9/10/12 16 Words That Will Make You Sound Like A Wall Street Hotshot - Business Insider

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16 Words That Will Make You Sound Like A Wall Street Hotshot
Max Nisen | Jul. 17, 2012, 12:36 PM |
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The financial markets are much more complicated than just stock market priceearnings ratios and bond market interest rates.

Thanks to complex statistics-based theories and the explosion of derivatives, reports analyzing the financial markets are now riddled with incredibly intimidating jargon. We selected some of the key terms that are both advanced and also used pretty frequently by Wall Streeters to describe what's going on in the markets. Learning to use them will make you sound like a real hotshot.
Flickr Avi Flax

Crack spread

Definition: The "crack spread" is the difference between cost of crude oil and price of a refined petroleum product, usually using gasoline and distillate fuel. Both single and multi-product crack spreads are calculated. The most common multi product figure is the 3:2:1 crack spread, calculated by subtracting the cost of three barrels of crude oil from the price of two barrels of gasoline, and one barrel of distillate.

Use: Crack spreads are a useful way to look at supply trends and refinery margins in different markets, as it compares a locally priced commodity (wholesale products) to a globally priced one (crude oil). Crack spread futures are used by independent refiners to hedge against adverse price movements.
US Energy Information Administration

Source: U.S. Energy Information Administration

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Contango

Definition: "Contango" is when the prices along a futures curve rises successively as the contracts' expiration increases. More basically, it is when the futures price is trading above the spot price for a commodity.

Use: If a commodity is in contango, it usually reflects weak demand today or strengthening demand over time. The obvious current example is the natural gas market, which is in severe contango. Source: Options, Futures, And Other Derivatives

CNBC

Backwardation

Definition: Backwardation is the opposite of a contango. It occurs when prices in the futures chain fall as the contracts grow more distant in time. The futures price will be below the spot price.

Use: Backwardation tends to occur when there are deflationary expectations for a commodity. Recently, we've seen backwardation in the silver market.
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Source: Options, Futures, And Other Derivatives

John Kemp/Reuters

2s10s

Definition: This term refers to the difference in yield between a sovereign debt issuer's 2 year bond (2s) and its 10 year bond (10s).

Use: A steeper curve, where the yield on the 10 year is higher than the 2 year, indicates an increasing growth and/or inflation expectations.

FRED

Duration

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Definition: Duration is a weighted average of the times that interest payments and the final return of principal are received. The weights are the amounts of the payments discounted by the yield-to-maturity of the bond.

Duration is also used to describe the risk of a bond as reflected by the change in price as the market interest rate moves. Use: Duration allows the comparison of bonds with different maturities and coupons. A bond with a higher duration is riskier and will likely have higher price volatility. Source: Options, Futures, And Other Derivatives

Convexity

Definition: Convexity is the first derivative of duration, so it measures the sensitivity to interest rates of a bond's duration.

If a bond exhibits positive convexity, the price increases at an accelerating rate when market interest rates fall. And vice versa. Use: Generally used as a risk management tool for a bond portfolio, along with duration. Source: Options, Futures, And Other Derivatives

Swap spread
Definition: A swap spread is the difference between the rate paid on an interest rate swap and the rate of the most recently issued treasury with the same maturity as the swap.

Use: Higher swap spreads reflect higher risk in the bond market. Source: Investopedia

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The Automatic Earth

Alpha
Definition: Alpha is a measurement of a portfolio's risk adjusted return.

Use: Often used to measure fund manager's performance. Source: Corporate Finance

Business Insider

Delta
Definition: Delta is the the spot change in the price of a call (or put) option relative to the change in the price of the underlying stock.

Use: Delta hedging is a strategy that aims to reduce the risk from movements in an asset price by offsetting positions at a ratio determined by delta. Source: Options, Futures, And Other Derivatives

Gamma

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Definition: Gamma is the first derivative of delta, and measures its rate of change.

Use: A trader may seek to minimize Gamma when delta hedging, so as to make the hedge effective over a wider variety of price movements. Source: Options, Futures, And Other Derivatives

Theta
Definition: Theta measures the "time decay" of an option, it captures the sensitivity of the price of the option to elapsed time as the option approaches maturity.

Use: Options can either be exercised immediately or held until a date nearer its expiration. Theta can give an idea of how much the price of the option might move as it approaches maturity. Source: Options, Futures, And Other Derivatives

Vega
Definition: Vega is the sensitivity of the price of an option to volatility.

Use: Especially important in today's volatile market, volatility can significantly affect certain options strategies. Source: Options, Futures, And Other Derivatives

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Implied volatility

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Definition: Implied volatility is the solution value for volatility in an option pricing model like Black Scholes, the value implied by the market price of an option and its underlying security.

Use: Used in options pricing, particularly for Black Scholes. Source: Options, Futures, And Other Derivatives

Straddle/strangle

Definition: A long straddle involves purchasing a put and call for a security at the same strike price and expiration. The trader will profit should the price move a long way in either direction. A long strangle is similar, except that the options have different strike prices.

Use: Allows a trader to profit if a security moves, the only potential loss is the price of the options. This is a strategy for volatile markets, in that a trader might expect a big move, but is unsure of the direction. Source: Options, Futures, And Other Derivatives
Wikimedia Commons

Prepayment risk
Definition: Prepayment risk comes from the possibility of an early, unscheduled return of the principal of a bond or other fixed income security, usually a mortgage-backed security.

