Do you analyse the greeks before trading options?
- Thread starter crgarcia
- Start date
I Just take a quick glance at open interest, daily volume, and bid-ask spread.
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).
I "hedge" from theta (time decay), purchasing calls with 70 or 100 days left.
Hedge from vega (volatility) purchasing options slightly out of the money, on the the very same day the market dipped (which usually lowers volatility on calls).
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).
I "hedge" from theta (time decay), purchasing calls with 70 or 100 days left.
Hedge from vega (volatility) purchasing options slightly out of the money, on the the very same day the market dipped (which usually lowers volatility on calls).
yep... i prefer delta neutral positions, and i don't want too much excessive gamma (time decay) working against me.
Crgarcia:
âSometimes 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).â
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.
âI "hedge" from theta (time decay), purchasing calls with 70 or 100 days left.â
How is this a hedge? Or hedged position? When you buy calls youâre long theta unhedged.
âHedge from Vega (volatility) purchasing options slightly out of the money, on the very same day the market dipped (which usually lowers volatility on calls).â
Assuming weâre 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?
Chibondking: by the way CBK sorry I have not been around I have had a full plate, Iâll see you sometime tomorrow.
âand i don't want too much excessive gamma (time decay) working against me.â
Just a point of clarification, you can be long gamma and hedge your theta as to not be excessive. Donât forget about time spreading and using short dated options in this case.
A529612:
âI like the short side and usually look for overpriced options to sell.â
I too am usually a shot gamma player and I prefer to be net short Vega but âover pricedâ is really a relative phrase and in this day and age of multi listing with 6 market places for most equity options, and dispersion throughout the markets, you wont find âover pricedâ anywhere. If youâre just outright selling options itâs a spec on one or more of the variables in the price of an option depending on how you handle the residual risk.
No offense to anyone, just wanted to be thorough.
âSometimes 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).â
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.
âI "hedge" from theta (time decay), purchasing calls with 70 or 100 days left.â
How is this a hedge? Or hedged position? When you buy calls youâre long theta unhedged.
âHedge from Vega (volatility) purchasing options slightly out of the money, on the very same day the market dipped (which usually lowers volatility on calls).â
Assuming weâre 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?
Chibondking: by the way CBK sorry I have not been around I have had a full plate, Iâll see you sometime tomorrow.
âand i don't want too much excessive gamma (time decay) working against me.â
Just a point of clarification, you can be long gamma and hedge your theta as to not be excessive. Donât forget about time spreading and using short dated options in this case.
A529612:
âI like the short side and usually look for overpriced options to sell.â
I too am usually a shot gamma player and I prefer to be net short Vega but âover pricedâ is really a relative phrase and in this day and age of multi listing with 6 market places for most equity options, and dispersion throughout the markets, you wont find âover pricedâ anywhere. If youâre just outright selling options itâs a spec on one or more of the variables in the price of an option depending on how you handle the residual risk.
No offense to anyone, just wanted to be thorough.
One generally gets a sense of the greeks after a while where you kind of know your exposure on any position you put on and the specific number may not matter too much since you are comfortable with the magnitude.
However on combination positions I will peak at the greeks to see if I can make any adjustments or if one is needed at all.
However on combination positions I will peak at the greeks to see if I can make any adjustments or if one is needed at all.
Sorry Looking back at my answer from last night I got off the topic of the actual question.
IMO If you're not going to actively trade and manage the variables on a position it may be nice to know them but they're not going to do much for you. They all decay in some manner or another so they're always changing. None have a linear decay curve either.
If you're trading a complex position of many series across many months and which includes deltas from your trading of the underlying vs. your options, then I would say that using the greeks to manage your position is an absolute must.
If you buy or sell a few options or a few spreads then its fairly simply enough that you dont need to manage the greeks and since you're just putting on a position and then waiting to take it off not trading against it then you really dont need to actively manage the greeks.
IMO If you're not going to actively trade and manage the variables on a position it may be nice to know them but they're not going to do much for you. They all decay in some manner or another so they're always changing. None have a linear decay curve either.
If you're trading a complex position of many series across many months and which includes deltas from your trading of the underlying vs. your options, then I would say that using the greeks to manage your position is an absolute must.
If you buy or sell a few options or a few spreads then its fairly simply enough that you dont need to manage the greeks and since you're just putting on a position and then waiting to take it off not trading against it then you really dont need to actively manage the greeks.
I reduce time decay, of course don't eliminate it completely (so its just a partial "hedge").
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).