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Keep Your Eye on Risk Management and Volatility. Ignore Extreme "What If" Scenarios.

Minneapolis, MN | November 1, 2023 | By: Steve Sinos, Blue Lacy Advisors, LLC


The ongoing global conflicts result in discussions that explore increasingly disruptive scenarios, but they add no value to your process.


Three Things

  1. Further to last week’s post, volatility remains front and center, emphasizing the near months.

  2. This can exaggerate prices, especially as we go into expiration, depending on how traders manage risk within their books.

  3. Reviewing second-order options Greeks helps build perspective on what drives these risk management decisions.

Position your book to reflect your risk goals, not the unquantifiable potential for escalation to extreme outcomes.


As the conflicts in Europe and the Middle East drag on, the public discourse drifts toward hypothetical scenarios that include increasingly disruptive events, even if these events would inflict harm on the assumed instigator. There is no value in engaging in the specifics of these discussions. Unfortunately, we can’t ignore them all together, though. Our risk process should already consider tail events, which should position us within our tolerance. This is why we must consider more than just prices. We also focus on volatility and its effect on our portfolio. We care primarily about the change in our position caused by events, not the events themselves. With this in mind, we should not be caught saying, “No one saw this coming,” despite our inability to see into the future.


*This summary is based off October 23, 2023


A free excerpt, such as this one, will be published on a delay periodically. This is an excerpt from Blue Lacy Advisors, LLC's (“Blue Lacy”) weekly commentary for clients, which is based on a collection of models, research/analytical subscriptions, and bespoke work. Each week Blue Lacy explores how market drivers included in these analyses might affect or be used in clients' planning, budgeting, and execution of strategy. Call Blue Lacy to make an appointment today!

 

Meet the Author!

Phone: +1-832-413-3124


Steve has spent his career in strategy, risk, trading, and investment. He works with investors to source investments in opportunistic or high growth sectors, with particular interest in early-stage companies solving clearly defined problems.


He is currently a Managing Partner with Blue Lacy Advisors LLC, giving management teams and investors confidence in their decision making by supporting strategic planning and execution, risk management, commodity trading, and market analysis.


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