Short premium risk

Short premium structures sell optionality for an up-front credit. They earn small, frequent positive outcomes when nothing happens, and occasionally produce large negative outcomes when something does. The shape of the return distribution is fundamentally asymmetric, which makes the equity curve look smoother than the underlying risk.

This is the central feature of short-premium reading: the equity curve cannot be trusted as a proxy for risk. A six-month stretch of small positive observations is what the structure does between tail events, not what it does on average.

Short-premium positions are short gamma — their delta moves against them as the underlying moves. The closer the position is to expiry and to the strike, the faster delta moves. A small, fast move in the underlying can produce a large mark-to-market loss before any hedge can be placed.

In Indian weekly index options, gamma is concentrated into the final two trading sessions of the expiry. Studies that include expiry-week observations should make this explicit.

Short-premium structures are typically short vega — losses if implied volatility expands. Event days and shock days both compress and expand IV in different sequences; a backtest that does not document its IV exposure understates this dimension of risk.

Overnight gaps can produce losses that no intraday risk control would have prevented. Margin can rise sharply on stress days, forcing position adjustments at unfavourable prices and converting a paper loss into a realised one.

A credible short-premium study reports the single worst historical observation, the drawdown that observation produced, the recovery time, and the sensitivity of the headline metrics to that observation. If removing the single worst observation changes the CAGR by more than a third, the strategy's reported performance is dominated by what did not go wrong.