Leverage, margin & derivatives: glossary

The terms

• Buying powerBuying power is the position value your free margin can open at the allowed leverage: ₹20,000 at 10x is ₹2,00,000. It shrinks when you open a…
• Call optionA call option is the right to buy at the strike before expiry. Strike 24,200 and premium 80 means profit only above 24,280, because in the money is…
• Commitments of Traders (COT) reportThe Commitments of Traders report is the CFTC's weekly breakdown of who holds US futures: producers, dealers, hedge funds. It lands Friday for…
• Cost of carryCost of carry is what it costs to hold a position over time: storage, insurance and interest, minus any income. It is why futures usually sit above…
• DrawdownDrawdown is the fall from an account's peak to its trough, in percent. Recovery is lopsided: minus 50% needs plus 100% to get back, minus 80% needs…
• ExpectancyExpectancy is the average result per trade: win rate times average win minus loss rate times average loss, usually counted in R, the amount risked.…
• Expected moveThe expected move is the size of move the options market is pricing for an event: add the at-the-money call and put premiums and divide by the stock…
• Futures contractA futures contract is an exchange-traded agreement to buy or sell at a set price on a set date, settled daily against margin. It binds both sides…
• HedgingHedging is taking a second position that loses when your first one wins, to cut risk. Market makers hedge every fill and hold no view. For an Indian…
• Implied volatilityImplied volatility is the volatility an option's price implies, worked backward from the premium: the market's priced expectation of the move. It…
• Index futures (E-mini S&P 500)Index futures are futures on a stock index, like the E-mini S&P 500 on the CME. They trade almost round the clock, so between the US close and open…
• Initial margin vs maintenance marginInitial margin is the deposit to open a position; maintenance margin is the floor your account must stay above to keep it. The gap between them is…
• IV crushIV crush is the drop in an option's price when the uncertainty it was charging for disappears, typically the morning after results. A ₹150 call can…
• Kelly criterionThe Kelly criterion is the bet size that maximises long-run growth given your edge and odds. Bet above it and growth falls fast, at about twice…
• Leverage in tradingLeverage is controlling a position bigger than the money you put up. At 5x, ₹10,000 of margin controls ₹50,000, so a 2% move is 10% of your money…
• Leverage ratioThe leverage ratio is position value divided by margin: ₹50,000 on ₹10,000 is 5x. One over the ratio is how far the price can move against you…
• Liquidation / forced square-offLiquidation, or forced square-off, is the venue closing a leveraged position because the margin can no longer cover the loss, at a price computed…
• Liquidation cascadeA liquidation cascade is a chain of forced closes: traders with similar entries and leverage have liquidation prices a few dollars apart, the first…
• Margin callA margin call is a broker's demand for more funds when your account falls below the required margin; ignore it and positions are closed. On a venue…
• Margin interestMargin interest is what a US broker charges, daily, on cash it lends you to buy shares. A perpetual contract has no loan and no margin interest; its…
• Margin requirementA margin requirement is the minimum collateral for a position as a percent of its value: 10% is the same as 10x leverage. It rises for larger…
• Margin tradingMargin trading is taking a position larger than your deposit, the margin. A US broker lends you cash at interest; on a margined contract nothing is…
• Negative balance protectionNegative balance protection means you cannot lose more than the money in your account, even when a gap jumps past your liquidation price. On…
• Notional valueNotional value is the full size of a position, price times quantity, whatever margin backs it: ₹50,000 of exposure on ₹10,000 of margin has a…
• Option open interestOption open interest is the number of option contracts that exist at a strike right now, free on any option chain. The strike above the price with…
• Options contractAn options contract gives the buyer the right, not the obligation, to buy (call) or sell (put) at a strike before expiry, for a premium. The buyer…
• Overnight financing / swap feeOvernight financing, or a swap fee, is the daily interest a broker charges for holding a leveraged position past the session close, paid to the…
• Position sizingPosition sizing is deciding how much to trade: the rupees you are willing to lose divided by the distance from entry to stop. Size is the output and…
• Put optionA put option is the right to sell at the strike before expiry, so it gains when the price falls: insurance on a holding, or a short with the loss…
• Risk-reward ratioThe risk-reward ratio compares what you lose if the stop is hit with what you gain at target: risking ₹1,000 to make ₹3,000 is 1:3. Alone it means…
• Stop-out levelThe stop-out level is the margin level at which a venue closes your positions for you, at whatever the book gives. It is the venue's trigger, not…
• Strike price and expiryThe strike price is where an option pays; expiry is when a contract ends. Expiry is what ties a future to the real price, which is why the gap goes…