies fall by the wayside. When supply eventually contracts enough to equal out to demand, health returns to that industry, but in the mean time, jobs, money, careers, and egos all fall victim to the retrenchment process. Thus it is; thus it always will be. That's human nature, at least over the past several thousand years.

Buy and Hold: A rather stupid theory that asks you to believe your decision today will continue to be a good decision tomorrow. In a static world it makes sense. In a dynamic world, it's the antithesis of rationality. As Zig Zigler (and probably many before him) says, "New information enables (I would substitute requires) you to make a new decision based on that new information." The key phrase here is "new decision." But that also requires you to think, analyze, and decide. Too much work for too many people.
Buy and hold is based on faulty chart work. It implies just because "the market" (some market average - composed of many stocks) can be displayed to show a steadily rising price line over an extended period of time, that individual stocks also rise continuously, ad infinitum. The sad truth is that this wildly misleading indicator average is reconstituted regularly to remove the weak stocks and add strong stocks (read survivorship bias). No buy and hold within the average (index). It would be an interesting study for some grad student to figure out the amount of money has been made by buying and holding the stars of today (Amgen, Intel, Microsoft, Home Depot, etc.) versus the buying and holding (into oblivion) the stars of yesterday (Polaroid, Equity Funding, Four Seasons Nursing Homes, Enron, Quest, Global Crossing, Kmart, Levin-Townsend Computer, etc.). Sure, we all hear about the fabulous success stories, but the war stories don't usually make it to the headlines unless a lawsuit is coming up. As long as we are fortunate to live in a relative free-market society where individuals are unencumbered enough to start new businesses in an attempt to make life better, longer, and happier, then you will have to constantly watch the markets, continually culling the chaff from your holdings. The bottom line is that we investors have a responsibility to shift our assets toward what we want produced. It is only by taking upon ourselves that responsibility that we truly participate in making the world what we want to live in tomorrow. 

Call option: The right to buy 100 shares of a specific stock at a specific price for a specific amount of time. 

Discipline: Having enough confidence in your strategy to act when it says to act. If you don't believe you won't act, and therefore, your investing will be chaotic and random - a sure way to lose money.

Delta: See Greeks.

Dow Jones Theory: Imagine you check into a beach resort, then head toward the water. You want to stake out your  territory, oil down, then settle in for a day in the sun. But you need to know whether the tide is coming in or going out so you can decide where to spread out your towel. So you stand and wait. You watch the tide come in, then roll back out. You pick up a stick and plant it at the high-water mark. You  wait. In comes the tide again, and it washes past the stick farther toward the hotel. You push another stick in the sand at this new high point. And you wait. The third time the tide comes in, it again passes the earlier high points and wets new sand. 
Aha! You know the tide is coming in. 
This is the way the Dow Theory works. If the market (DJ Averages) makes a new high, then the market is rising. As long as each successive rally surpasses the previous one, the market is rallying. If it fails to make a new high, then begins to make a series of new lows, you know the market is falling. As the popular saying goes, "The trend is your friend." This is one of the oldest and surest theories of stock investing.

Formula (The Simplespread Strategy - The Buy/Write): 
Net return if call option is exercised = proceeds of call plus or minus the profit or loss on the stock.
Net return if position is closed out prior to call exercise = profit or loss from call added or subtracted from the profit or loss on the stock.

Gamma: See Greeks.

Goes to Size: There is a long-standing theory on Wall Street that stock prices "go to size," meaning prices rise to find increased supply, or drop to find increased demand. How does this work? Imagine you're the specialist on the NYSE. Your XYZ stock is $60.00 bid, $60.10 ask - a couple hundred shares on either side. Let's say that several thousand shares are offered at gradually higher prices up to $63.00. Also let's say that several thousand shares are bid at gradually lower prices down to $57.00. 
A broker comes into your crowd and indicates he has 100,000 shares to buy. Nowhere is there enough size to transact the order. He doesn't want to buy all offers up to $63.00 and end up with only a few thousand shares, so the word goes out to entities that might have stock for sale. Remember that everyone involved here, the specialist and the various brokers, not to mention the buyer, all want a trade to take place. And you can bet that brokers are working the phones, contacting as many potential sellers they can find. 
Eventually, the brokers find several sellers with a total of 100,000 shares to sell. The price everybody can agree upon is $62.40. The trade is made. The buyer does better than having to piecemeal the order at ever increasing prices; the sellers were able to unload their stock without disrupting the market on the downside. Everybody is happy.
Remember it wasn't because a buyer wanted to acquire 100,000 shares of stock that the price printed at $62.50; it was because brokers were able to find enough sellers agreeable to sell at that price. The brokers put together the deal in order to make the transaction by amassing a sellers consortium of 100,000 shares. That's why stocks to to "size."

