It's All GREEK To Me....

Cactiman. That is how I've been doing it. Took an Investools weekend seminar with 5 months free use of their green arrow website analysis. However, right after that I had an old trader tell me to learn the basics the old fashioned way instead of relying on green arrows. That is what I did using Yahoo and other sites to research stocks and the tools included with my brokersxpress chicago account. I haven't even logged in to that investools site and my freebie is up this month. I will probably drop it till I take my quarter mil 401K off the cash/money market securities sidelines and begin trading stocks in it. Don't think the rules lets me do options in it.

Haven't learned the greeks yet but thanks to Quickless I have an idea on the basics and I will start logging delta and theta with my options trades on my little ira account to see if I can understand it.

Delta makes me wonder though, is it constant so it has some predictive value or does it move around in a reactive manner as the days and underlying changes? It just seems like that if it moves around because of outside factors, then I couldn't predict from it. For example, right now the SPX 1255 put has delta of -.49 and theta of -1.39 and the 1200 put has delta of -.10 and theta of -.81 and I'm not sure what these are telling me yet. The IV's are different as well.
 
Here's a typical "Stock Surrogate" Bullish Trade for me:

1. DPZ: a "lower left to upper right" rapidly trending stock (up 700% in 3 years!) with good fundamentals (IBD Composite Rating of 93).

2. How far it can move by January 20th (7 weeks) based on its past behavior? I see plenty of multi-point moves over that much time on the chart.

3. I wait for a Bull Flag/Pull Back/Dip to get a better price, and set up a Bull Put or Bull Call Vertical Spread. In this case a JAN 12 34/33 Bull Put Spread, at a limit price of .41, when DPZ was at 33.59.

4. So the Bet is: DPZ Closes at 34.00 or Higher on 01/20/12.

5. If it does that, I'll net a gain of 64.41% on the trade.

6. Risk Control: If the loss on the Spread Contract hits -2% of my total equity, I exit the trade.

Would the "Greeks" help me with this kind of trading? Am I using them already without even knowing it? Not sure.
 

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With basic vanilla option strategies like a vertical spread, the Greeks aren't essential or for that matter, even necessary. You set your price alerts and barring a gap, adjust or close if it gets there.

But suppose you had a number of different option positions in XYZ, long and short and wanted to know what you exposure was to price change. Would it be easier to model each leg/position or just look at an aggregate number for all of them? Time wasted can be money lost when the market is moving.
 
At the very least keep an eye on IV/HV. At least you'll know if the options are expensive or not.

This has helped immensely trading options on the greatest underlying ever, the beast BIDU.

Knowing the Greeks isn't the holy grail but at least you would have a clue.
 
Quote from billsafari:

At the very least keep an eye on IV/HV. At least you'll know if the options are expensive or not.

This has helped immensely trading options on the greatest underlying ever, the beast BIDU.

Knowing the Greeks isn't the holy grail but at least you would have a clue.
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Billsafari,

I imagine IV/HV are a numerical value for:

"lower left to upper right rapidly trending stock (up 700% in 3 years!)..."
"How far it can move by January 20th (7 weeks) based on its past behavior?"

But I'll check IV/HV out.

Thanks.

cactiman
 
Quote from spindr0:

But suppose you had a number of different option positions in XYZ, long and short and wanted to know what you exposure was to price change. Would it be easier to model each leg/position or just look at an aggregate number for all of them? Time wasted can be money lost when the market is moving. [/B]
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Spindr0,

Good point. Though doing non-vanilla/multi-trades like that might give me a nervous breakdown!

Thanks,

cactiman
 
Quote from cactiman:

Billsafari,

I imagine IV/HV are a numerical value for:

"lower left to upper right rapidly trending stock (up 700% in 3 years!)..."
"How far it can move by January 20th (7 weeks) based on its past behavior?"

But I'll check IV/HV out.

Thanks.

cactiman
More...

In it's basic form. For example, if HV is 46 and IV is 87 this should let you know the options are expensive. So if you are trading a event (like earnings) it is more than likely after the event there will be a volatility collapse (IV comes down) which can offset any gains you may have had in favorable movement. Ever hear " the stock went in my direction but my options are down, wtf". A recent example I believe was GMCR, or it was CRM.

And likewise if HV is 46 and IV is 37 then one could surmise that the options are cheap on a relative basis. Now you got your option on the cheap and direction goes your way and voltility increases giving your position a little extra umfff.

Since volality is a component of option pricing it is certainly something to look into.

Think of it as a range, When I traded BIDU . I believe the HV was 46. I've seen IV up around 80 plus. Expensive. Some will start selling the options and collecting a nice premium. I've seen it around 35. I like it down here. Expecially long a put. So I buy my BIDU put on the cheap. Bidu starts selling off, I make money on the direction, now IV is at 50, giving the option premium a nice little kick.

Again, these are examples but I'm sure you get the jist of it.
 
Quote from billsafari:

In it's basic form. For example, if HV is 46 and IV is 87 this should let you know the options are expensive. So if you are trading a event (like earnings) it is more than likely after the event there will be a volatility collapse (IV comes down) which can offset any gains you may have had in favorable movement. Ever hear " the stock went in my direction but my options are down, wtf". A recent example I believe was GMCR, or it was CRM.

And likewise if HV is 46 and IV is 37 then one could surmise that the options are cheap on a relative basis. Now you got your option on the cheap and direction goes your way and voltility increases giving your position a little extra umfff.

Since volality is a component of option pricing it is certainly something to look into.

Think of it as a range, When I traded BIDU . I believe the HV was 46. I've seen IV up around 80 plus. Expensive. Some will start selling the options and collecting a nice premium. I've seen it around 35. I like it down here. Expecially long a put. So I buy my BIDU put on the cheap. Bidu starts selling off, I make money on the direction, now IV is at 50, giving the option premium a nice little kick.

Again, these are examples but I'm sure you get the jist of it.
More...


billsafari,

Very cool info. Thanks.

cactiman
 
Quote from billsafari:

In it's basic form. For example, if HV is 46 and IV is 87 this should let you know the options are expensive.
More...

Not necessarily. HV and IV are different animals. Measured differently. Some traders might have ways of comparison, but I doubt that they use the values that simplistically.

Comparing current IV to historical IV levels is sometimes used to determine whether options are cheap or expensive.
 
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