The Ultimate Trading & Finance Knowledge Hub

✅ Delta (Δ)

Definition: Measures how much an option’s price changes per $1 move in the underlying asset.

Range: -1 to 1 (Calls: 0 to 1; Puts: -1 to 0).

Use: Hedge ratio, directional exposure. Crucial for understanding an option's sensitivity to price movements in the underlying asset.

Example: A call with delta 0.60 gains ~$0.60 if the stock rises $1. A put with delta -0.40 gains ~$0.40 if the stock falls $1.

✅ Gamma (Γ)

Definition: The rate of change of delta. Measures delta’s sensitivity to underlying price moves. It's the second derivative of the option price with respect to the underlying price.

High Gamma: Near ATM (at-the-money) options, especially close to expiration. These options experience rapid delta changes.

Risk: High gamma = rapid delta changes = larger hedging needs or faster profit/loss acceleration.

✅ Theta (Θ) – “Time Decay”

Definition: How much an option loses in value per day as expiration nears, assuming all other factors remain constant.

Sellers Love Theta: Positive theta means you profit from the option's value eroding over time. This is common for option sellers.

Buyers Hate Theta: Negative theta means the option loses value daily, acting as a drag on profits for option buyers.

Peak Decay: Time decay accelerates significantly in the last 30-45 days before expiration.

✅ Vega (ν)

Definition: Sensitivity of an option's price to changes in implied volatility (IV). A higher Vega means the option's price will move more dramatically with changes in IV.

Higher Vega: Longer-dated options and ATM (at-the-money) strikes typically have higher Vega.

IV Crush: Vega drops sharply after an event (like earnings) → resulting in big losses for option buyers who rely on high IV.

✅ Rho (ρ)

Definition: Sensitivity of an option's price to changes in interest rates. Positive for calls, negative for puts.

Impact: Generally minor for short-term traders. More relevant for LEAPS (Long-term Equity AnticiPation Securities) and long-dated options.

✅ Vanna

Definition: Measures the rate of change of an option's delta with respect to a change in implied volatility. Or, the rate of change of an option's Vega with respect to a change in the underlying asset's price.

Use: Important for professional market makers and large institutional traders to manage their risk exposures, especially in volatile markets.

✅ Charm (Delta Decay)

Definition: Measures the rate of change of an option's delta with respect to the passage of time. Similar to Theta, but specifically for Delta.

Impact: Causes delta to accelerate towards 0 for out-of-the-money (OTM) options and towards 1 (or -1 for puts) for in-the-money (ITM) options as expiration approaches.

🔹 Covered Call

Setup: Own 100 shares of a stock and simultaneously sell 1 OTM (out-of-the-money) call option against those shares.

Goal: Generate income via premium collected from selling the call option, or to slightly reduce the cost basis of your stock.

Max Profit: Premium received + (strike price - purchase price of shares).

Risk: Capped upside profit if the stock rallies sharply above the strike price (shares may be called away). Loss if the stock falls below your purchase price.

🔹 Cash-Secured Put

Setup: Sell a put option and set aside enough cash in your account to purchase the shares if you are assigned.

Goal: To collect premium income, or to acquire shares of a stock you want to own at a lower price if the option is assigned.

Use Case: Bullish on a stock long-term but want to buy it at a lower price. Collect premium if the stock stays above the strike.

🔹 Iron Condor

Setup: A neutral strategy involving selling an OTM call spread and an OTM put spread, typically with the same expiration date.

Goal: Profit from low volatility and time decay as the underlying asset stays within a defined range.

Max Profit: The net credit received when opening the position.

Max Loss: The width of either spread minus the net credit received. Risk is limited and known upfront.

Best For: Sideways or range-bound markets where you expect minimal price movement.

🔹 Straddle

Setup: Simultaneously buy an ATM (at-the-money) call and an ATM put option with the same strike price and expiration date.

Goal: Profit from a large price move in the underlying asset, regardless of direction (up or down).

Break-Even: Strike price ± total premium paid for both options.

