The Beta Weighting tool is widely used in risk assessment. When activated, it modifies the Delta of your positions based on the Beta coefficient (the relation of the volatility of a stock to that of another stock or index).
For example, a stock's volatility can be compared to an index’s volatility. If a stock tends to move a similar percentage to an index's percent move, then that stock will have a beta of 1 when compared to the index. However, if a stock tends to move a higher percentage than the index's percent move, that stock's beta will be higher than 1 when compared to the index. Conversely, if a stock's percent move is less than index's, that stock's beta will be lower than 1 when compared to the index.
The process of comparing volatility of a stock and an index is called beta weighting. You can also use the same process to beta weight one stock's volatility relative to another stock.
You may notice that the positions in the Activity and Positions sections tend to have different Delta or Net Shares. Delta is defined as an approximation of the change in the price of an option relative to a change in the price of the underlying stock when all other factors are held constant. However, each stock has a different price and different volatility making it difficult to assess overall risk on the portfolio.
How to activate Beta weighting
Beta weighting converts the Delta or Net Shares of the position relative to the selected symbol. To activate beta weighting:
- Activate the Beta weighting checkbox above your positions.
- In the symbol selector, type in the symbol or an index you would like to beta weight your positions against. Press Enter. Delta for each symbol is now updated to reflect the Beta weighting.
- If you apply beta weighting and a symbol in your account returns N/A, contact us via the Help tab, Live Support, email, chat, or phone. Request beta weighting for the symbol, and once the process is complete, the N/A will become a beta weighted number for that symbol.