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!