Markets: A Rigorous Course
Sign in Sign up

9.11 A checklist before any option trade

Foundation about 5 min
  1. Which volatility are you trading: implied vs your forecast of realised, or implied now vs implied later?
  2. What is the position's dollar gamma, vega and theta per lot, and how do they change if spot moves 2% or one day passes? Recompute on expiry day.
  3. What exactly has to happen for it to make money (9.7)? Is the condition about STS_T, or about the path?
  4. What is the worst loss in a stress scenario (a 13% one-day Nifty fall happened on 23 Mar 2020) and what fraction of capital is that?
  5. What do costs (STT on premium, exchange charges, brokerage, GST, slippage) take from the expected edge?

Create a free account

Reading is open to everyone. An account keeps your progress, answers, notes and code drafts, and gives you the study plan, the journals and the simulator. Running code needs an account approved for it.

Create a free account Sign in