Risk, Position Sizing and Trade Management
28 words you meet in options, each one explained plainly.
Averaging Down
Averaging down means adding to a position after its price has fallen, thereby reducing the average entry price.
Buying Power Reduction
Buying power reduction is the amount by which opening or maintaining a position reduces the account's available buying power under the broker's met...
Closing Before Expiration
Closing before expiration means exiting an options position through an offsetting transaction before the contract reaches expiration.
Contract Risk
Contract risk is the amount of potential loss associated with an individual option contract or one unit of an options strategy under the trader's d...
Covered Option
A covered option is a short option position where another holding or position provides the specified coverage for the option obligation. A classic...
Cutting Losses
Cutting losses means reducing or closing a losing position when the trader's risk limit, invalidation condition or trade plan indicates that the po...
Event Risk
Event risk is the possibility that a known or unexpected event causes a significant change in price, volatility or market conditions.
Expiration Concentration
Expiration concentration occurs when a significant portion of an options portfolio expires within the same narrow time window.
Gap Risk
Gap risk is the risk that an asset moves sharply from one price level to another with little or no opportunity to trade at prices in between.
Maximum Profit
Maximum profit is the greatest profit a position can produce under its defined payoff structure, where such a maximum exists.
Naked Option
A naked option generally refers to a short option position that is not covered by the underlying asset or another position that fully defines the r...
Options Exposure
Options exposure describes the economic sensitivities and risks created by options positions across an account or portfolio.
Options Margin
Options margin refers to collateral or account requirements associated with certain options positions, particularly positions involving short options.
Overnight Risk
Overnight risk is the risk created by holding a position while the relevant market is closed or liquidity is materially reduced.
Planned Loss
Planned loss is the amount a trader intends to risk on a trade according to their trade plan, which may be lower than the position's theoretical ma...
Position Adjustment
A position adjustment changes an existing options position in response to changes in the market, risk or trade thesis. An adjustment may involve: c...
Probability of Profit
Probability of profit is an estimate of the probability that an options position will satisfy a specified profitability condition under the model a...
Probability of Touch
Probability of touch is a model based estimate of the probability that the underlying price will reach a specified price level at some point before...
Roll Down
Rolling down means moving an options position to a lower strike while closing the existing position and opening the replacement.
Roll Down and Out
Rolling down and out means moving an options position to: a lower strike and a later expiration.
Roll Out
Rolling out means closing an option position and opening another with a later expiration, generally while maintaining the same or a related strike...
Roll Up
Rolling up means moving an options position to a higher strike while closing the existing position and opening the replacement.
Roll Up and Out
Rolling up and out means moving an options position to: a higher strike and a later expiration.
Rolling an Option
Rolling an option involves closing an existing option position and opening another option position with a different strike, expiration or both.
Rolling for a Credit
Rolling for a credit means the closing and replacement transactions produce a net credit for the roll itself.
Rolling for a Debit
Rolling for a debit means the closing and replacement transactions require an additional net payment.
Tail Risk
Tail risk refers to the possibility of unusually large market moves or outcomes in the extreme parts of a probability distribution.
Taking Profit
Taking profit means reducing or closing a profitable position to realise some or all of the gain.