Risk and Decision Making · Options Trading Guide
A portfolio of different strategy names can share the same hidden exposure. Reprice the positions together under adverse changes in price, volatility and time.
Translate Greeks into consistent cash units
For a simple standard equity option, a quoted delta of 0.40 corresponds to about 40 share equivalents per contract. Vega quoted at 0.12 per share means about $12 per contract for a one percentage point volatility change near the current state. Providers can use different conventions, so verify units before adding exposures. A total made from incompatible units is not a risk report.
Use a local approximation carefully
Suppose a fictional portfolio has cash delta of $60 per $1 underlying move, cash gamma of $10 per squared dollar, vega of $25 per volatility point and theta of a $12 daily loss. A $2 fall, three point volatility rise and one day passage gives a local estimate of a $120 directional loss plus $20 gamma contribution plus $75 volatility gain minus $12 time effect, or a $37 loss. This is an approximation around one starting state.
Reprice larger moves
Greeks change with the underlying, volatility surface and time. A large shock should be assessed with full position repricing and multiple volatility assumptions rather than stretching a local formula indefinitely. Include upside shocks for short calls, downside gaps for short puts and changes in skew across strikes. Apply simultaneous shocks to correlated holdings instead of assuming one position loses while everything else remains unchanged.
Inspect funding along the path
A final hedge can still create cash pressure before the horizon. Stress margin changes, early assignment, spread widening and a delayed exit. Record the scenario loss, cash required and actions that remain feasible. If several strategies depend on calm markets or the same short volatility exposure, their distinct names do not provide economic diversification. Compare the aggregate stressed result with the portfolio’s capacity to absorb loss.
Try it yourself
A portfolio has cash vega of $40 per volatility point. What is the local effect of a two point fall in implied volatility, holding other inputs fixed?
Show the worked answer
The approximate effect is a loss of $80. Actual repricing can differ because vega and the rest of the volatility surface may change.
Further reading
Educational material. Examples and rates are hypothetical, not trade recommendations. Product terms, eligibility and risks vary by venue and jurisdiction.
