Risk Considerations

Question 1

Delta Risk (directional)

Answer 1

the risk that the underlying market will move in one direction rather than another

Question 2

Gamma Risk (Curvature)

Answer 2

the risk of a large move in the underlying contract, regardless of direction. The gamma position is a measure of how sensitive a position is to such moves

Question 3

Vega Risk (Volatility)

Answer 3

the risk that the volatility that we input into the theoretical pricing model will be incorrect. What impact does changes in implied volatility have on a given option position

Question 4

Rho Risk (interest rate)

Answer 4

the risk that interest rates will change over the life of the option
- Positive rho = helped by interest rates
Considered to be the least important of the risk factors

Question 5

Theta Risk (time decay)

Answer 5

the opposite of gamma risk. If movement helps a position, the passage of time hurts. A positive gamma always goes hand in hand w a negative theta

Question 6

Volatility risk

Answer 6

Comes in two different factors; 1) the risk that he has incorrectly estimated the realized vol of the underlying contract over the life of a strategy and 2) the risk that implied vol in the option market will change