Portfolio Risk Analysis Tool

Become your own risk manager with the Portfolio Risk Analysis tool, which lets you view real-time portfolio stress tests on your queued trades and open positions. This tool can be helpful for options and futures traders looking to simulate "what if" scenarios by viewing the potential effects on positions after an implied volatility shock or price move. Also, if expiring options risk is a concern, you can determine your expiration exposure by omitting any expiring hedges or evaluating at a future date. 


Stock and options buying power requirements directly correlate with the risk level of a specific strategy and underlying. When it comes to buying power requirement calculations, Standard Margin accounts (Reg-T) use a fixed percentage position-based system. Meanwhile, Portfolio Margin (PM) accounts use a dynamic risk-based margining approach commonly used by trading firms. PM calculates margin requirements by looking at the aggregate exposure of a trader’s portfolio. As a result, if an investor has a well-hedged portfolio, their margin requirements can be much lower than a Reg-T margin account. Learn more about enabling portfolio margin here. Most traders will have a standard Reg-T margin account. However, it's important to understand how Portfolio Margin works and harness the same tools risk managers use to analyze portfolio risk. 

In a PM account, margining eligible positions are stress-tested by hypothetical price moves in the underlying. These hypothetical price moves are used as inputs into our options pricing model to produce Risk Arrays* across a set price range, generally ranging from -20 % to +20%. The price range is split into ten equidistant points. At each price point, there is a theoretical change in the profit or loss for the position and portfolio. PM will aggregate the largest theoretical single-day loss for each position across the price range and subtract it from the account's net liquidation value to determine the remaining buying power for the account.

Risk Arrays: Each position's risk array scenario, also known as a stress test, comprises a different market simulation. Simulations include moving the underlying price, implied volatility, or date.

Stress Test Example

Let's look at the risk analysis window to understand how stress tests create risk arrays to determine margin requirements. For example, if an account holds a short strangle (1 short OTM call and 1 short OTM put), the position will start to trade at a loss as the underlying moves against the position. Below is a risk array that makes this easier to visualize. 

Example risk array for a short strangle

The default stress test (price volatility range) will be ± 20%. With this range, we are testing for the potential losses if the underlying price increases by +20% or decreases by -20%. The Total row above each position will list the theoretical one-day change in profit/loss for that position at varying stress levels. Underneath the Total row, you can see the 20% up and down max stress test levels and their accompanying risk array below. If the underlying price drops 20% from a price of $161.82 to a price of $129.46, then based on the risk array, the strangle will theoretically have a loss of -$1,766.

On the other hand, if the underlying price increases by 20% from $161.82 to $194.18, the strangle would theoretically have a loss of -$1,688. The portfolio margining system will take the higher potential loss at all stress test scenarios, which results in a buying power requirement of $1,766 to hold that strangle. In comparison, a Regulation-T margin account would likely have a buying power requirement closer to $3,000 in a typical market environment. Although you cannot take advantage of these lower requirements in a Reg-T account, you can still use this information and tool to your advantage. Independent of account type, with the risk analysis tool, you can test and analyze how a group of positions or your entire portfolio may react to specific shocks in price up and down, changes in volatility, and time.

Risk Analysis Tool Location

To access the Risk Analysis tool, click on the capital requirements button in the top right of the desktop platform (CAP REQ). In the capital requirements window, click on the check box next to each symbol and or position you wish to analyze. To view all positions, click the check box on the top row next to "Total." After selecting which positions to view, click on the "Risk Analysis" button at the top of the window. Risk arrays calculate each position using a Black-Scholes Options Pricing Model to determine potential gains and losses at various price points, levels of volatility, and future dates. The maximum expected single-day loss from these price moves aggregate to determine the overall gains and losses for the portfolio displayed on the top row.

Animated example of opening Risk Analysis tool

Select Individual Positions from the Cap Req Window

To add individual positions to the risk analysis window, click on the gray checkbox next to each symbol or position you wish to view. Click on the topmost check box to view all positions.

Animated example of selecting positions to view on the risk analysis tool


Risk Analysis Window Layout

The risk analysis tool found in the portfolio report window allows you to analyze your position's estimated risk. The tool enables you to analyze the profit or loss based on a percentage up or down move. The risk analysis window generates risk arrays for all positions and queued orders. An industry-standard theoretical option pricing model that accounts for time decay is used to determine potential real-time gains and losses at various price points, levels of volatility, and future dates. The risk array has multiple columns for each percentage move in price and also several important rows. There will be a row for each leg of a strategy as well as a totals row for each symbol. At the very top, there is a net totals row that will list the aggregate theoretical profit or loss for all positions in the risk report.

Pink: Underlying Symbol (AAPL) and evaluated up and down move percent (-20%/+20%) (adjustable)

Blue: Underlying Price at the time the risk array was generated (adjustable) 

Red: Per Contract Implied Volatility (adjustable)

Green: Risk array for a -3 = -12% down move in the underlying price

Yellow: Risk array for a +3 = +12% up move in the underlying price

For example, in the image above, we have a short AAPL call expiring in 1 month. The risk array displays each extreme (-5/+5) for 20% down and 20% up. The column outlined in green represents the price and total account risk if there was a 12% down move in the underlying. The price underneath the -12% is the underlying price after a 12% move down from 148.28 (148.28 * 0.88 = 130.49). Underneath the underlying price is the theoretical single-day price movement of the short option based on the displayed percentage up or down. The opposite applies to the yellow outline. A 12% up move in AAPL would have a theoretical change in price of -$728 on the short call.

