GLOSSARY#

The terms this site uses constantly, defined in a few sentences and with no claim to completeness: each entry points, where one exists, to the page that treats it properly. If a term goes missing while you read, this page is the place to come back to.

1DTE#

One day to expiration: an option with one day of life left. It’s the home turf of TRPS: tiny vega, a daily strike reset and 252 near-independent bets a year — which is what makes the seller’s statistics legitimate.

ATM, OTM, ITM#

At the money: a strike near the underlying’s current price. Out of the money: a strike with no exercise value today (a put below the price, a call above it). In the money: the opposite. Distance from the money determines how much premium you collect and what risk you underwrite (Options page).

Backtest#

A simulation of a strategy on historical data. Useful for understanding the mechanics, dangerous for estimating the future: the sample doesn’t contain the disasters that haven’t happened yet, and parameters “optimal” on the past are usually overfitting (Risk measures page).

Cash secured put (CSP)#

Selling a put while parking the strike’s full value in cash, ready for assignment. It’s the prudent, inefficient version of the trade: the capital works only once, harvesting the VRP while giving up ERP and TRP (Capital efficiency page).

Contango and backwardation#

The two slopes of a term curve. Contango: distant maturities trade above near ones (the normal state, from financing cost and uncertainty). Backwardation: the opposite, typical of stress. For index futures the slope is cost-of-carry arithmetic, not an opinion (Futures page).

Covered call#

You own the underlying and sell an OTM call against it: you collect premium while giving up the upside beyond the strike. Decomposed into factors it’s half equity exposure, some volatility selling and an involuntary market timing that rewards no one (Strategies page).

CVaR (Expected Shortfall)#

The average loss conditional on having ended up beyond the VaR threshold: it answers “when things go badly, how badly do they go on average?”. It’s the tail metric regulators adopted precisely because of VaR’s flaws (Risk measures page).

Delta#

The change in the option’s price per one-point move in the underlying; to a first approximation, the probability of expiring ITM. For the seller it’s the residual directional exposure: TRPS keeps it tiny by construction, DHCS cancels it with futures (Options page).

Delta hedging#

Neutralizing the delta of an options position by selling (or buying) the underlying or its futures in an amount equal to the delta. The result is near-pure exposure to volatility: it’s the heart of the DHCS, with end-of-session rebalancing.

DHCS#

Delta-hedged convexity selling: selling front-month SPX puts near the money — where premium per unit of stress is highest — and hedging their delta with futures, rebalancing every evening. It isolates the VRP in its pure state; it loses in moving markets, not in falling ones (DHCS page).

Drawdown#

The decline from an account peak to the subsequent trough, in percent. Maximum drawdown is the most honest metric for anyone living off their own capital: it incorporates the sequence of the losses, not just their distribution (Risk measures page).

Edge#

The expected advantage that justifies a strategy: without one, every system is noise plus commissions. The volatility seller’s edge is the VRP, and it needs periodic re-verification, because premiums compress when too much capital chases them (Edge page).

Ergodicity#

A bet is ergodic when the time average of a single trajectory coincides with the ensemble average across scenarios. Volatility selling isn’t ergodic on its own: it is made ergodic with the right leverage, because a single fatal tail interrupts compounding forever (Ergodicity page).

Fat tails#

Real-world return distributions assign extreme events a probability far higher than the Gaussian does: what the model calls impossible is merely rare. For an option seller the tails are not a technical detail: they are the merchandise (Tail risk page).

Flash crash#

A violent, lightning-fast collapse, with liquidity evaporating and spreads gaping wide: market stops fill at absurd prices and oddball strikes turn into traps. It’s the reason for the stop-limits and the prominent strikes of the TRPS.

Gamma#

The change in delta per point of underlying: convexity in action. For the seller it’s enemy number one — the delta moves against you while the market falls — and it explodes near the strike and near expiry (Options page).

Information Ratio (IR)#

Alpha divided by its volatility: it measures the quality of a strategy’s path. One-day deep OTM puts have the highest IR on the surface — and precisely for that reason the IR alone misleads: it can’t see the tail not yet realized (Risk measures page).

Iron condor#

Selling a strangle while buying the wings: defined maximum loss per contract, reduced margins, huge retail popularity. The wings, though, buy back part of the premium at a steep price (the skew), and “defined” risk per contract is not defined portfolio risk (Strategies page).

