← BeginnerLesson 12 · 4:36
How do you read a risk matrix?
Summary
You can read a risk matrix three ways: across a row as the stock moves, down a column as time passes, and in the corners for your best and worst. You can find the box for any stock price and days left. You know every box before the last day is a model's estimate that changes with volatility.
Key terms
- risk matrix
- A grid of your profit or loss with days left down the side and the stock price across the top.
- pricing model
- A formula that estimates an option's price; its numbers are estimates, not market prices.
- row
- column
- model estimate
- A value worked out by the pricing model, such as a calendar's day-30 result, that changes when volatility changes.
Check yourself
Answer each question to see why the right answer is right.
1. When you read across one row of a risk matrix, what changes?
2. In the matrix for the $345 call, follow the column for $100. With 14 days left, what does the box say?
3. In the top row, with 30 days left, XYZ is at $90. What does the box say?
4. Which boxes in the risk matrix are not estimates?
5. The box at $100 with 30 days left says $0 at 30% volatility. What does it say if volatility is set to 40%?
Finished the video and the quiz? .