How to think about correlation between multiple outstanding options trades

Question

I'm just getting into trading options. I think it would be sensible to ensure that my multiple outstanding trades at any given time are not correlated so that if I lose on one, I am not more likely to lose on another in a short timespan. However, calculating the correlation between options trades seems much more complicated than calculating the correlation between equities. Not only does one have to consider the correlation between the underlying asset price, but also the implied volatility. Moreover, some strategies have highly non-linear returns.

Is correlation something I should be worried about? If so, how do people typically approach this?

Bob Baerker · Answer

Every option strategy has a non linear return prior to expiration because option pricing is non linear as are the resultant Greeks (theta, delta, etc.).  Only the result at expiration is linear when delta approaches one or zero.

If your concern is a concentrated win/loss rate then you should be utilizing a blend of bullish and bearish strategies.

Options are derivatives that track the underlying. That's the primary correlation that you should be concerned with. Much of this depends on how you're using options.  Buying them? Selling them? Spreads?  Trading volatility?  In the end, you need to get the timing and selection right.

How to think about correlation between multiple outstanding options trades

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