High Vega Play: Works best when implied volatility is low before an expected significant event (like earnings) and is anticipated to rise afterwards.

🔹 Strangle

Setup: Simultaneously buy an OTM call and an OTM put option with different strike prices but the same expiration date.

Notes: Generally cheaper than a straddle as both options are OTM, but requires a larger price move in the underlying asset to become profitable.

Ideal: Before earnings reports or other significant news events where a large, unpredictable price swing is expected.

🔹 Calendar Spread

Setup: Sell a near-term option and buy a longer-term option with the same strike price (either both calls or both puts).

Goal: To profit from the differential in time decay (theta) between the short-term and long-term options. The short-term option decays faster.

Best For: A neutral outlook on the underlying asset, or when you expect implied volatility to slowly rise over time.

🔹 Butterfly Spread

Setup: A neutral strategy using three different strike prices (e.g., buy 1 ITM, sell 2 ATM, buy 1 OTM call or put option, all with the same expiry).

Goal: To profit if the stock finishes exactly at or very close to the middle strike price at expiration. Offers limited risk and limited reward.

Notes: Low Risk, Low Reward. Often used by experienced traders to profit from low volatility environments.

🔹 Vertical Spread (Debit/Credit)

Setup: Simultaneously buying and selling options of the same type (calls or puts) and expiration, but different strike prices. Can be a Debit Spread (bull call, bear put) or a Credit Spread (bear call, bull put).

Goal: To profit from directional moves with limited risk/reward, or to generate income. Risk and reward are defined.

Use Case: When you have a moderate directional bias and want to limit both potential profit and loss.

🔎 Implied Volatility (IV)

Definition: The market’s forecast of future volatility for an underlying asset, derived from the price of options. It's a forward-looking measure, unlike historical volatility.

High IV: Generally means options are expensive → favorable for option sellers (premium collection).

Low IV: Generally means options are cheap → favorable for option buyers (potential for large moves).

IV Rank (IVR): Compares the current implied volatility to its 52-week high and low. A value of 100 means current IV is at its 52-week high, 0 means at its 52-week low.

IV Percentile (IVP): Indicates the percentage of days in the past year when the implied volatility was lower than the current IV. A 90% IVP means current IV is higher than 90% of past readings.

⚡ IV Crush

What: A sharp and sudden drop in implied volatility after a significant event (e.g., earnings report, FDA announcement, economic data release).

Effect: Option buyers who bought before the event can experience significant losses, even if the underlying stock moves in their favored direction, because the drop in IV offsets potential price gains.

Example: Buying a straddle before earnings, but IV crush wipes out gains despite a 5% stock move. The expected volatility decreases sharply after the uncertainty is removed.

Trade Tip: Option sellers often profit from IV crush by selling premium before anticipated high IV events.

🔄 Delta Hedging

Definition: The process of adjusting a position to maintain a neutral delta (or a desired delta exposure) by buying or selling the underlying asset as its price changes.

Used By: Primarily by market makers and large institutional traders to manage their risk from changes in the underlying asset's price.

Example: If you are long a call option with a delta of 0.50, you might sell 50 shares of the underlying stock (or 0.5 shares for one option contract) to achieve a delta-neutral position.

💥 Gamma Squeeze

What: A rapid and exaggerated price increase in a stock, triggered by a feedback loop between increasing call option buying and market maker hedging activity.

Triggers: High short interest combined with significant buying of out-of-the-money call options. Market makers who sell these calls then need to buy the underlying stock to hedge their delta exposure, pushing the price up further.

Examples: Notable examples include GameStop (GME) and AMC Entertainment (AMC) in early 2021.

📉 Short Squeeze

Definition: Occurs when a stock's price surges, forcing short sellers to buy back shares to cover their positions and limit losses, which further fuels the price increase.

Fuel: A high percentage of short interest (many shares sold short) combined with positive news or an unexpected upward price movement.

🔄 Pin Risk

Definition: The risk that a stock's price closes exactly at or very close to an option's strike price at expiration. This creates uncertainty as to whether the option will be assigned or expire worthless.