The price, volatility per contract, and data will be based on the values at the time you opened the risk analysis window. Click on the Refresh button at the top of the window (Tow arrows in circular motion) to update to the current price and volatilites. 

Price Stress Test - Percentage Overrides

Override - None

With no overrides active, the risk arrays will list arrays based on their default house price move percentages. The house price move percentage can vary between symbols and depends on the symbol's volatility (generally, this percentage sharply increases near earnings and other significant events).

Override - β-weighted

Quickly Beta-weight your risk arrays to a particular symbol with the risk analysis tool. First, click on the override dropdown in the top right corner and then select β-weighted. By default, your arrays will be beta-weight to SPY (at this time, you can only beta-weight to SPY). Next, select the percentage up and down move in SPY you wish to view. Arrays will update in real-time based on the percentage move selected. For example, if you want to analyze your positions after a 20% move in SPY, simply select an override percentage of 20%. The equivalent move percent for viewed symbols will reflect in the top row of each symbol. Symbols with a beta of 1.0 will show a max up and max down move of 20%, whereas symbols with differing beta values, such as V (0.91β), will show maximum up and down moves of 20%*0.91 = 18.1%.

At this time, the risk analysis tool cannot beta-weight symbols with a negative Beta (VIX is an example). Risk arrays for symbols with a negative Beta will maintain the default house price move percentages for the symbol, which in the example below is 20% for VIX.

Override - Uncorrelated

Selecting the Uncorrelated override will adjust all risk arrays to the price move percentage selected in the override tool. The price move percentage across all symbols will equal the override percentage chosen. In the example below, all risk arrays list a 20% down and 20% up, based on the override percentage selected being 20%.

Test Global IV Shocks

The IV Shift drop-down allows you to test how your portfolio will react to increases and decreases in volatility across all symbols in your ability to anticipate an account's excess risk. Our clearing firm's macro stress test applies an implied volatility shock from 10% to 50% for each position's symbol. Thus via Global IV shock adjustments, you can get a better picture of how your portfolio's requirements and performance would react to a particular percentage up or down move in implied volatility across all products. Analyzing how the totals row at the top of the window reacts to changes in global IV can help you better understand your potential exposure to larger market events. 

Picture of IV shock adjustment on risk analysis window

Adjust Underlying Price, Evaluation Date, and Per Contract IV

You can adjust movement percentages from 5% to 100%. Additionally, you can change the evaluated price of the underlying and the day of evaluation, which allows you to test "what if scenarios" on a contract basis to see how changing price movement and implied volatility will affect position exposure. With per contract and price adjustment, you can better see how your portfolio's total profit/loss will react to exposure from a specific symbol.

Animated example of changing underlying price, move percent, and evaluation date

Add and Remove Order Legs

On top of your existing positions, you can also view the risk profile of opening simulated trades. Open an order ticket for the trade you would like to analyze. Click on the Positions tab and then on the CAP REQ button in the top right corner of the platform. Once in the risk analysis window, click on Add Order Legs to populate your orders risk array. To clear the simulated trade from your risk analysis window, click on Remove All Order Legs.

Animated example of adding an opening trade to the risk analysis window


Option Expiration Risk

Unchecking expiring option strikes in the Risk Analysis' risk arrays will show your position's exposure with expiring hedges to manage option expiration better and make sure that any hedges are in place before exercise/assignment. For example, the account in the animation below holds two strangles in SPY for the Sep 27th expiration and two long calls for the Sep 20th expiration (Sep 20th being the current day). To analyze the potential upside or downside risk on your strangle after your long options expire, you can uncheck the expiring legs and view the theoretical profit or loss changes on the risk array. In this case, since the long calls are a hedge for the upside on the strangle, there would be a large increase in upside risk on SPY for this account after the long calls expire.

Animated example of analyzing hedged positions

Risk array including expiring hedges

Risk array excluding expiring hedges

Export Risk Analysis to CSV

Click on the CSV button at the top of the risk analysis window to download a CSV file of the displayed data. The CSV file will not update in real-time, and you would need to refresh and download another risk array for updated prices or volatilities.

Location of CSV file download button

Alternative Minimum/Vega-Minimum Requirement

Alternative Minimum Requirement for Naked Options
An alternative minimum requirement will be calculated for each underlying by multiplying the number of uncovered short options by a variable percentage of the underlying deliverable value. While this variable percentage can change at any time and may be different depending on the underlying, the default percentage is 0.5%. For example, if you were to sell-to-open 1 ABC call while ABC is trading at $500 and the variable percentage for ABC is 0.5%, the alternative minimum requirement for this ABC position would be $250 ($500 x 100 multiplier x 0.5%). Additionally, naked equity index options will have a  default variable percentage of 0.25%.

Alternative Minimum Requirement Vega Test
An alternative minimum requirement will be calculated for each underlying by finding the worst-case net vega scenario and multiplying it by a variable factor. This variable factor can change at any time and may differ depending on the underlying; the default factor is 10.

Alternative Minimum and Alternative Vega-minimum values will only populate in portfolio margin enabled accounts. Regulation-T margin accounts will list a blank value of “--".