Greeks: Delta, Gamma, and Theta (and Vega and Rho). Simplespreaders can disregard them. But although they don't enter into the computations necessary for The Simplespread, we'll define them anyway. 
Delta is the theoretical numerical value that measures how much an option rallies or falls in relation to how much its stock rallies or falls. A stock is trading at $40 and the January 40 call is trading at $3. Let's say the call has a Delta of .60. That means it is expected that if the stock rallies $1 to $41, the call will rally $0.60 to $3.60. If the stock drops by $1 to $39, the call will also drop but by only $0.60 down to $3.40. 
As a stock rallies above the exercise price of an option, the call's Delta gradually rises to approach 1.00 whereby it would be trading dollar for dollar with the stock. As a stock drops below the exercise price, the call's Delta will gradually approach zero and the call will eventually be worthless.
Gamma is the theoretical numerical value assigned to how much the Delta will change as the stock rallies or falls. In the above example, let's say the stock rallies to $41. Also let's say the Delta rises to .65. Do the math...and you'll see that the Gamma equals to +.05.
Theta is the theoretical numerical estimate for how much an option's value loses in time decay over the period of 24 hours providing the stock doesn't move.
Then we have Vega which addresses how an option's value changes due to a volatility change, and Rho which concerns itself with the affect of interest rate changes on an option's value.
But, as stated above, Simplespreaders are concerned only with whether an option's price falls within desired parameters, not what the "theoretical values" are. 

Hedge (to hedge): To take a position in one security in order to reduce the risk of holding a position in another security. The assumption is that the two securities have an inverse relationship to each other which can be quantified and predicted. This frequently means one will go up if the other one goes down. Your goal is to profit more from one than you lose on the other.

Implied Volatility: Estimated forward volatility of a stock based on the price its options are trading at. Let's say that XYZ stock has a volatility of 20% based on its past 12-month price movement. But its options are priced by the market (buyers and sellers of those options) comparable to XYZ trading at a 40% volatility (computed value as indicated by the Black-Scholes Model). Are the options "overpriced" or is XYZ about to go ballistic? That's the question option traders confront daily. Buyers say "fairly priced;" sellers say "overpriced."
Example: XYZ is trading at $28. It's Nov 30 call is trading at $2.10. According to Black-Scholes, the correct value of the Nov 30 call should be $1.82, making the call $0.28 "overpriced." With the call trading at $2.10, the Implied Volatility of the call is 40%. Thus, either the call is "overpriced" due to aggressive buyers, or XYZ is going to become much more volatile in the near future. So, two things can happen: XYZ begins to jump around quickly indicating the call was correctly priced to take into account the increased future volatility of the stock, or the call was "overpriced" and will lose its excessive value in the days ahead as XYZ continues to trade at a 20% volatility. See Volatility.

Manias: "Manias are when nearly everybody agrees, creating Shared Mistake." Donald Coxe

Momentum: Newton and Galileo's idea that a body in motion tends to stay in motion until it reverses. In the stock market, it is quite valid over the short term, but totally invalid over the long term. Why? Again, because of the business cycle. Any number of studies prove this out. Companies and industries "catch the wave," so to speak, and ride it for 6 months to maybe a year or more. Competition heats up, and over the course of 3-5 years, the trend will certainly have run its course. Moral of the story: Buy short-term momentum; sell long-term momentum.

Oscillators: Non-trending statistics which measure how much above or below a mean (or normal) the price of a security is. Regularly, when oscillators rise too above the mean they fall back toward the mean; and when they fall too far under the mean, then they rise back toward the mean. Sometimes called reversion to the mean.

Resistance: A price level at which it can be expected that sellers will overwhelm buyers, forcing the stock to fall.

Rolling Down: Covering (buying back) the call you had previously sold in order to sell a call with a lower exercise price. We strongly advise against doing this.

Rolling Out (same as rolling over): Covering (buying back) the call you had previously sold in order to sell another call with a longer duration.

Rolling Over (same as rolling out): Covering (buying back) the call you had previously sold in order to sell another call with a longer duration.

Rolling Up: Covering (buying back) the call you had previously sold in order to sell a call with a higher exercise price. We strongly advise against doing this.

