59 terms

Glossary

Every term used in the lessons, defined in the words a person would actually use. Each term has its own page; where it also has a lesson, that is linked too.

Ask Market mechanics: The lowest price a seller is currently willing to accept. You buy at the ask.
Average down Risk: Buying more of a losing position to lower the average cost. It lowers the average and raises the total amount at risk — which is the part people forget.
Backtest Risk: Running a set of rules over historical data to see how they would have behaved. Useful for finding out whether an idea is arithmetic or hope; useless as a promise about the future.
Bid Market mechanics: The highest price a buyer is currently willing to pay. You sell at the bid.
Bid-ask spread Market mechanics: The gap between the two. It is a real cost you pay on entry and again on exit, and it widens exactly when you most want out.
Body Charts: The thick part of a candle, running from the open to the close. Lesson →
Breakeven Options: The level at which a position returns exactly nothing. For a long call it is the strike plus the premium paid. Lesson →
Breakout Charts: Price moving decisively beyond a level it had been contained by. Judged on closes, not on wicks.
Call option Options: A contract giving the buyer the right, not the obligation, to buy the underlying at a fixed strike price on or before expiry.
Candle Charts: One period of trading drawn as four prices — open, high, low and close. Lesson →
Carry forward Tax: Setting off a loss against future years' income. Business losses from F&O can generally be carried forward for eight assessment years, provided the return is filed on time.
Compression Charts: Successive candle ranges narrowing. It says participants are disagreeing less, which usually precedes a larger move — and says nothing about the direction of it.
Delta Options: How much the option price moves for a one-point move in the underlying. A delta of 0.5 means roughly half a point of option for one point of index.
Drawdown Risk: The fall from a peak in your account to the trough that follows, usually stated as a percentage. The number that decides whether a method is survivable.
Expectancy Risk: Hit rate times average win, minus miss rate times average loss. One number that says whether a method makes money over many trades. Lesson →
Expiry Options: The date on which a contract ceases to exist. Everything about an option changes shape as this date approaches.
Exposure Risk: The full value of a position, as opposed to the amount you have decided to risk on it. The two are routinely confused.
Fill Market mechanics: The execution of your order. The price you get, which is not always the price you saw.
Flip Charts: A level changing roles — support becoming resistance, or the reverse. Lesson →
Gap Charts: Empty space on a chart where one period opened away from the previous close, with no trading in between.
Greeks Options: The set of sensitivities — delta, gamma, theta, vega, rho — describing how an option price responds to changes in the underlying, in time and in volatility.
Hit rate Risk: The proportion of trades that make money. On its own it tells you almost nothing, which is why it is the number most often quoted.
Implied volatility Options: The volatility the market is currently pricing into an option. Not a forecast — a price, and one that can move against you while the underlying stays still.
Intrinsic value Options: What an option would be worth if expiry were now. Everything above that is time value.
Level Charts: A price area where buyers or sellers have repeatedly been active enough to stop a move. Best drawn as a band, not a line. Lesson →
Leverage Risk: Controlling a large exposure with a small amount of capital. It multiplies the outcome in both directions, and the losing direction arrives faster.
Liquidity Market mechanics: How easily a contract can be traded without moving its price. Thin liquidity turns a small mistake into an expensive one.
Long Market mechanics: A position that profits if the price rises. Also used as a verb.
Lot size Market mechanics: The fixed quantity in which a derivative contract trades. You cannot buy half a lot.
Margin Market mechanics: The amount your broker requires you to keep against an open derivative position. It can be raised while the position is open.
Mark to market Market mechanics: Revaluing an open position at the current price, daily. Losses are settled in cash as they occur, not at exit.
Moving average Charts: The average closing price over a set number of periods, plotted as a line. A description of where price has been, not a prediction of where it goes.
Open interest Options: The number of contracts currently outstanding. Rising open interest means new positions are being created rather than closed.
Option chain Options: The table of all available strikes for an expiry, with their prices and open interest.
Payoff diagram Options: A picture of what a position is worth at expiry, across every possible level of the underlying. Lesson →
Position sizing Risk: Deciding how much to buy, from your capital and your stop distance rather than from conviction. Lesson →
Premium Options: The price of the option itself — what the buyer pays and the seller receives.
Put option Options: A contract giving the buyer the right, not the obligation, to sell the underlying at a fixed strike price on or before expiry.
Reclaim Charts: Price closing back above a level shortly after breaking below it, suggesting the break was mechanical rather than genuine. Lesson →
Resistance Charts: An area where selling has repeatedly overwhelmed buying, stopping advances.
Reward to risk Risk: Average win divided by average loss. With a 2:1 ratio, a 40% hit rate is profitable.
Risk of ruin Risk: The probability that a run of losses takes your capital below the point where you can continue. It rises sharply with position size.
Rollover Options: Closing a position in the expiring contract and opening the same position in the next one.
Short Market mechanics: A position that profits if the price falls.
Slippage Risk: The difference between the price you expected and the price you got. Small per trade, large per year.
Spread (strategy) Options: A position with more than one leg, built to cap both the loss and the gain deliberately. Lesson →
Stop loss Risk: A predetermined exit for a losing position. Its purpose is to make the size of a loss a decision rather than an event.
Strike Options: The price written into an option contract, at which it can be exercised.
STT Tax: Securities Transaction Tax, levied on trades. On options it applies differently to a sold contract than to one allowed to expire in the money — a distinction that has surprised many people on expiry day.
Supply Charts: Sellers waiting at a price. Where supply exceeds demand, advances stop. Lesson →
Support Charts: An area where buying has repeatedly overwhelmed selling, stopping declines.
Theta Options: The rate at which an option loses value purely from the passage of time. It is not linear — the final week behaves nothing like the first.
Time value Options: The part of an option premium that is not intrinsic value. It decays to zero at expiry, with certainty.
Turnover Tax: For F&O, computed from the absolute profits and losses on each trade rather than from contract value. The number that decides whether a tax audit applies.
Underlying Options: The instrument a derivative is written on — an index or a stock.
Vega Options: How much an option price moves for a one-point change in implied volatility.
Volume Charts: How many units traded in a period. Read underneath price, it says how much participation was behind a move.
Wick Charts: The thin line beyond a candle body, marking a price that was reached and not held. Also called a shadow. Lesson →
Zone Charts: A level drawn as a band rather than a single price, reflecting how imprecise real levels are. Lesson →