This article was originally published in The Option Strategist Newsletter Volume 15, No. 13 on July 13, 2006.
Whether or not the current market decline develops into something more severe – perhaps the elusive 9% (or 10%) correction or even a bear market – one is well-advised to gauge the risk of his strategies before trouble springs up. Most traders handle things on a “case by case” basis, or just figure they’ll play defense if they have to with a particular option or stock position. But perhaps a better approach would be to try to judge the risk of one’s general strategy in light of what could go wrong. Often, it is the increase in implied volatility that is the bane of an option trader, as much as a decline in prices. In this article, we’ll try to formulate the basis for such a general approach.
