I've read the theory behind the Greeks, about how delta, gamma, vega and rho affect the option price and all that, but they don't really explain how to go about using them to make an actual option trade IRL. Say for example I want to buy a ATM or OTM put that expires next week. Can someone show an example how Greeks may give an edge as opposed to just blindly buying an ATM or OTM put?
How are Greeks used to actually trade?
- Thread starter nxt7
- Start date
Greeks are primarily descriptive quantities... They're mainly used for risk management and PNL attribution. That said, one way you can use the Greeks for trade selection is in the context of scenario analysis and/or stress testing. For instance, for a particular option structure you're exploring you could look at what its delta/etc might look like, given particular moves in the underlying or vol.
It's hard to imagine how Greeks can offer you any edge if all you're doing is buying outright puts.
It's hard to imagine how Greeks can offer you any edge if all you're doing is buying outright puts.
nxt7:
My ramblings: take with a grain of salt.
I would advise caution in seeking answers to non-specific questions such as this, especially on this forum.
IMHO: The more I learn, the more I realize I did not know. Once I learn and understand enough to ask the correct question, it typically is a mute point, since then, the answer is either obvious, or fairly easily attainable. Forming the proper questions become the difficult part (for me).
There is insufficient detail in your question to understand what your objective is. There is no magic in the greeks, but they can be use to understand your position's sensitivity to other factors to aid in understanding and controlling your position risks.
Ask yourself why you want to buy a ATM or OTM put that expires next week, and what is your plan if your expectations pan out, and what is your plan if/when you discover the trade will not be profitable! Assuming you expect the underlying to accelerate a downward move, then you have price movement (delta) and volatility (vega) in your favor. If the downward move is not accelerating or may cease, then volatility (vega) may be against you, and delta may provide a slight edge.
It may help you to understand, by considering many of the possibilities of your trade (once you have entered the position).
1) Price remains fixed (what will you do, what should you do.)
2) Price moves up slowly (what will you do, what should you do).
3) Price moves up quickly. ...
4) Price moves down slowly ...
5) Price moves down quickly ...
6) Price does combinations of the above ...
This may help to determine what questions are most important for the trade.
Regards,
My ramblings: take with a grain of salt.
I would advise caution in seeking answers to non-specific questions such as this, especially on this forum.
IMHO: The more I learn, the more I realize I did not know. Once I learn and understand enough to ask the correct question, it typically is a mute point, since then, the answer is either obvious, or fairly easily attainable. Forming the proper questions become the difficult part (for me).
There is insufficient detail in your question to understand what your objective is. There is no magic in the greeks, but they can be use to understand your position's sensitivity to other factors to aid in understanding and controlling your position risks.
Ask yourself why you want to buy a ATM or OTM put that expires next week, and what is your plan if your expectations pan out, and what is your plan if/when you discover the trade will not be profitable! Assuming you expect the underlying to accelerate a downward move, then you have price movement (delta) and volatility (vega) in your favor. If the downward move is not accelerating or may cease, then volatility (vega) may be against you, and delta may provide a slight edge.
It may help you to understand, by considering many of the possibilities of your trade (once you have entered the position).
1) Price remains fixed (what will you do, what should you do.)
2) Price moves up slowly (what will you do, what should you do).
3) Price moves up quickly. ...
4) Price moves down slowly ...
5) Price moves down quickly ...
6) Price does combinations of the above ...
This may help to determine what questions are most important for the trade.
Regards,