Portfolio fit
Correlation and concentration risk
Institutions do not only ask whether a trade is attractive by itself. They ask what it does to the whole book.
What to check
- Does the position overlap with existing sector, factor, ticker, or market exposure?
- Would several positions lose for the same reason?
- Is the trade effectively doubling a view you already own?
- Is correlation known, estimated, or ignored?
The tool penalizes high or unknown overlap because it can make the portfolio more fragile than the single-trade reward/risk suggests.
Primary reading: Investor.gov risk tolerance overview · FINRA options overview and risk · SEC Investor Bulletin on options · OIC options pricing overview · OCC Options Disclosure Document