Do you analyse the greeks before trading options?

[crgarcia]

Quote from xflat2186:

Crgarcia:

“Sometimes I take a look at theoretical price (I don't mind paying up to 5 cents above theoretical, I'm not that picky since I always do directional trades).”

What makes you think your theoretical prices are absolute value? Simply adjust one or more of the variables and you can make any value of theoretical prices.

“I "hedge" from theta (time decay), purchasing calls with 70 or 100 days left.”

How is this a hedge? Or hedged position? When you buy calls you’re long theta unhedged.

I reduce time decay, of course don't eliminate it completely (so its just a partial "hedge").

Quote from xflat2186:


“Hedge from Vega (volatility) purchasing options slightly out of the money, on the very same day the market dipped (which usually lowers volatility on calls).”

Assuming we’re talking about the US equity markets, when the markets dip volatility in both the calls and puts goes up. The Vega curve is for the most part bell shaped and therefore a slightly out of the money option has a similar Vega to one just in the money and so on down both sides of the curve ( not counting the skew). This being the case how is that a hedge or hedged position?

Many times during dips the call prices (and thus the IMPLIED volatility) drop more than expected from stock (ETF in my case) movement. Easily seen in a ETF vs options chart.

Of course, historical volatility may increase in both calls and puts.

Purchasing slightly out of the money calls, reduces vega (changes in volatility).
In the past traded options with 180 days left, but they were more prone to volatility changes (and had smaller volumes).

 

[xflat2186]

Crgarcia,

On theta you post this : “I reduce time decay, of course don't eliminate it completely (so its just a partial "hedge").”


I don’t see where there is any hedge at all? You originally posted that you buy calls. That’s a net long theta position not a hedge to anything in terms of theta partial or otherwise.

On the subject of vega you post this…

“Many times during dips the call prices (and thus the IMPLIED volatility) drop more than expected from stock (ETF in my case) movement. Easily seen in a ETF vs options chart.

Of course, historical volatility may increase in both calls and puts.”


You’re seeing the effects of the delta on the price of the option not the implied in those dips in the stock or ETF. In addition “historical” volatility is a calculated value over a time period in the stock. If you look at the historical volatility of the STOCK and compare it the IMPLIED volatility in the options you’ll see some correlation but the historical volatility does not move the implied volatility in the options, the relationship is opposite. If we’re talking about the US equity markets and those ETF’s and other products based on the US equity markets when the underlying falls volatility rises not the other way around. There are exceptions but they’re event specific, and outside the normal movement in volatility.

 

[xflat2186]

crgarcia you also wrote:

"Purchasing slightly out of the money calls, reduces vega (changes in volatility).
In the past traded options with 180 days left, but they were more prone to volatility changes (and had smaller volumes)."



Again the vega curve for options is roughly bell shaped as is the delta curve where slightly out of the money options you speak of have similar vega's to those in the money but equidistant to the at the money then the ones you trade. IN the same respect, options further out of the money or deeper in the money will have less vega then those you mention as "slightly out of the money."

The options with the greatest vega are the longest dated options which are closest to true .50 delta. The vegas decrease fairly evenly ( close enough for this discussion ) as you move equidistant in or out of the money and closer in time.

Time has a great effect on vega so any option with 180 days left in general will have much more vega then one of similar strike but fewer days till expiration. Volume has no effect on vega. In a rare case where if there is a significant and unusual spike in volume for a particular month it might drive the implied volatility for the entire months options higher or lower depending on the flow of that volume.