Yeah, stress it. BSM, CRR, Bjerksund-Stensland, etc. Sum the thetas is a spreadsheet and keep it under 1/100.
Several sources have told me that the average lifespan of naked option underwriters is about seven years. I have never found a direct conformation source to confirm or deny it, but based on decades of trading, it is unquestionably true that by far the majority of traders over-trade, over-leverage and over-risk their trading capital. There are old traders and there are bold traders but there are no old, bold traders!
I would like to clarify the calculation and the definition in a couple of posts above. Let's say a person has an account that is 100% options, most of them short options. The net option value today -$100,000 and the aggregate Theta (summing all the capital "T" Theta in IB's Risk Navigator) is $1400. Is "notional/book" value as referenced in the previous posts -$100,000? If so, this would be getting up there in risk because Theta/Notional = 1.4%, right?
If your account value is 100k then you are running 1.4percent theta. I would have used the term theta to equity rather than theta to notional. Though I also have notional to equity limits as well. It's a rule of thumb.
Thank you. This is another reason I would discourage fresh college graduates from plunging right into independent trading - it's hard to pick up the rules of thumb if you're not interacting - in person - with other traders, mentors and risk mgmt staff.
OP mentioned that they are running a DELTA hedged SHORT PUT option strategy. Can someone explain how it is possible to blow up when you are delta hedged? Assuming you are Short Puts and Short Stock, I can only see 3 ways: - You are short Vol so if Vol very quickly goes through the roof you lose - Large Gap ups which are far rarer than large gap downs. - If the market falls quickly gamma causes delta to increase faster than you can rebalance the delta hedge which would cause a loss since you are longer than you would like to be but you are still short stock so I don't see how this would be a blowup What else am I missing? What else would cause this strategy to lose?