Let's take a general look at how market practitioners manage the risks of an option portfolio.

In practice, traders usually don't just hold a single option.

A portfolio often contains dozens or even hundreds of different positions.

That's why it makes sense to look at the overall aggregated risk.

However, individual risks don't simply add up.

In fact, they can sometimes offset each other.

Think about a market maker in single stock options.

Imagine they've just bought a lot of calls from one client and a lot of puts from another, both on the same stock.

Now a long call gives long exposure to the stock price, while a long put gives you short exposure.

If you only look at one of these trades in isolation, you'd miss the fact that taken together parts of the risk cancel out before hedging anything.

It's essential to consider the net position, and this approach isn't unique to options, bonds, traders, swap traders.

Everyone managing a portfolio of instruments needs to aggregate risks in the same way.

So how does this process work? For options, it follows three steps.

First, decompose, we break down each option position into its sensitivities to things like changes in the price of the underlying volatility and the passage of time.

Second, aggregate, we bring those sensitivities together at the portfolio level.

This is where possible offsetting effects show up, like the long exposure from calls being reduced by the short exposure from puts, and finally modify.

Once we understand the combined portfolio risk, we can adjust it with overlay strategies.

This ensures the portfolio reflects not only the market's view, but also the traders risk, appetite, and risk limits.