I am currently working on a risk analysis model that is primarily focused on options portfolios, but will likely be later expanded to cover mixed (options, stocks, bond, futures, etc...) portfolios. This will be used at a non-professional but advanced level to identify overweighted risks and show how proposed positions would affect the portfolio risk balance.
The goal is to be able to clearly show risks in a number of scenarios; Market move up/down, Correction down(w/ IV shock), Individual symbol shocks, etc
I want to be able to show the effect of risks to Portfolio performance and also to the greeks and the resulting risk profile.
The basic portfolio analysis methods such as beta weighting and VaR models seem to be very limited and don't have any concept of IV change or the effects of volatility shocks. I could mix some different models, but I still need the basic underlying models to do that.
Could anyone offer some suggestions for a risk modeling framework or even specific analysis techniques that could be used in simulations to get the results I need? At this point, I am searching but finding little that directly applies. Some guidance would be very welcome.
Note - I understand options pricing models very well, so that isn't the part I am looking for. I need a model that lets me understand and predict how IV will change during periods of market stress so that I can feed the pricing models.
Hopefully, I can clarify what I am looking for. The models I am used to working with are all focused on risks associated with price movements in stocks but the portfolios I am trying to model are built primarily from Options positions.
This adds a new dimension to the risk modeling that I would like to get a handle on.
If the market drops in value 5% I can certainly estimate what would happen to the values of the underlying assets. Then using a pricing model I can determine what the new options values would be.
The problem stems from the fact that a sudden 5% drop in price would have a dramatic effect on the IV of the options. Without taking this into account the model is effectively worthless.
Are there good models for determining what the change in IV would likely be based on some form of shock in the market? How do I determine the resultant IV due to the uncertainty created by the market disruption?
Without this aspect, most risk models are effectively useless for an options portfolio.