The Skinny On Options Data Science

Impact of Increasing IV

The Skinny On Options Data Science

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

Through a series of theoretical Monte Carlo simulations, Michael Rechenthin, PhD examines the question -- What would happen if implied volatility increases after placing a short strangle?

A typical approach to analyzing this question is to look at the position's vega.  For example, a -25 vega position means that an increase in 1 point of the volatility, the position would decrease by $25.  But, as Mike explains, this is a very one-dimensional outcome -- there is more to this answer.  How, for example, does the distribution of possible profit/losses change? By using a Monte Carlo approach, he is able to show that relatively small increases in volatility can skew the largest losses to the downside.

Watch the segment to hear more takeaways!

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