How do I learn to manage option risk in Volcube?

Learning risk management

The following describes a number of techniques you should employ to learn how manage risk using Volcube. As with all trading, learning risk management is a cumulative process. Practice and continual analysis are the keys to success.

Understand the basic principles of option risk

It is difficult to progress without an understanding of the fundamental concepts of option risk. Fortunately, this is relatively easily learnt by studying the relevant introductory material in the Volcube Learning environment. Start to familiarise yourself with the basic terminology of option risk and the meaning of the Greeks, in particular delta, vega and gamma.

If you are breaking limits, try to understand why

Breaking risk limits and being pulled from the Volcube simulation market is a common occurrence for beginners. But you should try to understand why this is happening as soon as possible. Breaching limits is entirely avoidable and is always a symptom of over-buying or over-selling one thing or another. Persistently breaching limits indicates a lack of understanding as to the contracts or strategies being traded. Search the material in the Volcube Learning environment to learn more about risk limits.

Try to focus more on the Risk Detail than on the Inventory pane

A common and understandable mistake for newcomers is to focus undue attention on the Inventory pane rather than the Risk Detail. Advanced traders will overwhelmingly use the Risk Detail and only occasionally focus on the Inventory pane. There are many reasons for this but the essential point is that the risk of an option or portfolio of options has more to do with its Greek characteristics than the simple fact of whether we are long or short so many lots of a certain strike. Also, inventory can become extremely complex and difficult to ‘read’ at a glance; you will notice this as you trade longer sessions in particular. The Risk Detail always accounts for all our longs and shorts automatically, by adding and subtracting the associated risk. So try to get into the habit of relying on the Risk Detail as your primary risk management tool.

Try to reduce your position into simpler terms

This is a technique employed by derivatives traders with complex portfolios to manage and involves stripping out very tight spreads from the position to leave a reduced core position. In this way, traders can often reduce a complex position involving many thousands of contracts into a small collection of strategies. So, as you look at the Inventory pane, if you notice that some of position may be reduced to very low risk spreads, these may effectively be dismissed or relegated in importance to leave other less diversified or spread-off inventory. There is more on this topic both in in-game Market Mentor and in the Volcube Learning environment.

Try to assess each quote or order

Each strategy or outright that we quote or receive orders in is a potential trade with risk. Unless we understand these risks, we are to an extent trading blindly. So try to briefly assess the risk of each quoted strategy or order received. Start with basics such as the amount of vega or gamma, how the Risk Detail would reflect the strategy and how the strategy’s risk profile varies along the price slide.

Try to anticipate how an order will affect your risk.

Once you have analysed the risk, try to assess how these suits your position. If we buy the strategy, does our portfolio risk rise or fall on balance? Do we replace one set of risks for another? Does the strategy lower risk in one part of the portfolio but increase risk elsewhere? Try to anticipate these effects in advance of trading orders and then test to see if your expectations are fulfilled. Has the order impacted on your risk in the ways you anticipated? Have new risks appeared that you had not weighed up in advance? Perhaps your risk has fallen by less than you expected; in this case would trading greater size have been more appropriate? These are some of the many questions you should ask yourself; in many ways this is the most crucial part of the process of risk management because it is the point at which our decisions truly impact on our risk.

Try to characterise your position using the Risk Detail and see if this matches expectations in the Inventory pane

As mentioned, many beginners to option trading will focus too heavily on their inventory rather than their Risk Detail. The correct methodology however should be to assess in the Risk Detail to understand the overall character of the portfolio risk and only then should we look to our inventory to uncover the precise contracts that are generating the risk. Even then however, we should not overly emphasize the particular inventory we hold per strike. It is a grave mistake to consider buying options because we are short a particular strike or selling options because we are long the strike, (unless the options are on the verge of expiring which is not the case in Volcube). This is a typical newcomers mistake and it is most easily avoided by focussing primarily on the Risk Detail. Only once you have characterised the portfolio risk in this way should you enquire as to which exact inventory is responsible for which risks; but even then, trading on a per strike basis is mistaken. Better to trade on the basis of the risk of the strategy or outright and how this fits your overall risk, rather than on whether or not you are long or short a particular strike.

In summary…

A summary then of how to learn to manage risk in Volcube:

Understand the basic principles of option risk

  • If you are breaking limits, try to understand why
  • Try to focus more on the Risk Detail than on the Inventory pane
  • Try to reduce your position into simpler terms
  • Try to assess each quote or order
  • Try to characterise your position using the Risk Detail and see if this matches expectations in the Inventory pane


Have a question for the author? Happy to help! Email [email protected].

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