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definitions guide When you’re trading options, knowing all the vocabulary and terminology associated with the market is essential. This guide will give you an understanding of the most common terms used in online options trading to feel confident when placing your bets. Let’s get started.
What is the expiry date in the UK market?
The expiry date is when an option contract expires, sometimes called the ‘maturity date’. The expiry date is set when the option contract is created and cannot be changed afterwards.
Once an options contract has expired, it is no longer valid and cannot be exercised. If you have purchased a call option and the underlying asset’s price has risen above the strike price, you can exercise your option and make a profit. You will lose money if the price has not risen above the strike price.
Similarly, if you have bought a put option and the underlying asset’s price has fallen below the strike cost, you can exercise your option and make a profit. You will lose money if the price has not fallen below the strike price.
What is open interest definitions guide in the UK market?
Open interest is the number of outstanding contracts bought or sold but not yet closed. In other words, it is the number of option contracts still ‘active’.
Open interest can be used to gauge market sentiment for a particular asset. If there is high open interest, there is a lot of activity in the market, and traders are confident about the asset’s future price movement. If there is low open interest, there is not much activity in the market, and traders are less confident about the asset’s future price movement.
What is implied volatility in the UK market?
Implied volatility measures how much the price of an asset is expected to fluctuate in the future. It is calculated using option prices and can be used to gauge market sentiment for an asset.
If the implied volatility is high, traders expect the asset price to move a lot in the future. If the implied volatility is minimal, it means that traders expect the price of the asset to move less in the future.
What is a short position in the UK market?
A short position is when you sell an asset you do not own and hope to repurchase the asset at a lower cost to make a profit.
You first need to borrow the asset from somebody else to take a short position. For example, if you wanted to take a short position in shares of ABC plc, you would need to find somebody willing and able to lend you those shares.
Once you have borrowed the shares, you can sell them shares on the open market once you have borrowed them. If the price falls, you can repurchase them at the lower price and return them to the person who lent them to you. You will have made a profit, and the person who lent you the shares will have made a loss.
However, if the asset’s cost price rises, you will lose. You will have to repurchase the asset at a higher price than you sold it.
Short positions are often used by traders who think the market is about to fall. They can be used as a hedging strategy to offset the risk of losses in other investments.
What is a long position definitions guide in the UK market?
A long position is when you buy an asset and hope to sell it at a higher cost in the future to make a profit.
For example, if you think the price of ABC plc shares will rise, you could buy them and hope to sell them at a higher price. If the price rises, you will make a profit; however, if the price falls, you will make a loss.
Long positions are often used by traders who think the market will rise. They can also be used as a hedging strategy to offset the risk of losses in other investments.
Conclusion
Understanding terminology when trading options in the UK can give you a significant edge. It is also vital if you want to be a successful trader. The above article provides just some examples of the terms you may encounter when placing trades, and it is by no means an exhaustive list. Ideally, you should continue learning and improving upon your knowledge base to ensure you can grow as a trader.
