Scenario Analysis

[samip2u]

Hi Option Traders,

I was trying to make a scenario analyzer for Nifty F&O, to capture the possible scenarios to my open positions in terms of the changes to Time ( Theta), IV ( Vega) and Spot ( Delta and gamma ).

Idea is to be aware where we will be if a large swing happens tomorrow. it helps us to stay calm , n not to panic.

What's the best way to go about it ? If any of you already have a scenario analyzer, it would be great if you can share the details

here is my approach: ( request feedbacks from you )
price of Option change considered per:
1. Spot. if changed from -200 to +200 in interval of +/-50 , and consider the delta impact . I am not sure how to incorporate the gamma factor, as for a swing of -/+100 gamma factors gets critical

2. Time value is easy as it always delays,.... theta can be taken as it is.

3. Volatility Is tricky... Although I can take Vega... but not sure about the dollar Vega values. I also thought of Volatility Surfaces to consider. Not sure.

To incorporate all these impacts, into one graph/ payoff, means a 3D plot ( time, Vol, delta) .. how to go about it...???

suggestions appreciated

thank you
SM

 

[tradedatrend]

If you have traded options long enough, you won't need to calculate these things mechanically, it would do rounds in your mind.

Knowing the value of ATM options should be enough the plot the rough value of most of the OTM and ITM options.

After all you can calculate most of the things mechanically, but what you will do with VIX, which keep on swinging depending upon volatility in the market.

 

[samip2u]

well agree to an extent... the figures are roughly there. Still a plot comforts for traders who kind of trade on ranges and checking the PnL against the risk appetite, helps.

Delta says enough on the notional P/L for the next day.
For Vega, smart guesses from earlier trends of vix movement in the markets.
-200 points movement ( sudden) let the VIX spiked upto =20-22% , a movement of +/-50 changes the Vix from -/+2-5%....so worry is wen vix crashed or spiked beyond 10%.... so a scenario can be made and analysed....to check the PnL impact ( notionally)

 

[TradeOptions]

Are you looking for doing such calculations in Excel ? Or if you already have such data in excel and just want some ideas for plotting / visualizations ?

 

[tradedatrend]

well agree to an extent... the figures are roughly there. Still a plot comforts for traders who kind of trade on ranges and checking the PnL against the risk appetite, helps.

Delta says enough on the notional P/L for the next day.
For Vega, smart guesses from earlier trends of vix movement in the markets.
-200 points movement ( sudden) let the VIX spiked upto =20-22% , a movement of +/-50 changes the Vix from -/+2-5%....so worry is wen vix crashed or spiked beyond 10%.... so a scenario can be made and analysed....to check the PnL impact ( notionally)

No offense, but I seriously don't get why people make ir complicated by using too many parameters and jargon like Time ( Theta), IV ( Vega) and Spot ( Delta and gamma ). etc.


For me in the options there are only two parameters, 1. Intrinsic value and 2. Time Value

2nd is is subject to how distant OTM or if ATM options are AND how much time is left

Need I say about 1st ?

 

[samip2u]

Hi

Well.. i guess we both are talking the same thing... So I do not have the data-points yet. I want to have an excel model.
The issues I am facing:I am unable to bring the rupee value change in the option prices when all three factors ( Time/underlying/ Volatility ), can change.... so the 3X3 scenario are coming up....

I am sure there is a simpler way out... I simply need to know how the option price would change per the multiple factors...the next or any given day in future ( on assumed changes )

Extrinsic value - is both TV and Volatility and the relation is not a linear one.
Intrinsic is delta value

a simple way out ?

 

[trade4bread]

I have developed similar tool where I was calculating greek values considering following factors:
1)Underlying Price 2)Strike Price 3)RiskFreeRate 4)Dividend Yield 5) Days toMaturity 6)Volatility

Out of which, Risk free rate, strike price and dividend yield do not change generally.

Thus, keeping all other factors same, I do scenario analysis for
1) Underlying price: From 10 to 180 with step increase of 5
2) Volatility: From 0.1 to 0.9 with step increase of 0.1

Thus testing 261 scenarios for each value. Again, since it is tool built for stat analysis, so gives results in one click.
Interactive graphs helps visualize the output.

Are you looking for similar solution??

 

[samip2u]

yes. something of that sort should help. Can you guide to your sheet to have a look?

I wanted to predict the price of the option with the change in the spot as spot change ( increase or decrease ) changes all the greeks.

Can you share your approach ? many thanks