The Skinny On Options Data Science

Impact of Increasing IV

The Skinny On Options Data Science

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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