iCharts Discussions

[beowulf]

Can we quantify the risk associated with an option (call or put)

For eg:
Risk_factor = function of (CE orPE price, Strike price, CMP of the stock, time before expiry)

So if I buy (say) Reliance call option for Rs.5, strike price = 820, CMP=815 , 10 trading days before expiry the Risk_factor = 1.

Assuming the price stays same for 5 trading sesssions (CMP @ 815), the risk_factor should increase to 2 since we are close to expiry.

This way we are factoring all variables into one single number...

Is there a SIMPLE way to calculate this..?

More IMP, does this help in deciding whether to enter a trade or not...?

Appreciate help and feedback from all experienced traders...

Thanks,
Beo

[vinay28]

I don't think it can be. even if one could, it would vary regularly depending upon vix.

since each option is asociated with its own IV, it's best to calculate IV and then calculate likely value of option for any price target.