Avoidance: Traders often close or roll their positions before expiration to avoid the uncertainty and potential logistical issues of pin risk.

📈 Market Cap (Market Capitalization)

Definition: The total value of a company's outstanding shares. Calculated by multiplying the current stock price by the number of shares outstanding.

Importance: Used to categorize companies (e.g., large-cap, mid-cap, small-cap) and provides a quick measure of a company's size.

📊 Bid-Ask Spread

Definition: The difference between the highest price a buyer is willing to pay for an asset (the **bid**) and the lowest price a seller is willing to accept (the **ask** or **offer**).

Importance: Represents the cost of trading and reflects market liquidity. A narrower spread indicates higher liquidity and lower trading costs.

🛡 Position Sizing

Rule: The most crucial aspect of risk management. Never risk <1-2% of your total trading capital on a single trade. This prevents any single loss from devastating your account.

Formula: (Account Risk %) / (Entry Price - Stop Loss Price) = Number of Shares/Contracts to trade. This ensures you only take a manageable loss if your stop is hit.

📊 Risk-Reward Ratio

Ideal: Aim for a minimum of 1:2 or better. This means for every $1 you risk, you aim to make at least $2 in profit.

Example: Risking $100 to potentially make $200. This positive expectancy allows you to be profitable even if you only win a portion of your trades.

🧠 Trading Psychology

Mastering your emotions is as important as strategy. Common psychological biases include:

• FOMO (Fear Of Missing Out): Impulsive entries into trades that have already moved significantly, leading to chasing and poor risk-reward.
• Revenge Trading: Attempting to immediately win back losses after a losing trade, often leading to larger, more reckless losses.
• Anchoring: Holding onto losing trades because you are anchored to your original entry price, rather than cutting losses when the trade rationale is broken.
• Confirmation Bias: Only seeking out information that confirms your existing beliefs about a trade, ignoring contradictory evidence.

Fix: Develop a robust trading plan, meticulously journal your trades (including emotional state), practice mindfulness, and adhere strictly to your rules.

📅 Trade Journaling

What to Track: Detailed records of every trade, including entry/exit points, rationale for the trade, management decisions, emotions felt, and profit/loss.

Use: Review your journal weekly or monthly to identify recurring patterns in your trading (both positive and negative), refine your strategy, and improve your emotional discipline.

🛑 Stop Loss

Definition: A pre-determined price level at which you will exit a losing trade to limit potential losses. Can be a market order or a limit order.

Importance: Essential for risk management. Helps enforce discipline and prevents small losses from turning into large ones.

🎯 Take Profit (Target)

Definition: A pre-determined price level at which you will exit a winning trade to lock in profits. Can be a market order or a limit order.

Importance: Helps secure gains and prevents winning trades from turning into losers due to reversals.

🔍 Technical Analysis (TA)

Definition: The study of past market data, primarily price action and volume, to forecast future price movements. It assumes that all known information is already discounted in the price.

Core Belief: History tends to repeat itself, and market psychology drives price patterns.

Tools:

• Moving Averages (e.g., 50-day, 200-day): Smooth out price data to identify trends. Crossovers can signal trend changes.
• Relative Strength Index (RSI): A momentum oscillator that measures the speed and change of price movements. Signals overbought (>70) or oversold (<30) conditions.
• Moving Average Convergence Divergence (MACD): A trend-following momentum indicator that shows the relationship between two moving averages of a stock’s price. Useful for identifying trend strength and reversals.
• Bollinger Bands: Volatility indicators that consist of a middle band (a simple moving average) and two outer bands (standard deviations above and below the SMA). Prices tend to stay within these bands.
• Support & Resistance: Price levels where a stock historically stops moving in a particular direction. Support is a price level where buying interest is strong enough to prevent the price from falling further, while resistance is a price level where selling interest is strong enough to prevent the price from rising further.
• Volume: The number of shares or contracts traded in a security or market during a given period. High volume confirms price moves, low volume suggests weakness.
• Candlestick Patterns: Visual representations of price action (e.g., Doji, Hammer, Engulfing patterns) that can signal reversals or continuations.

