Extremely dumb question about the greeks

[Surgo]

Warning: I said it's going to be a dumb question

Why is so much emphasis put on them? They represent instantaneous snapshots of continuous functions of time-to-expiration, implied volatility, and underlying price. Do people really find them more useful to evaluate positions than a graph of the above variables?

For example, here is a risk chart from Livevol X courtesy of Lightspeed. https://www.lightspeed.com/wp-content/uploads/2015/05/livevol-risk-chart.jpg. (You could imagine how one might transform this into a 3D graph.) I compare that to most other software, which will show you your position delta, gamma, vega, and theta. But I don't understand how those snapshots are all that useful compared to seeing how they will change based on the underlying inputs. Personally I find the graph much more useful. Do you find them useful for quickly evaluating and choosing among a number of different positions?

 

[Robert Morse]

Greeks are not a tool to make money, they are a tool for managing and allocating risk. They help you understand where your risk is and determine if that position fits your expectation. If all the greeks are zero, you have little or no risk. If your expectation is that vol is high, you want to focus on being short Vega. If you expect the underlying will move up, you will focus your risk on long delta. If you think little will happen over a shot time period, sell Theta. Then, reduce risk in the greek you have no opinion on.

To make money in options, you need to have some expectation of something happening or not happening, then compare that to current prices. Then you can look for an option strategy that fits your thesis and view the greeks to make sure your risk is allocated in the manner that will help you profit if you are right.

Does that help? I like the graphs myself, but that is a personal preference.

Bob

 

[Surgo]

Thank you Robert, that is indeed a helpful explanation.

 

[stepandfetchit]

The importance of the greeks are a function of the type of trader and the type of trade. Pure directional traders probably have only a passing interest, such as Delta. They (the greeks) do help in understanding a trade's sensitivity to specific influences, and to manage more complex option positions. The folks that typically pay a lot of attention to the greeks, are observing the greeks of the complex option position (less for greeks of a unique option).

 

[FSU]

Greeks are not a tool to make money, they are a tool for managing and allocating risk. They help you understand where your risk is and determine if that position fits your expectation. If all the greeks are zero, you have little or no risk. If your expectation is that vol is high, you want to focus on being short Vega. If you expect the underlying will move up, you will focus your risk on long delta. If you think little will happen over a shot time period, sell Theta. Then, reduce risk in the greek you have no opinion on.

To make money in options, you need to have some expectation of something happening or not happening, then compare that to current prices. Then you can look for an option strategy that fits your thesis and view the greeks to make sure your risk is allocated in the manner that will help you profit if you are right.

Does that help? I like the graphs myself, but that is a personal preference.

Bob

Wow, a pretty good answer from a newbie with only a couple of posts. You may have a future on these boards, Robert Morse.

 

[Robert Morse]

Pure directional traders probably have only a passing interest, such as Delta.

This is where a many traders have lost money and don't understand why. When I was trading AAPL as a MM, a customer bought 100 OTM calls just before earnings, where earnings were thursday night before expiration. After earning, there was one trading left. The stock went up around 10%, yet the calls were down a 1/8 (Yes, long time ago). The customer sent his broker into the crowd to complain that he was right, AAPL went up, but he lost money. He was long deltas, but also long a lot of vega with a lot of theta decay. The stock did not move enough to for the current options prices and he ignored the risk of the other greeks.

Bob

 

[stepandfetchit]

Wow, a pretty good answer from a newbie with only a couple of posts. You may have a future on these boards, Robert Morse.

Bob is not really a newbie. He has been here before with a different company. He does know his stuff, and has helped many of us here.

 

[Jones75]

My two cents while waiting for Shark Tank at 9 PM (EST)

The greeks are a mathematical equation that will indicate the future of the option which is based on the underlier price…and… and… the MM's perception of (implied) volatility, which in turns gives the trader an arbitrary number.

And with that info your greeks fluctuate. And your best defense against a loss on long calls where the underlier has headed north at ER, is to find higher 30 day stat vol to lower implied, and be aware of vega.

 

[killshottrader]

There are no dumb questions. Questions (seeking knowledge) is inherently honorable. There are are only dumb answers.

 

[Pekelo]

I agree with the OP. No matter how much you know about the greeks, if you are betting the wrong directions you are not going to make money, so your original expectation has to be right...