Stress test
Definition · Level 4 · Naked options
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Revaluing a position or book under a specified extreme shock — e.g. a 25% overnight gap plus a vol spike, or equities −20% and vol +15 points — to see the loss and size by what it could lose, not by margin.
Example
Short 35 put at 0.80, gap to 30 → at least −$420 per contract (at intrinsic).
Where Tradecraft teaches it
Level 4 · Naked options, in the lesson “When short vol blows up — and how to size”: Volmageddon, the OptionSellers.com collapse, and sizing by stress loss instead of margin.
Related terms
- Blow-upLosing all or most of an account in a single event, usually from oversized short-vol or leveraged positions.
- VolmageddonMonday 5 February 2018, when the VIX more than doubled in a day (about 17 to 37) and inverse-VIX products such as XIV lost over 90%, ending a long…
- XIVCredit Suisse exchange-traded note that delivered the inverse daily return of short-term VIX futures; redeemed early after losing over 90% of its…
- Calendar Spread – CreditBuy the near-term option and sell the longer-term one at the same strike.
- Delta hedgingTrading the underlying (or futures) to offset a position’s delta so small moves barely change P&L, leaving gamma, theta and vega; it must be redone…
- Diagonal Spread – Long leg expires firstBuy a near-term option and sell a longer-term one at a different strike.