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Determining Greek position limits
- Thread starter TSLexi
- Start date
I'm trying to figure out how to determine my Greek position limits in order to do effective financial risk management. I can risk $15000 per position, and I am moderately aggressive, and hold my trades for a maximum of 5 days.
Watch your thetas, for the overall portfolio. Don't let them grow too large given size of book.
Watch your thetas, for the overall portfolio. Don't let them grow too large given size of book.
So I'm going to limit my thetas to -$300/day. What about vega, gamma, and delta? Should I have a limit on positive theta?
So I'm going to limit my thetas to -$300/day. What about vega, gamma, and delta? Should I have a limit on positive theta?
I was referring to long thetas. If you're short theta/long gamma, then you're long risk.
I was referring to long thetas. If you're short theta/long gamma, then you're long risk.
Well, my goal is to minimize my risk, not avoid it entirely.
Probably by being gamma-delta neutral, long or short vega depending on my volatility outlook, and either theta neutral or long theta.
Why aren't vomma and vanna automatically calculated as well? Being vomma neutral would be great.
Well, my goal is to minimize my risk, not avoid it entirely.
Probably by being gamma-delta neutral, long or short vega depending on my volatility outlook, and either theta neutral or long theta.
Why aren't vomma and vanna automatically calculated as well? Being vomma neutral would be great.
Why complicate things? Looking at global thetas (and delta) inherently gives your risk exposure. Vomma risk will be inconsequential day-to-day given your holding time account size.
Why complicate things? Looking at global thetas (and delta) inherently gives your risk exposure. Vomma risk will be inconsequential day-to-day given your holding time account size.
Thanks. That makes sense. Sometimes I think I have $1.5M and 30 days per position, and try to risk manage accordingly.
If you are going to 'risk $15k' per position you might want to define that a bit more precisely.
Is this 15k you are prepared to lose in total.
or 15k in theta
or 15k in getting the option or delta wrong - are you delta hedged?
or 15k in vega.
Or is it 15k assuming a stress test and a number of things changing.
There are a lot of things to watch, and if its simply 15k then watching the greeks is irrelevant, as your PL will tell you to exit, and you have to watch the mark to markets for your exit price.
eg; you buy calls, underlying falls slowly or sits still, theta decays and volatility gets crushed, then you have to cross the bid ask spread........
what if you get the direction right, but theta decays, and vega gets crushed.
Is this 15k you are prepared to lose in total.
or 15k in theta
or 15k in getting the option or delta wrong - are you delta hedged?
or 15k in vega.
Or is it 15k assuming a stress test and a number of things changing.
There are a lot of things to watch, and if its simply 15k then watching the greeks is irrelevant, as your PL will tell you to exit, and you have to watch the mark to markets for your exit price.
eg; you buy calls, underlying falls slowly or sits still, theta decays and volatility gets crushed, then you have to cross the bid ask spread........
what if you get the direction right, but theta decays, and vega gets crushed.
Problem with greek position limits is that the greeks themselves can change quickly and they are often dependent on the parameters (vol and moneyness).
If an option has higher vol, it will have less gamma but it will be a riskier option than an option with lower vol.
Most traders use a shock based methology for determining risk limits. They will answer a question similar to "I can't lose more than X on a 20% gap move." This normalizes across all stocks and accounts for all the greeks and their changing behavior. What it doesn't account for is the probability of that 20% gap move.
You make a few rules that you have to stay within that keep your loss to 15,000 and constantly check for that. A reasonable rule is that you don't have to put up more than 15,000 of portfolio margin for the underlying.
If an option has higher vol, it will have less gamma but it will be a riskier option than an option with lower vol.
Most traders use a shock based methology for determining risk limits. They will answer a question similar to "I can't lose more than X on a 20% gap move." This normalizes across all stocks and accounts for all the greeks and their changing behavior. What it doesn't account for is the probability of that 20% gap move.
You make a few rules that you have to stay within that keep your loss to 15,000 and constantly check for that. A reasonable rule is that you don't have to put up more than 15,000 of portfolio margin for the underlying.
Problem with greek position limits is that the greeks themselves can change quickly and they are often dependent on the parameters (vol and moneyness).
If an option has higher vol, it will have less gamma but it will be a riskier option than an option with lower vol.
Most traders use a shock based methology for determining risk limits. They will answer a question similar to "I can't lose more than X on a 20% gap move." This normalizes across all stocks and accounts for all the greeks and their changing behavior. What it doesn't account for is the probability of that 20% gap move.
You make a few rules that you have to stay within that keep your loss to 15,000 and constantly check for that. A reasonable rule is that you don't have to put up more than 15,000 of portfolio margin for the underlying.
I'm prepared to risk $15,000 total of Reg T margin (I'm not yet eligible for portfolio margin as I have <$100K and only 1 year of options trading experience).
My maximum loss I can withstand is 20% of a position that is 25% of my trading capital.