Option Convexity Risks

Option convexity risk refers to the non-linear relationship between an option price and the underlying asset price. Because options have a curved payoff profile, they exhibit convexity, meaning their value changes at an accelerating rate as the underlying asset moves.

This property is beneficial for long option holders but dangerous for naked sellers. If the market moves against a naked position, the losses accelerate due to the convexity, often leading to a rapid depletion of margin.

Understanding this risk is critical for sizing positions correctly, as the potential for extreme loss grows exponentially with adverse price movements.