Glossary

The trader's dictionary

Every term you'll meet in your journal, defined in plain English — no jargon, no hype. Jump to a letter or scan the list.

A
Averaging down
Buying more of a position at a lower price to reduce your average cost. Powerful as a plan, dangerous as a reaction to a loss. Try the calculator →
Ask
The lowest price a seller is currently willing to accept. You generally buy at the ask and sell at the bid; the gap between them is the spread.
B
Breakeven
The price at which a trade produces neither a profit nor a loss. For a long call it's strike + premium; for a stock position it's your average cost.
Black-Scholes
A classic model for estimating the fair value of an option from inputs like price, strike, time, volatility and rates. It's where the greeks come from.
Bid
The highest price a buyer is currently willing to pay. You typically sell into the bid.
C
Call option
A contract giving the right to buy the underlying at the strike price before expiration. Buyers profit if the price rises well above the strike.
Covered call
Selling a call against stock you own, collecting premium in exchange for capping your upside at the strike. See the payoff →
Cost basis
What you actually paid for a position, including fees — the reference point for calculating gains, losses and tax.
Compound growth
Growth that builds on itself as gains are reinvested. Small, consistent returns compound into large ones over time.
D
Drawdown
The drop from a peak in your account to a subsequent low, usually shown as a percentage. Deep drawdowns are hard to recover from — down 50% needs +100% to get back.
Delta
How much an option's price is expected to move for a $1 move in the underlying. A delta of 0.50 means roughly $0.50 of option move per $1 of stock.
Direction
Whether a trade is long (profits if price rises) or short (profits if price falls).
E
Equity curve
A running chart of your account value over time. A steady upward slope signals consistency; a jagged one signals variance.
Expectancy
The average amount you can expect to win or lose per trade, combining your win rate with your average win and loss. Positive expectancy is the definition of an edge.
Expected move
The price range an option's implied volatility suggests the underlying may move by a given date. Useful for setting realistic targets.
F
FIFO
"First in, first out" — a method that matches your earliest purchases against your sales when computing gains for tax. Common default in many jurisdictions.
Fill
The execution of an order, at a specific price and quantity. A single position can be built from several fills.
G
Greeks
A set of measures (delta, gamma, theta, vega) describing how an option's value responds to price, time and volatility. They explain option movement before expiration.
Gamma
How fast an option's delta changes as the underlying moves. High gamma means delta shifts quickly.
I
Implied volatility (IV)
The market's estimate of how much the underlying will move, priced into an option. Higher IV means pricier options and a wider expected move.
K
Kelly criterion
A formula for the position size that maximises long-term growth given your edge. Often used at a fraction ("half-Kelly") because full Kelly is aggressive.
L
Long
A position that profits when the price rises. Buying a stock or a call is going long.
Limit order
An order to buy or sell only at a specified price or better, rather than at whatever the market offers right now.
M
Max drawdown
The largest peak-to-trough decline in your account over a period — a key gauge of how much pain a strategy has actually caused.
Margin
Borrowed money used to increase position size. It magnifies gains and losses alike, and adds the risk of a margin call.
O
Option
A contract giving the right — not the obligation — to buy (call) or sell (put) the underlying at a set strike before expiration.
P
Position sizing
Deciding how much to trade so that a loss stays within your planned risk. The single most important risk skill. Try the calculator →
Profit factor
Gross profits divided by gross losses. Above 1.0 means you make more than you lose; 1.5+ is generally considered solid.
Put option
A contract giving the right to sell the underlying at the strike. Buyers profit if the price falls well below the strike.
P&L
Profit and loss — how much a trade or account has made or lost, either realized (closed) or unrealized (open).
Premium
The price paid (or received) for an option, quoted per share. One contract usually covers 100 shares.
R
Risk/reward ratio
How much you stand to lose versus make on a trade, e.g. 1:2. A better ratio lowers the win rate you need. Try the calculator →
R-multiple
A trade's result measured in units of the risk you took. Risk $100 and make $300 and that's a +3R trade — a clean way to compare trades of different sizes.
Realized P&L
Profit or loss on positions you've actually closed. It's what tax is based on, unlike unrealized P&L.
S
Stop-loss
A predefined price at which you exit a losing trade to cap the loss. Deciding it in advance is what keeps losses uniform.
Short
A position that profits when the price falls. Involves extra risk because losses are theoretically unlimited.
Strike price
The fixed price at which an option can be exercised. Compared against the underlying to decide if an option has value.
Slippage
The difference between the price you expected and the price you actually got — common in fast or thinly-traded markets.
T
Theta
An option's time decay — how much value it loses each day as expiration approaches, all else equal. It works against buyers and for sellers.
U
Unrealized P&L
Profit or loss on positions you still hold. It fluctuates with price and only becomes realized when you close.
V
Vega
How much an option's price changes for a 1-point change in implied volatility. High-vega positions are sensitive to volatility swings.
Vertical spread
Buying one option and selling another of the same type and expiration at a different strike, to cap both cost and risk.
W
Win rate
The share of your trades that end in profit. Important, but meaningless without your risk/reward — a low win rate can still be very profitable.
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