🔎 Fundamental Analysis (FA)

Focus: Evaluating a company's intrinsic value by examining financial statements, industry conditions, management quality, and economic factors.

Goal: To determine if a stock is undervalued or overvalued relative to its true worth.

Key Ratios & Metrics:

• P/E Ratio (Price-to-Earnings Ratio): Stock price divided by earnings per share. Indicates how much investors are willing to pay for each dollar of earnings.
• PEG Ratio (Price/Earnings to Growth Ratio): P/E ratio divided by the earnings growth rate. Helps evaluate a stock's value by factoring in its expected growth.
• EPS Growth (Earnings Per Share Growth): The rate at which a company's earnings per share are increasing. A key indicator of profitability and growth.
• ROE (Return on Equity): Measures how much profit a company generates for each dollar of shareholders' equity. Indicates how efficiently a company is using shareholder investments to generate profits.
• Debt-to-Equity Ratio: Measures a company's financial leverage. A higher ratio indicates more reliance on debt financing.
• Revenue Growth: The rate at which a company's sales are increasing. Important for assessing top-line growth.
• Net Income/Profit Margin: The percentage of revenue left after all expenses have been deducted. Indicates profitability.

Stocks (Equities)

Definition: Represents ownership in a company. Owning stock gives you a claim on the company's assets and earnings proportional to the number of shares you own.

Goal: Long-term capital appreciation or dividend income.

Types: Common stock, preferred stock.

Options

Definition: Financial contracts that give the buyer the right, but not the obligation, to buy (call option) or sell (put option) an underlying asset at a specified price (strike price) on or before a specific date (expiration date).

Use: Speculation, hedging, income generation. Offer leverage and flexibility.

Futures

Definition: Standardized legal agreements to buy or sell something at a predetermined price at a specified time in the future. They are an obligation, not a right.

Use: Hedging against price fluctuations (e.g., commodities, currencies, interest rates) or speculation on future price movements. Involve high leverage.

ETFs (Exchange-Traded Funds)

Definition: Investment funds that hold assets such as stocks, commodities, or bonds, and trade on stock exchanges like regular stocks.

Use: Diversification, tracking various indexes (e.g., SPY for S&P 500, QQQ for Nasdaq 100), or gaining exposure to specific sectors/themes.

LEAPS (Long-term Equity AnticiPation Securities)

Definition: Options contracts with an expiration date of more than one year (typically 2-3 years) from the date of purchase.

Use: Long-term directional bets, long-term leverage, or as a capital-efficient alternative to owning stock outright.

Bonds

Definition: Debt instruments issued by governments or corporations to raise capital. When you buy a bond, you are essentially lending money to the issuer in exchange for regular interest payments and the return of the principal at maturity.

Use: Income generation, capital preservation, portfolio diversification (typically less volatile than stocks).

Mutual Funds

Definition: Investment vehicles that pool money from multiple investors to invest in a diversified portfolio of stocks, bonds, or other securities. Managed by professional money managers.

Use: Diversification, professional management, accessibility for smaller investors.

Scalping

Duration: Seconds to minutes. Trades are typically held for very short periods, aiming to profit from small price discrepancies.

Focus: Level 2 data, DOM (Depth of Market), extremely fast execution, identifying fleeting imbalances in supply and demand.

Day Trading

Duration: Intraday (trades are opened and closed within the same trading day, no overnight positions).

Focus: Technical analysis (short-term charts), volume, real-time news, and identifying strong intraday trends or reversals.

Swing Trading

Duration: Days to weeks. Captures short to medium-term price swings.

Focus: Chart patterns (e.g., head and shoulders, flags), earnings reports, momentum indicators, and anticipating trend continuations or reversals over several trading sessions.

Position Trading

Duration: Weeks to months, or even years. Longer-term trend following.

Focus: Combination of fundamental and technical analysis, identifying major trends, and holding positions through minor fluctuations. Less concerned with short-term noise.

