Positions, PnL & Risk
Szymon Kopyciński · 23 September 2026
1. Long, short and positions
Position
The quantity of an instrument currently owned or owed by a trader or portfolio.
Long
A position that gains when the asset rises in price.
If you buy 100 shares, you are long 100 shares.
Short
A position that gains when the asset falls in price.
Shorting shares involves borrowing them, selling them, and later buying them back to return to the lender.
Flat
Having no position in an instrument.
Inventory
The positions currently held by a trader.
The term is particularly common in market making.
Exposure
The amount of risk associated with a position or collection of positions.
It can be measured in several ways, including notional value (the market value of the underlying position), delta and beta-adjusted value.
Gross exposure
The total absolute exposure across positions.
For example, if a portfolio is:
£1m long A
£1m short B
its gross exposure is £2m.
Net exposure
Long exposure minus short exposure.
Using the same example:
£1m - £1m = £0
so net exposure is zero.
Hedging
Taking a position designed to offset a specific existing risk.
Delta hedge
A hedge that offsets the directional price exposure of an option or derivatives portfolio, usually by trading the underlying.
2. Profit, loss and performance
PnL / P&L
Profit and Loss.
The amount of money gained or lost.
Realised PnL
Profit or loss from positions that have been closed.
Unrealised PnL
Profit or loss on positions that remain open.
If you buy something for £100 and its current value is £105, you have £5 of unrealised profit until you sell it.
Mark-to-market
Valuing a position using current market prices.
This makes unrealised gains and losses appear in the portfolio's current value.
Return
The gain or loss on an investment relative to its initial value.
A simple return is:
$$ R = \frac{P_1 - P_0}{P_0} $$
Log return
An alternative definition of return:
$$ r = \ln\left(\frac{P_1}{P_0}\right) $$
Log returns add across time periods, which makes multi-period calculations simpler.
CAGR
Compound Annual Growth Rate.
The constant annual growth rate that would produce the same total return over a period.
Hit rate
The proportion of trades that are profitable.
A strategy can have a low hit rate and still be profitable if its winning trades are sufficiently larger than its losing trades.
Payoff ratio
The average size of winning trades divided by the average size of losing trades.
Sharpe ratio
A widely used measure of risk-adjusted return:
$$ \text{Sharpe} = \frac{\text{Excess Return}}{\text{Volatility of Returns}} $$
where excess return is the return above the risk-free rate. It is usually annualised.
A higher Sharpe means more return per unit of volatility.
Sortino ratio
Similar to the Sharpe ratio, but penalises only downside volatility rather than all volatility.
Information ratio
Active return relative to a benchmark, divided by the volatility of that active return.
Drawdown
The decline in portfolio value from a previous peak.
Maximum drawdown
The largest peak-to-trough decline over a period.
Turnover
In a strategy context, the amount of trading required to maintain the portfolio.
High turnover means greater sensitivity to execution costs.
Capacity
The amount of capital a strategy can deploy before its own trading materially reduces its returns.
For example, a strategy trading small, illiquid stocks may work at £100,000 but not at £1 billion.
3. Risk
Risk
The possibility that actual outcomes differ unfavourably from expected outcomes.
Volatility
A measure of how much prices or returns fluctuate.
It is usually measured as the standard deviation of returns, often annualised.
Historical volatility
Volatility estimated from past price movements.
Implied volatility
The volatility that, when inserted into an option-pricing model, produces the option's observed market price.
It can be read as the market's expectation of future volatility embedded in option prices.
Leverage
Using borrowed capital or derivatives to obtain exposure larger than the capital committed.
Leverage amplifies both gains and losses.
Margin
Collateral that must be posted to support leveraged or derivative positions.
Margin call
A requirement to post additional collateral because existing margin is no longer sufficient.
Value at Risk / VaR
A statistical estimate of potential portfolio loss over a specified horizon and confidence level.
A one-day 99% VaR is a loss threshold expected to be exceeded on roughly 1% of days, under the model's assumptions.
VaR is a threshold, not the worst possible loss, and says nothing about how large losses beyond it can be.
Expected Shortfall / ES
The expected loss given that losses exceed the VaR threshold.
It describes the severity of losses in the tail rather than only the threshold.
Tail risk
Risk arising from rare but extreme outcomes.
Counterparty risk
The risk that another party to a transaction fails to meet its obligations.
Credit risk
The risk that a borrower or issuer fails to repay money owed.
Market risk
Risk arising from adverse changes in market prices.
Liquidity risk
The risk that a position cannot be traded quickly enough, or in sufficient size, without substantial losses.
Model risk
The risk that decisions based on a model are wrong because the model is incorrect, incomplete, poorly implemented or used outside the conditions where it works.
Part of Glossary Index · Previous: Market Microstructure & Trading Strats · Next: Statistics & QR
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