Business
Options Risk Management
Options risk management involves strategies to mitigate potential losses associated with trading options. This includes techniques such as hedging, diversification, and setting stop-loss orders. By carefully managing the risks associated with options trading, businesses can protect their investments and minimize the impact of market fluctuations.
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3 Key excerpts on "Options Risk Management"
eBook - ePubOptions for Risk-Free Portfolios
Profiting with Dividend Collar Strategies
- M. Thomsett(Author)
- 2015(Publication Date)
- Palgrave Macmillan(Publisher)
H A P T E R 2MANAGING AND REDUCING RISK WITH OPTIONS
To conquer without risk is to triumph without glory.Pierre Corneille, Le Cid , 1636MOST TRADERS ACKNOWLEDGE THAT OPTIONS MARKET RISKS ARE potentially high and come in many forms, unique to that market. However, the nature of risk is widely misunderstood as well. For the options market, several key risk discussions beyond the inherent market risk and short side risk potential need to be discussed. This lays the groundwork for a majority of options strategies and may also help traders to appreciate on a deeper level the range of risk issues they face.This range of topics includes the nature of market risk in general; stock short-selling risk (and a comparison between stock risks and alternative option strategies); differences between short calls and short puts; long option risks; spread and straddle risks; and less obvious risks of options trading.THE NATURE OF MARKET RISK IN GENERAL
Traders usually agree on the definition of simple market risk: The risk that portfolio values or components of the portfolio may lose value. For the purpose of discussion relating to options, the assumed market includes underlying securities consisting of not only stocks but also indices and exchange-traded funds (ETFs as well as related exchange-traded notes, or ETNs, and exchange-traded commodities, or ETCs).Market risk for the equity investment class on which options are written is also called equity risk, which factors in not only price but also the historical volatility, and when options are also in play as a combination strategy with equities, implied volatility is also a factor. For other nonequity markets, traders (within a portfolio as well as in consideration of derivative positioning) are concerned with interest rate risk, currency exchange risk, and commodity valuation risk. Options may apply to any and all of these, and in fact, are often used not as speculative devices but as hedging instruments, intended to reduce or eliminate common market risk as a feature of portfolio management.
eBook - PDF- Aparna Gupta(Author)
- 2016(Publication Date)
- CRC Press(Publisher)
Firms are constantly impacted by changing regulations, government poli-cies, as well as industry trends. Technology risk or other innovation risk also can’t be ignored in business risk management. At the strategic level, real op-tions framework is a powerful method for evaluating the impact of these risks on the firm’s interests. At the business unit level also real options framework can be applied with higher granularity of detail relevant to the risk for the business unit to guide in generating fine-tuned risk management responses. The purely financial component of business risk lies in managing cash flows of the firm or business unit so that the liabilities of the business unit are well supported. Identifying, measuring, and monitoring liquidity risk are important components of business risk management. In the next section, we will develop an asset-liability management framework, which integrally addresses liquid-ity risk management issues primarily from a financial institution perspective. However, this framework may also be applied in non-financial corporations to develop a strategic assessment of liquidity risk, which provides a sound basis for liquidity risk management at the business unit level. As discussed in the previous section, sound strategic risk management can help enhance the bor-rowing capacity of a firm, which in turn helps manage liquidity risk. Along with improved debt capacity, tactical risk control for liquidity shocks can be done through actual and synthetic asset divestiture, such as securitization. Strategic uncertainties such as business plan assumptions, competitor re-sponses, and technology changes should be measured and managed through robust business risk management. Even a company with a well-thought-out strategy must establish feedback mechanisms and contingency plans to ensure that the company’s strategy is sound over time. Companies with unbending strategies can face extinction.
eBook - ePubCredit Engineering for Bankers
A Practical Guide for Bank Lending
- Morton Glantz, Johnathan Mun(Authors)
- 2010(Publication Date)
- Academic Press(Publisher)
Chapter 12 Strategic Real Options Analysis: Managing Risk Through FlexibilityChapter Outline- What Are Real Options? 296
- The Real Options Solution in a Nutshell 297
- Issues to Consider 298
- Implementing Real Options Analysis 299
- Types of Real Options Strategies 300
- Execution Option Types 301
- Industry Leaders Embracing Real Options 301
- Automobile and Manufacturing Industry 301
- Computer Industry 302
- Airline Industry 302
- Oil and Gas Industry 302
- Telecommunications Industry 303
- Utilities Industry 303
- Real Estate Industry 303
- Pharmaceutical Research and Development Industry 303
- High-Tech and e-Business Industry 304
- Mergers and Acquisitions 304
- Real Options Example in Banking: Asset Liability Management 304
- Embedded Options in Financial Instruments 305
- Implementing Asset Liability Management 306
- Real Options Applications to Asset Liability Management 308
This chapter gives the reader a cursory look at and quick introduction to strategic real options analysis. It explains why only running simulations, forecasting, and optimization are not sufficient in a comprehensive risk management paradigm. Obviously, time-series forecasting and Monte Carlo simulation are used for identifying , predicting , and quantifying risks. The questions that should be asked are: So what? and What next? Quantifying and understanding risk is one thing, but turning this information into actionable intelligence is another. Real options analysis, when applied appropriately, allows you to value risk, creating strategies to mitigate risk and showing how to position yourself to take advantage
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