stress-testing an option position

[LM3886]

It's a bit more work to make these "typical" P&L graphs, but I agree with you that I should do it. That is probably the most intuitive way to visualize.

Maybe this is a type of stress test that can be done by your analysis but not broker's software: You can randomly generate stock price paths and visualize the PnL changes overtime.

 

[morganpbrown]

Maybe this is a type of stress test that can be done by your analysis but not broker's software: You can randomly generate stock price paths and visualize the PnL changes overtime.

That is true. I could certainly do a Monte Carlo type analysis that I doubt the typical broker software would do

 

[morganpbrown]

Maybe this is a type of stress test that can be done by your analysis but not broker's software: You can randomly generate stock price paths and visualize the PnL changes overtime.

Here's a set of P&L curves for the above mentioned diagonal call spread, along the lines you were thinking.

In this case, I vary the strip volatility up (+vol) or down (-vol) by 1%/day. So over the course of 15 days, that's +/- 15%.

The green curve just shows the P&L of the -vol case at 16 DTE (day 0).

Definitely kind of interesting to look at. I'm pushing the limits of what one can/should do in a spreadsheet.

 

[Overnight]

I do know one guy - a retired trader/MM who can put words together pretty well - who has written a book; I reviewed it for him. The problem is, he keeps fiddling with the damn thing because it's "not perfect", and, well, putting something that's not perfect out into the market is something he's incapable of doing. I hope he manages to break through that wall at some point...

Regarding that disconnect, Taleb said it quite well:

For us practitioners, theories about practice should arise from practice or at least avoid conflict with it. This explains our concern with the "scientific" notion that practice should fit theory. Option hedging, pricing, and trading are neither philosophy nor mathematics, but an extremely rich craft rich with heuristics with traders learning from traders (or traders copying other traders) and tricks developing under evolution pressures, in a bottom-up manner. It is technë, not ëpistemë.

I'm enough of an engineer by training, practice, and preference, that this definitely strikes a spark. You need theory to get you most of the way there - but after that point, you've got to do some sweating in the trenches.

Hrmm, after reading what you typed above, something clicked in me...You have a bit of OCD in you, don't you? i can finally see it. You hide it well on the phone, but man it is coming out here.

 

[jamesbp]

Heh. It's a bit surprising, actually; they've got some fairly smart quant kids on board these days. I guess they just haven't gone back to fix all that crude, normal vs. log-normal stuff they built in the early days.

Looks like TastyTrade just went back to fix the problem ... and made it worse ... today's Market Measure on "Expected Move" for SPY with Spot = 420 / IV = 19.3% / DTE = 34 Days

The basic approximation formula would suggest that the Expected Move is :
Spot 420 x IV 19.3% x Sqrt(34/365) = 24.70 points

TastyTrade proprietary formula = 13.60 points