Managing Multiple-Class Risk
Most traders hold option positions in more than one option class. As an
aside, I recommend doing so, capital and experience permitting. In my
experience, having positions in multiple classes psychologically allows for
a certain level of detachment from each individual position. Most traders
can make better decisions if they don’t have all their eggs in one basket.
But holding a portfolio of option positions requires one more layer of risk
management. The trader is concerned about the delta, gamma, theta, vega,
and rho not only of each individual option class but also of the portfolio as a
whole. The trader’s portfolio is actually one big position with a lot of
moving parts. To keep it running like a well-oiled machine requires
monitoring and maintaining each part to make sure they are working
together. To have the individual trades work in harmony with one another, it
is important to keep a well-balanced series of strategies.
Option trading requires diversification, just like conventional linear stock
trading or investing. Diversification of the option portfolio is easily
measured by studying the portfolio greeks. By looking at the net greeks of
the portfolio, the trader can get some idea of exposure to overall risk in
terms of delta, gamma, theta, vega, and rho.