What is Position Analysis?

When a trader first enters the options market, the initial concern is usually finding the strategies with sufficient profit potential to warrant the risk.  As the trader becomes more active and the capital invested is larger, options complexity increases and the need for analyzing positions in groups become crucial.

The groups could consist of option combinations for one underlying security or a group of groups constituting a portfolio.  The analysis is done on the group level while the adjustments are made on the individual instrument  (i.e., options, stock shares). The measures and baselines that would indicate the risks and imbalances are analyzed on the group level. As market conditions change, the individual positions are adjusted to meet or maintain a specific risk reward objective. Such changes could include closing or initiating offsetting option positions, options rolling, stock purchases or sales.  The risk reward metrics analyze are on the group levels. 

The way to accomplish this is by analyzing the option sensitivity properties in indicators known as the "greeks" (delta, gamma, theta, vega, rho) as well as capital indicators such as buying power and net liquidity ratios. The selection of the instruments are important since each has it's own specific risk factor such as  duration, liquidity, event and options premium risks.

The level of positions management activity will depend on the characterization of the risks.  Risks are categorized as defined or undefined.  Undefined risks carry more loss exposure but have more profit potential and need to be more actively managed than defined risk trades.  The trader must also balance the proportions of them depending on the level of managing capacity available and exercisable.  With out these considerations, the risk to portfolio losses can be significant.

Fortunately a discipline of measuring, monitoring and controlling the positions can prove to be quite profitable.  Imbalances and distortions are dynamic and always exist.  The opportunities to profit are present there but may be obscure.  Prudent opportunities discovery processes allow them to become more visible from which strategies are formulated then implemented.