Use: Fixed income securities are used to provide a steady cash flow, should the principal be paid early it could cause problems in the future. This is a particular risk for mortgage backed securities. Source: Investopedia

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Flickr / HacksHaven

Reinvestment risk

The federal funds rate target has never been lower, indicating that commercial interest rates are at their lowest levels ever.
Federal Reserve Bank of St. Louis

Definition: Reinvestment risk stems from the possibility that payments from an investment, usually a bond, occur when market rates are low.

Use: This is a particular risk for pension funds that have a required rate of return. Should an investment end early, they may be unable to find a suitably high rate elsewhere. This risk is particularly high when interest rates are falling. Source: Investopedia

For some next level math

17 Equations That Changed The World >

Thomas Fisher Rare Book Library on flickr

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22 Comments

Beltway Greg on Jul 17, 12:56 PM said: "Crack spread." As this is a family show I won't go any further.

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corn 55 on Jul 17, 2:32 PM said: @Beltway Greg: Real money managers who actually make money could care less about beta, theta, gamma, or other nonsense.

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Remember, a stock is like owning a business. Do you think some restaurant owner knows what Gamma is? Do you think when the founder of Home Depot started the business he was worrying about "Theta??" Business Insider is a bunch of interns. They do not yet know what real investing is all about. They are too busy reading "Trader" magazine with all the fluff ads of yachts and watches. They think that is investing. It's not. I don't know what schools are teaching kids these days but thanks god its not the right stuff. Otherwise I wouldn't be able to make so much money - Warren Buffett
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DA on Jul 17, 4:28 PM said: @corn 55: I love how wall street is trying to sound like they are very smart mathematicians however they use formulas that are merely excel plug-ins and need assumptions for forumlas to give a correlation. What it comes down to is getting wealthy people to loan you money and you to sell services. Sell financial services and ask people for money... blah

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Banker Big Shot on Jul 17, 12:59 PM said: Some more words....

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bamboozle, beat, beguile, bilk, bleed, bunco, burn, caboodle, chisel, con, cozen, crib, cross, deceive, defraud, delude, diddle, do a number on, do, double-cross, double-deal, dupe, fast talk, finagle, fleece, flimflam, fudge, give bum steer, gouge, gyp, hoodwink, hose, jerk around, milk, mislead, pull one's leg, ream, rip off, rook, rope in, sandbag, scam, screw, shaft, short, shuck, skin, snow, stiff, sucker, swindle, take, take for a ride, take in, take out, trick, trim, two-time, victimize

Winston on Jul 17, 2:19 PM said: @Banker Big Shot: You beat me to it, but I'll add a few:

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appropriate, burglarize, carry off, cheat, defraud, despoil, divert, embezzle, heist, hold for ransom, hold up, housebreak, loot, make off with, misappropriate, peculate, pilfer, pillage, pinch, pirate, plagiarize, plunder, poach, purloin, ransack, remove, rifle, rip off, run off with, sack, shoplift, snitch, spirit away, stick up, strip, swindle, swipe, take, take possession of, thieve, walk off with

Uh... on Jul 17, 2:23 PM said: @Winston: Ponzi?

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Winston on Jul 17, 2:55 PM said: @Uh...: Doh! You're right. I forgot the most important one!

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Emperador on Jul 17, 4:10 PM said: @Banker Big Shot: What ever happened to 'Muppets'? That's a power word alright!

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Frenchy on Jul 17, 1:20 PM said: I learned this stuff in the '90's at NYU...big effing deal.....so what are they teaching now, I wonder?

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Beltway Greg on Jul 17, 2:20 PM said: @Frenchy: Unemployment.

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Steve W on Jul 17, 3:40 PM said: @Frenchy: How it all works great in marketing material but does zilch in practical application.

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Mittens Romney, good friend of the Communist Red (state) Chinese on Jul 17, 2:23 PM said:
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My super-sized over-fat McFucky meal John Sunnunu claims that he retroactively started all those words.

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Fred-SoF on Jul 17, 2:28 PM said: Add these to the list - On advice of my counsel - I take the 5th - What email? - Tempest in a teapot

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Pearls Before Swine on Jul 17, 3:37 PM said: 16 Words That Will Make You Sound Like You Spend Way Too Much Time Goofing Off On Business Insider

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DeDe on Jul 17, 6:00 PM said: LieBOR?

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lukmanleong on Jul 17, 9:45 PM said: I see Backwardation in crude oil future

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lukmanleong on Jul 17, 9:48 PM said: you dont need to talk all that crap to sound like a wall street hotshot, just say that you made 7digits a year and buy them drinks, they will call you a hot shot.

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gridflash on Jul 18, 1:03 AM said: Gee now all I need to do is fine someone to impress....

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solomon10 on Jul 25, 7:56 PM said: Macrowanked.

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solomon10 on Jul 25, 8:08 PM said: Macrowanked.

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Helen Keller leading the blind. on Jul 29, 8:33 PM said: Contango = weak demand today = total dumbass comment, rethink career.

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capital.engineer on Aug 9, 1:13 PM said: PROFIT is the ultimate word!

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