Options Selling (Income Strategies)

Duration: Typically weekly or monthly expirations.

Focus: Profiting from time decay (theta) and high implied volatility. Strategies include covered calls, cash-secured puts, iron condors, and various credit spreads.

📊 VIX – “Fear Gauge”

Definition: The CBOE Volatility Index (VIX) measures the market's expectation of 30-day forward-looking volatility, based on S&P 500 index option prices.

High VIX: Signals high market fear and uncertainty, typically occurring during market downturns or heightened volatility.

Low VIX: Signals market complacency and stability, usually seen during periods of steady market uptrends.

VIX Term Structure: Refers to the relationship between implied volatilities for different expiration months. Contango (normal) means longer-dated VIX futures are higher than near-term. Backwardation (fear) means near-term VIX futures are higher, indicating immediate market stress.

📊 Put/Call Ratio (P/CR)

Definition: A sentiment indicator calculated by dividing the volume of put options traded by the volume of call options traded for a specific period (e.g., daily, weekly).

> 1.0: More puts traded than calls → typically indicates bearish sentiment. Traders are buying puts to hedge or speculate on downside.

< 0.7: More calls traded than puts → typically indicates bullish sentiment (but extreme low readings can sometimes signal market tops due to excessive optimism).

Note: Extreme readings in either direction are often considered contrarian signals by experienced traders.

📊 Short Interest

What it is: The total number of shares of a company's stock that have been sold short by investors but have not yet been covered or closed out. Often expressed as a percentage of the total float (shares available for trading).

High Short Interest: Can indicate a significant bearish sentiment on the stock, but also signals a potential for a short squeeze if the stock price unexpectedly rises.

📊 Advance/Decline Line (A/D Line)

Tracks: A market breadth indicator that plots the cumulative difference between the number of advancing stocks and declining stocks over a period.

Use: Confirms the strength of a market trend. If the A/D line is rising with the market, it confirms bullish breadth. If it diverges (e.g., market is rising but A/D line is falling), it suggests weakness beneath the surface.

📈 High-Low Index

Definition: Measures the number of stocks making new 52-week highs versus new 52-week lows. Typically smoothed with a moving average.

Use: A market breadth indicator. When many stocks are making new highs, it confirms strength. When many are making new lows, it indicates weakness.

GDP (Gross Domestic Product)

Definition: The total monetary or market value of all the finished goods and services produced within a country's borders in a specific time period.

Importance: The broadest measure of economic activity and a primary indicator of the health of an economy.

CPI (Consumer Price Index)

Definition: Measures the weighted average of prices of a basket of consumer goods and services, such as transportation, food, and medical care.

Importance: A key indicator of inflation. Rising CPI often leads to central bank interest rate hikes, impacting financial markets.

Unemployment Rate

Definition: The percentage of the total labor force that is unemployed but actively seeking employment and willing to work.

Importance: A vital gauge of economic health and labor market strength. Low unemployment generally signals a strong economy.

Interest Rates (Federal Funds Rate)

Definition: The target interest rate set by a central bank (e.g., the Federal Reserve in the U.S.) that banks charge each other for overnight loans.

Impact: Influences borrowing costs throughout the economy, impacting consumer spending, business investment, and ultimately stock and bond valuations.

SEC (Securities and Exchange Commission)

Role: U.S. government agency responsible for protecting investors, maintaining fair, orderly, and efficient markets, and facilitating capital formation. Enforces securities laws.

FINRA (Financial Industry Regulatory Authority)

Role: A self-regulatory organization (SRO) that oversees broker-dealers in the U.S. Aims to protect investors by ensuring the securities industry operates fairly and honestly.

NYSE (New York Stock Exchange)

Role: The largest stock exchange in the world by market capitalization. Known as "The Big Board," it operates a hybrid market combining human judgment with electronic trading.

NASDAQ (National Association of Securities Dealers Automated Quotations)

Role: The second-largest stock exchange by market capitalization globally. It's a fully electronic exchange, popular for technology and growth companies.