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Measuring Risk

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Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options before deciding to invest in options.

Understanding portfolio risk and its measurement can help us to place our trades. And when we are trading options, leverage is an important variable of risk to think about. Today, we will walk through 3 methods that can be used to measure portfolio risk, the calculation of each, and logic behind each method.

Capital allocation % is the percentage of our capital that has been used to place trades. It can be calculated as (1 - Option Buying Power Net Liq.). Capital allocation % is a useful metric because it can give us a boundary of worst-case scenarios that may happen.

Notional value is the total value of our positions if they are all exercised and can give us a hint about our portfolio's risk level. We can get an estimation of leverage by dividing notional value by Net Liq.

Beta weighted expected move can be calculated by multiplying the expected move of the underlying and its beta-weighted delta. This metric gives us a measurement of directional risk.

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