Guidelines for Theta/Vega and Theta/Gamma Ratios in overall Portfolio

[JackRab]

I am the guy that monkey was referring to. I work for a fund in Stockholm. I worked with the other guy that I mentioned, and we both were subject to the Russian risk-manager. I never stated it was the only measure of risk. You stated that I probably used it for premium writing, which would be retarded.

Stop babbling like a drunk in the middle of a hissy-fit in the local dive-bar.

'The 1% figure refers to your global book, not one position. It is absolutely a risk-measure'

'The theta gives you a dollar-denominated risk of LOCAL gamma. I never mentioned otherwise '

Your quotes mate...

Local gamma refers to within 1 sigma... that's like saying I'm having a pepperoni pizza because there's pepperoni on it... never mind all the beef, mushrooms, 4 cheeses and ansjovis.

And I meant SLE being knowledgeable. I don't really care what other people (monkey) think of your capabilities. Or what whoever makes at a bank with whatever risk-manager from Russia or Sweden...

And I never said you specifically use it for premium writing... but that most retail traders do...

That's the last I'm replying on this. Have a nice life being cocky and arrogant in Stockholm...

 

[destriero]

Stop babbling like a drunk in the middle of a hissy-fit in the local dive-bar.

'The 1% figure refers to your global book, not one position. It is absolutely a risk-measure'

'The theta gives you a dollar-denominated risk of LOCAL gamma. I never mentioned otherwise '

Your quotes mate...

Local gamma refers to within 1 sigma... that's like saying I'm having a pepperoni pizza because there's pepperoni on it... never mind all the beef, mushrooms, 4 cheeses and ansjovis.

And I meant SLE being knowledgeable. I don't really care what other people (monkey) think of your capabilities. Or what whoever makes at a bank with whatever risk-manager from Russia or Sweden...

And I never said you specifically use it for premium writing... but that most retail traders do...

That's the last I'm replying on this. Have a nice life being cocky and arrogant in Stockholm...

You erroneously asked, out of ignorance, if I could make up my mind between local and book. They are not mutually exclusive. Local meaning within a small boundary on price and vola. Book is your entire portfolio, etc. I have not contradicted myself. You simply do not know WTF you are talking about and choose to conflate it to make you not appear dumb.

It is used as a local risk measure bc nothing is useful over a broad range of Px, time and vola. Your theta at SPX 2000 will be different than at SPX 1900.

Your theta figure can give you a ton of information related to your other exposures. You're short gamma, market is flat, but your thetas have dropped. That implies you are up marks, vol, and gamma is now cheap -- time to cover. Market is moving and your gammas are now positive, and your thetas are crushed -- you are minimally (magnitude) bimodal to gamma and your position has blown-out. You are trading beyond your tails.

The option traders that I know can give you an index price without looking at their screens, solely by giving them their theta figure. Guys prop-bet on this ability.

You are so far out of your depth it is laughable.

 

[water7]

Does anybody have guidelines such as these? I'd like to know.

traders can have different risk preferences and approaches on how to manage their option book

specific guidelines can be used if you trade exactly the same way as your senior/ mentor
but it is more important to understand basic principle for every trades you made,
rather than looking for a magic formula / greeks ratio that can be applied on all market dynamics

logic comes first, then the mechanics..

--
ps: theta/vega = apple/orange

 

[destriero]

Theta/gamma's only utility is w.r.t. a dbase query. Say you're mining for potential tickers with high/low vola. That's when your sheet will be populated with tickers into release dates, term-skews, the like. GIGO as all of the tickers will have news forthcoming. It's of no use as a risk-measure.

 

[El OchoCinco]

 

[vegamedic]

First off, it's great seeing you guys debate/argue, since I've been diving in the books to try and find some rules of thumb for relationships between greeks for my small portfolio, particularly delta/vega, vega/theta, and gamma/theta. Any recommended reading sources (books or papers) or is it more of a learned by experience deal?

 

[tommcginnis]

First off, it's great seeing you guys debate/argue, since I've been diving in the books to try and find some rules of thumb for relationships between greeks for my small portfolio, particularly delta/vega, vega/theta, and gamma/theta. Any recommended reading sources (books or papers) or is it more of a learned by experience deal?

Shocking (to me) -- I have never seen anything on the subject that wasn't claptrap-garbage-pooh.

Plotting in 3d (market-distance by strike by time) is just too easy in 2017, so I think that easy-access answers to your query will be around "soon" -- but it still blows me away that one of the more *operational*-but-unwritten subjects in retail trading realms remains .... well, *unwritten*!. Oh well.

FWIW, "or is it more of a learned-by-experience deal" is pretty much right on. Absolute numbers are context specific, so ratios -- either "theta|vega" or %s of underlying -- will be the generalizable thing.

 

[destriero]

It's assuming that it's not model-dependent. If the ratio was exploitable it would only express as a skew on durations. Vertical skew is, by definition, zero-arb.

A time skew would express some stupid ratios, but then a look at the report dates, etc., would be the first thing vetted. IOW, you're wasting your time. It's analogous to calling some BBB- dogshit corporate an arb bc it's yielding 800bp over treasuries.

 

[InTheMaking]

Gentlemen, Thanks for the continued discussion on this topic. Appears that the classic option traders dont go beyond the greeks.

My question was motivated how to best manage my global book when dealing both long and short options and appropriately, filter and optimize the rich / cheap / high-risk / low-risk options for each local underlying. Currently, my approach is to view all my greeks in IB risk navigator and dump into a excel spreadsheet and run what-if scenarios for next days position adjustments. Figured some back of the envelope ratio would enable some quicker methods.

Regarding references to theta/vega and theta/gamma ratios, I'm beginning to see several publications and vol funds bring this up. Figured this might be common parlance among professionals.

http://www.fow.com/pdf/LSEwhitepaper.pdf
[p6 para2] Looking at the theta/vega ratio of a contract is one way to understand how risky it is to be short volatility compared to time decay

https://www.cboe.com/institutional/pdf/ArtemisCapitalQ12012_VolatilityatWorldsEnd.pdf
[p7 para2] The third tail-risk valuation metric involves graphing the theta to gamma ratio of a 30% OTM SPX put option. This is a fascinating and objective way to gauge how much "time decay" you are paying for each unit of "hedge" you are getting back. Once again the metric validates the highest cost of tail-risk protection for the past few decades

Evidently, from the above excerpts, the ratios themselves theta/vega ratio (call it TVR) may give a quick assessment of theta income to vol risk for the global book even without the skew charts or IVR. And theta to gamma ratio (TGR?) could give an indication of moneyness and allows an option seller to spread my short gamma appropriately across different DTE's

Again, just trying to become a good trader!

 

[destriero]

Gentlemen, Thanks for the continued discussion on this topic. Appears that the classic option traders dont go beyond the greeks.

I don't use any greeks in position-selection/mining or stress. I use an ATM up/down fly reversal premium valuation and convert to a delimited (%) format.