968 Glossary 
types of diagonal spreads are diagonal bull spreads, diagonal bear spreads, and 
diagonal butterfly spreads. 
Discount: an option is trading at a discount if it is trading for less than its intrinsic 
value. A future is trading at a discount if it is trading at a price less than the cash 
price of its underlying index or commodity. See also Intrinsic Value, Parity. 
Discount Arbitrage: a riskless arbitrage in which a discount option is purchased 
and an opposite position is taken in the underlying security. The arbitrageur may 
either buy a call at a discount and simultaneously sell the underlying security 
(basic call arbitrage), or buy a put at a discount and simultaneously buy the under­
lying security (basic put arbitrage). See also Discount. 
Discretion: see Limit Order, Market Not Held Order. 
Dividend Arbitrage: in the riskless sense, an arbitrage in which a put is purchased 
and so is the underlying stock. The put is purchased when it has time value pre­
mium less than the impending dividend payment by the underlying stock. The 
transaction is closed after the stock goes ex-dividend. Also used to denote a form 
of risk arbitrage in which a similar procedure is followed, except that the amount 
of the impending dividend is unknown and therefore risk is involved in the trans­
action. See also Ex-Dividend, Time Value Premium. 
Divisor: a mathematical quantity used to compute an index. It is initially an arbitrary 
number that reduces the index value to a small, workable number. Thereafter the 
divisor is adjusted for stock splits (price-weighted index) or additional issues of 
stock (capitalization-weighted index). 
Downside Protection: generally used in connection with covered call writing, this 
is the cushion against loss, in case of a price decline by the underlying security, that 
is afforded by the written call option. Alternatively, it may be expressed in terms 
of the distance the stock could fall before the total position becomes a loss (an 
amount equal to the option premium), or it can be expressed as percentage of the 
current stock price. See also Covered Call Write. 
Dynamic: for option strategies, describing analyses made during the course of 
changing security prices and during the passage of time. This is as opposed to an 
analysis made at expiration of the options used in the strategy. A dynamic break­
even point is one that changes as time passes. A dynamic follow-up action is one 
that will change as either the security price changes or the option price changes or 
time passes. See also Break-Even Point, Follow-Up Action. 
Early Exercise (assignment): the exercise or assignment of an option contract 
before its expiration date.