Spread: The simultaneous purchase of one security and the sale of another security, each of which have some relationship to the other. The purpose of these transactions is the profiting by the relative movement of one to the other.

Standard Deviation: A measure of volatility and probability used frequently by options traders to assess risk. Let's say that you're supposed to be at work at 9 am. Because you're human, you show up 5 minutes late sometimes. Also, sometimes you show up 5 minutes early. And other times you're 2 or 3 minutes early or late, but seldom ever more than 10 minutes one way or the other. If your boss plotted your punctuality as a distribution curve over the past year, it would resemble a bell curve with maybe 90% of your arrivals between 5 minutes early and 5 minutes late.
Now, let's say your buddy in the next cubicle is not as punctual as your are. He shows up 1/2 an hour late sometimes, but then to make it up in his own mind, he comes in 1/2 an hour early sometimes. And of course, he also misses both sides of the mark by 20, 15, and 10 minutes frequently. His distribution would be a flatter bell curve, showing a much wider dispersion.
Standard deviation is derived mathematically by taking the mean of all the inputs, then subtracting the mean from each input, then squaring the differences, then adding the difference together, then dividing by the number of inputs minus one, then taking the square root of that result. Got that? Good. Now forget it. All you need to know is that a one standard deviation move is quite probable, a two-standard deviation move is less likely, and a three-standard deviation move even more remote. 
In our example above, let's say your standard deviation works out to 5 minutes, plus or minus, while you buddy's works out to 18 minutes, plus or minus. What does it mean? It means that if your boss wanted to make sure somebody would be present to meet an important client at your office at 9 am tomorrow morning, you would be the more likely choice to be assigned that job.
In this case, standard deviation is simply a graphical representation of punctuality that confirms the old adage that a picture is worth a thousand words. You're more reliable. You're buddy's more risky. It's the same for the investment world - it's all about managing risk. And before you can manage risk, you have to measure risk. This is one way to do just that.

A better explanation: Find the standard deviation of 4, 9, 11, 12, 17, 5, 8, 12, 14.
First work out the mean: 10.222 (add up the nine numbers and divide by n (9).
Now, subtract the mean individually from each of the numbers in the question and square the result. This is equivalent to the (x - xbar)² step. x refers to the values in the question. 
x               4        9        11       12       17       5       8       12      14
(x - x)²     38.7   1.49    0.60    3.16    45.9   27.3   4.94    3.16   14.3
Now add up these results: 139.55
Divide by n-1. n is the number of values, so in this case is 8: 17.44
Finally, take the square root of this = 4.18. And that's your standard deviation. 

Support: A price level at which it can be expected that buyers will overwhelm buyers, forcing the stock to rise.

Technical Analysis: The study of supply and demand for any tradable commodity - stocks, bonds, options, futures, gold, cattle, orange juice, British Pounds, etc. Tradable commodities do not live in a world of chaos. Trends, as Newton said, tend to stay in motion until they reverse. Look at any chart and probably some 98% of the data will show a definite direction over a stated period of time, either up, down, or sideways. The other 10% or so consists of reversals of that trend. 
Technical Analysis seeks to determine the strength of that trend and whether it will continue or reverse. Terms such as support and resistance are used to delineate points at which there is expectation of a reversal. 

Theta: See Greeks.

Trend: Something that is continuing in its most recent direction. If the trend is positive, in sports, it's called a "streak." In human accomplishment, it's called "flow" or "in the groove." If negative, it's called a "slump," or "in a rut." In random-walk parlance, it doesn't exist. Go figure. 
Everything is made up of either trends or reversals of trends. Trends last about 98% of the time, reversals about 2% of the time. Old Wall Street adage: "The trend is your friend." If you want to take money out of Wall Street, you'd better believe it.

Vendor financing: The practice of loaning your customers money to buy your product. It didn't work well in the dot-com mania - think Enron. It raises risk for everyone concerned. Now, China, India, and Japan are using it to finance our purchases of their goods. We borrow money from them to buy their production. It keeps the Japanese, Indian, and Chinese workers happy so the local politicians are happy. It makes us happy because we get to keep on borrowing and consuming to our heart's content. Only problem is that some day, we'll have to pay them back.

Visual Analysis: See Technical Analysis.

Volatility: How much a stock has varied from its mean over a period of  time. Most measures of volatility in the stock market use one year. Volatility is backward looking. It tells you what has happened in the past. A stock with a volatility of 20% has rallied or declined an average of 20% from it mean over the past 12 months. Options on that stock may, or may not, reflect the same 20% volatility. See Implied Volatility.