Market Measures

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How Efficient Is Risk?

Market Measures

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

Vega is a greek that can be used as a proxy for theoretical risk and reward. But how efficient is it when comparing it to actual risk incurred on historical trades?

The answer is very efficient. We find that when comparing theoretical risk (vega) to actual risk incurred in the trade (volatility of P/L), we find that the ratios of the two are identical no matter what delta strangle you sell.

This means that as you increase theoretical risk and reward, your actual risk incurred increases proportionally.

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