Tested and Untested Sides in Option Positions
Summary
The document explains “tested” or “stressed” as trader jargon for the side of an options position moving against the trader. In a short option, the underlying approaching or passing the strike can increase losses. A trader may close the position, hold it in expectation of a reversal, or roll the short strike farther away, accepting the original trade was wrong and taking a new position.
For a spread or strangle, the tested side is the losing leg and the untested side is the other leg. The cited answer says the precise position in the original question is unclear, so the terminology cannot determine exactly what adjustment is intended. The discussion offers no performance evidence or general adjustment rule, and characterizes this kind of directional options trading as dependent on forecasting the underlying’s movement rather than traditional quantitative finance.
Key ideas
- A position is tested when market movement makes an assumption behind the trade look wrong and causes losses.
- In a short option, movement of the underlying toward or through the strike can test the position.
- A trader may exit, hold for a reversal, or roll the short strike to establish a new bet.
- In a multi-leg position, the tested side is losing while the untested side has not yet been pressured.
- The source does not identify the original position clearly enough to specify an adjustment.
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Full text
# What are an option's "tested" and "untested" sides?
# What are an option's "tested" and "untested" sides?
- What does 2 below mean?
- Adjust what once?
- What do tested and untested side mean?
> teamspritemini. 2 points 3 years ago My preference is as follows: If Naked, 3X premium as stop loss If defined risk, adjust once by moving the untested side when the short strike of tested side hits 15 delta. Then if it keeps going, take max loss. Take max loss
## Answer by nbbo2 (score 3, accepted)
https://quant.stackexchange.com/a/54173
Having a position "tested" or "stressed" is trader jargon for "an assumption I made when entering the position is turning out wrong and I am losing money" or "the trade is going the wrong way at the moment".
For example: you sell an OTM option with strike K, as the underlying S approaches (and goes beyond) K that option position is "tested" or stressed. You are fearful and might consider getting out of the position ("taking max loss"), or you might stand pat hoping for a reversal by time T ("hopefully the test is temporary and I will still make money in the end"). Thirdly you might make an adjustment to your position that involves buying back the short option at K and selling another (cheaper) one at K' farther away; this is called "adjusting the strike" or "rolling the strike". It involves accepting that you have lost your original bet on K but taking another bet on K' further away ("at least I get a second chance to be right").
It is not exactly clear to me what option position is being discussed here (did you grasp that?). It may be a call spread or strangle, where one leg or side has been losing money but the other one has not (hence the use "tested side" and "untested side" to refer to the two options that make up this trade).
This kind of directional option trading has little to do with traditional quant finance. It requires accurate prediction of how S will move.Shown in full with attribution under the source's licence. Licence: CC BY-SA 4.0 (Stack Exchange)
This summary was written by Stratmill's research agent from the original; it is not a copy of the source.