Leverage#

The ratio of notional controlled to own capital. In volatility selling it’s the existential defense, not a return multiplier: it’s sized on the plausible worst-case scenario — failed stops included — so that the disaster remains survivable (Ergodicity page).

Margin call#

The broker’s demand to restore margin when the account falls below the maintenance requirement; if the top-up doesn’t arrive, the broker liquidates for you, at whatever prices there are. The requirement rises exactly on the days the account falls: margin is procyclical (Capital efficiency page).

Marking-to-market#

The daily cash settlement of futures profits and losses: every evening the position “restarts” from the closing price. It makes risk visible day by day and demands active liquidity management (Futures page).

Naked put#

A put sold without dedicated cash backing: the margin, not the strike, is the capital committed. Under portfolio margin it’s the architecture that puts the same dollar to work on several risk premia at once (Capital efficiency page).

Portfolio margin#

The margin regime that computes the requirement by simulating shock scenarios on the entire portfolio rather than position by position. For deep OTM one-day options the margin becomes a small fraction of notional: it’s what makes the TRPS’s 3-4x leverage practicable (Capital efficiency page).

Premium capture rate (PCR)#

The share of gross premium collected that remains net after losses and stops. It’s a process metric, not a risk metric: a 94% PCR on the 1DTEs says a lot about underwriting quality and nothing about the tail (Risk measures page).

Premium (of an option)#

The price the buyer pays the seller for convexity: the insurance rate. For the seller it’s a certain collection against an uncertain obligation — and the whole trade lies in verifying that the rate pays for the risk (Volatility risk premium page).

Roll#

Closing an expiring position and reopening it on the next expiration. In the DHCS it’s the monthly ritual that avoids the gamma explosion near expiry, and the natural occasion to recompute the sizing.

Skew#

The IVs of low strikes trade above those of high strikes: the market prices the fear of crashes more than the greed of rallies. It’s why OTM puts are expensive insurance and OTM calls discounted lottery tickets (Options page).

STAR#

Stress-test appraisal ratio: alpha per unit of loss in the extreme scenario, Israelov’s metric. It flips the IR’s ranking: the zone best paid per unit of stress is near the money, not in the deep OTMs (Risk measures page).

Stop-loss and stop-limit#

Protective orders: the stop-loss closes at market once the trigger is hit, the stop-limit adds a limit price beyond which it won’t fill. The first guarantees the exit but not the price; the second the price but not the exit — in a flash crash the difference is worth weeks of premiums (TRPS page).

Strike#

The option’s exercise price: the level at which the buyer may sell (put) or buy (call) the underlying. For the seller it’s the line beyond which the obligation turns into loss; choosing it — by premium, not by distance — is the heart of the TRPS.

Term structure#

The term structure of IV: what volatility trades at across expirations. In normal times it rises with maturity; under stress it inverts, with the short maturities above everything — the signal that the perceived danger is here and now (Options page).

Theta#

Time decay: how much value the option loses with each passing day, all else equal. It’s the seller’s paycheck — collected day by day in exchange for the gamma and vega that stay on the seller’s books (Options page).

TRPS#

Tail risk protection selling: selling deep OTM 1DTE puts on the S&P 500 every evening, selected at a fixed premium (IV ≈ 2× VIX), with moderate leverage and daytime stop-limits. It sells others protection from the tails, and survives by architecture, not by forecast (TRPS page).

Vega#

The sensitivity of the option’s price to a one-point move in implied volatility. It’s the risk that turns a scare into an immediate loss without the strike ever being threatened; it grows with maturity, and it’s the structural reason for short expirations (Options page).

VIX#

The CBOE index of 30-day implied volatility on S&P 500 options: the current price of insurance, not a forecast. On this site it serves as the rate card: the TRPS selection rule is a multiple of the VIX, not an absolute level (Tail risk page).

Implied and realized volatility#

Implied volatility (IV) is the volatility embedded in option prices: what the market fears. Realized volatility (RV) is the one actually measured afterwards: what the market does. The systematic gap between the two is the subject of this entire site (Volatility risk premium page).

Volatility risk premium (VRP)#

The systematic premium that buyers of protection pay to its sellers: on average, implied exceeds realized, on one-day maturities as on monthly ones. It exists, it persists for structural reasons, and it’s the price of a real risk — not a free lunch (Volatility risk premium page).