Imagine a trading house that trades options, and is looking for simple but effective metrics over which trading option limits will be set. Which ones should it choose?

Some random thoughts:

  1. VaR is not ideal, since the biggest concern is what happens 1% of the time.

  2. Because the focus is to keep it simple, one should focus on Gamma and Vega risk.

  3. Stress Test is an alternative but only if applied in a simple way, something like limit up/limit down scenarios. Any ideas on how to calculate a stress test for Gamma and Vega?

  4. Would it be logical to set Gamma and Vega limits per product? I mean just add the gammas and vegas and set the limit.


1 Answer 1


What is wrong with your broker watching your risk for you? I assume the "modest trading house" has portfolio margin in which case you already have limit up/down calculations done for you implicitly. So the output from your broker is your margin equity and you can make that your metric. Implementing a simple rule like - not to exceed 70% of total margin equity. Unfortunately with options it is difficult to spread margin risk equally among the positions. Your short trades will consume a disproportinal amount.

  • $\begingroup$ @ the options trading (has to be) modest by the house itself is big. equity-wise we would allow much more that we want to allow. $\endgroup$ Commented Nov 13, 2015 at 9:58
  • $\begingroup$ I agree with baerrus, you should set aside an amount of capital (say 1 million USD) and specify that under "normal" circumstances the margin utilization must not exceed 70% (actually I would favor a somewhat lower percentage, but that is up to you). Once that amount is exceeded due to market movement you reduce trading and runoff the positions until it goes back to below 70 when you can restart again. $\endgroup$
    – Alex C
    Commented Dec 12, 2015 at 20:45

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