From the March 01, 2009 issue of Futures Magazine • Subscribe!

Interactive Brokers' Risk Navigator

Interactive Brokers’ Risk Navigator

One Pickwick Plaza

Greenwich, CT 06830 USA

Overall Rating: 3 of 4

Cost: Free download

Available from www.interactivebrokers.com

Requirements: Java plug in

The Interactive Brokers Risk Navigator examines portfolio risk using tables, charts and what-if strategies. It allows you to study the portfolio as a whole, group the positions by sectors or expiration dates and focus on a specific underlying and its positions.

Getting Started: 3 of 4

Importing positions is relatively easy. Save your portfolio to the desktop in an Excel document with an XML file extension, then open it as a ‘new portfolio’ within the ‘What-If’ area of the Risk Navigator. Or you can open the main Trader Workstation and add each underlying ticker, then highlight and drag it into the What-If window. Then change the position quantities to recreate the portfolio. Unfortunately, the initial trade price cannot be added, but changes in daily P&L will be shown. While recreating an existing portfolio can be tedious, it only needs to be done once and saved.

Layout: 3 of 4

The Risk Navigator contains three main sections: the Report Selector, the Report Viewer and the Portfolio Relative P&L Graph. The Report Selector utilizes dropdown menus allowing you to choose from and customize an array of risk reports. Here, you can examine the portfolio as a whole or focus on a specific underlying and add to or subtract risk parameters to each report. The dropdown menus are easy to locate, understand and navigate. The help documents provide clear explanations for every risk page and parameter.

The Report Viewer displays the chosen reports in easy-to-read tables. Tabs allow for further configuration of the report, as columns and parameters can be added, removed and adjusted. Clicking on a column header allows you to sort in ascending or descending order. In addition, the “drill-down access” feature will broaden or narrow the scope of a table simply by clicking on the + and – icons next to each underlying. The Portfolio Relative P&L graph rests in the lower left quarter of the screen. When the selected risk report encompasses multiple stocks or the whole portfolio, the graph will illustrate how the total value of the portfolio changes over percentage movements up and down. If one underlying is chosen in the Report Selector, then this P&L graph will reflect how the stock and options position for that underlying will behave over a range of stock prices. The graphs themselves are easy to navigate and allow you to zoom in or out, or highlight a particular section. The ability to add P&L lines that demonstrate 15% moves up or down is a helpful reference tool as well.

Information: 3 of 4

In the Report Selector, eight different styles of risk reports are available. The first five offer variations on position, price, value, P&L, exposure, VAR (value at risk), delta, gamma, vega and theta. The Risk by Underlying report is the default summary report. In its concise form, it provides the sum total of the parameters for each stock, with the cumulative portfolio sums across the top. Expanded, it shows all positions individually and provides parameter totals for each expiration month. Other variations sort this information into industry groups and subgroups, or provide a table displaying the risk for each underlying organized by expiration month.

The Price Change and Volatility Change report calculates risk matrices for portfolio P&L over a combination of a range of stock prices (unchanged, +/- 10%, 20%, 30%), volatility scenarios (unchanged, +/- 15%, 30%) or interest rate scenarios (unchanged, +/- 50 bp, 100 bp). For an individual underlying, it will give you a risk matrix for the overall position and break down the position into monthly risk tables that can be adjusted to study P&L, delta, gamma, theta and vega. This is an important tool for traders. However since it is going off last night’s closing data, this chart will be most useful before the start of a day’s trading. As a new trading day progresses, especially with a stock that has had a large move in the underlying or volatility, this chart will be less accurate.

The Risk Navigator also allows you to create an alternate What-If window where you can model fictional positions and examine the changes to risk parameters and P&L. Here, you can see how adjustments would affect the risk Greeks and P&L graph for both a particular underlying and the portfolio. Professional traders and beginning option investors will find this type of tool useful, but it would be more useful if other parameters could be adjusted. For example, sliding the date forward and manually adjusting the underlying prices are features an options trader would often use to assess the risk of positions.

While this is a very good basic platform for modeling options risk, it lacks some of the advanced features professional options traders and portfolio managers would use and find important, such as alerts for when certain parameters exceed set limits. The IB Trader Workstation also does not allow you to enter the option volatility values. To retail traders this may not make much of a difference, but professional traders will find this problematic, especially near expiration. Overall, this system is a very solid no-frills system that is easy to learn and use. Data and charts are clearly presented and easily configured. Most traders will find Risk Navigator is more than adequate for risk modeling and learning options, and experienced traders and fund managers can benefit from basic but solid position risk models.

David Zalesky is a managing member at Edgewater Partners LLC and has been trading equity options for 12 years. Reach him at dzl@edgewaterpartnersllc.com.

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