# 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](/blog/glossary-index) · Previous: [Market Microstructure & Trading Strats](/blog/glossary-index/glossary-market-microstructure-and-trading-strats) · Next: [Statistics & QR](/blog/glossary-index/glossary-stats-and-qr)