Negative Theta Options over Weekend

[MasterAtWork]

Hi guys,

Please, stop it.

I don't want to be part of this. There is no place in this thread for that.
Everybody got big balls and so what ?
This thread was friendly and respectfully, please keep it on.

Cheers

Maw

 

[newguy05]

Quote from optioncoach:

In other words, one put has a delta of -.15 and one of your calls has a delta of .20. If you are long both of them for sake of this discussion then your portfolio of these two options has a delta of .05. If you are trading SPY options then you have a better sense of the bias of your portfolio and the risks as they change over time looking at this delta and gamma, not to mention vega/IV risks.

optioncoach,

I am curious how you pros think of the greeks. For example, below is the IB risk navigator. Using the es mini atm short straddle as an example.

<table border=1><tr><th></th><th>Pos</th><th>Price</th><th>Delta</th><th>Gamma</th><th>Vega</th><th>Theta</th></tr><tr><td>1250C</td><td>-10x</td><td>19.5pt</td><td>-$259</td><td>-$4</td><td>-$417</td><td>$529</td></tr><tr><td>1250P</td><td>-10x</td><td>20.7pt</td><td>$242</td><td>-$4</td><td>-$417</td><td>$504</td></tr><tr><td>NET</td><td>-20x</td><td>40.2pt</td><td>-$19</td><td>-$8</td><td>-$833</td><td>$1033</td></tr></table>

So basically it's close to delta neutral, and saying if:
1) 1pt increase on the underlying the straddle loses $19
2) 1% increase in iv, it losses $833
3) 1day passes, it gains $1033

Assuming without knowing this is a short straddle, the bias on the underlying based on just the greeks should expect low(er) volatility and playing on theta decay. Now my question, do you think like this in dollar values or more in term of the raw greeks. Ie:

The short straddle has a -0.03 delta, 2.08 theta, etc..

I dont know why IB risk navigator decide to mix your positions, dollar, and raw greeks all into 1. I find it much easier to visualize just using pure raw greek #s. Is that how most option traders do it, or do they also think mostly in term of real $ values when looking at the greeks.

Thanks

 

[riskfreetrading]

I do not trade the emini, but the deltas of your calls and puts seem to be half of what they should be (divide them by 1000 and you get a number about 0.25 instead of about 0.50). Is this projected to es full size or what? It may also be that I am sleepy now, and mis- reading what you wrote.

 

[MTE]

Quote from riskfreetrading:

I do not trade the emini, but the deltas of your calls and puts seem to be half of what they should be (divide them by 1000 and you get a number about 0.25 instead of about 0.50). Is this projected to es full size or what? It may also be that I am sleepy now, and mis- reading what you wrote.

Emini is $50 per point and that's why they appear to be halved.

 

[MasterAtWork]

Quote from riskfreetrading:

[/B]

Thanks Maw. The same here. Welcome!

PS1: Just to add that regarding the delta > 1, one may not even need to have the strike deep in the money.

One can just change variable ____ , include the positive extra carry (as you suggested), and voila.

Could the lizard fill the above ____?

PS2: Since you have interest in math, are you familiar with the property of the call price as a homogeneous function of stock and strike price. I used it recently to derive the whole pricing model in a short way. [/B][/QUOTE]

Hi RiskFreeTrading,

Sorry, I missed the post.

I read a lot of things about option pricing, but I'm not familiar "with the property of a call as a homogeneous function of stock and strike".

We are talking about vanilla products.
Since purchasing a call is a right to buy a particular asset for an agreed amount at a specified time in the future, that means the option value is a function of two variables : underlying price and time. Others factors are parameters ( hard one: strike, mild one:dividends, and soft ones :volatility rates).

If one states that strike is the only other variable, it sound as if time was a parameter. It could be pretty good to assume smile as an absolut measure that solely depends on strike.
But It's hard to imagine time as a parameter since time inevitably changes. We can't price an option without time changing. We can't price an option without spot changing (price would be obvious).
So, if you have informations about that, feel free to post few of them.

Cheers

Maw

 

[riskfreetrading]

Maw:

Taking everything else constant, I was thinking of call price as a function of stock price and strike (S,k)

C(y*S,y*k)=y*C(S,K) for every y which is positive.

Intuitively the above is correct.

You can then show that this implies that

C(S,K)=S*C_(S,.)+K*C_(.,K)

C_(S,.) is the partial derivative of call price with respect to stock price, and you can extend things to the the second term on the right side of above equation.

That is step one.

Cheers,

RFT

 

[sellindexvol66]

Quote from riskfreetrading:

Maw:

Taking everything else constant, I was thinking of call price as a function of stock price and strike (S,k)

C(y*S,y*k)=y*C(S,K) for every y which is positive.

Intuitively the above is correct.

You can then show that this implies that

C(S,K)=S*C_(S,.)+K*C_(.,K)

C_(S,.) is the partial derivative of call price with respect to stock price, and you can extend things to the the second term on the right side of above equation.

That is step one.

Cheers,

RFT

maw and rft are the same two complete morons. check their ip.

i cannot imagine what life a person must lead that drives one to waste their time doing such. truly fascinating.

pay heed.

 

[MasterAtWork]

Hi guys, Hi Sellindexvol66,


I'm here to learn too. I know that maths are not easy to deal with. It's often because it's not explained to keep it confused. That is not my way.


Thinking about a call as an homogeneous function
"C(y*S,y*k)=y*C(S,K) for every y which is positive"

means just that
-a call with a spot at 1000 and a strike at 1500 is worth 1000 times a call with a spot at 1 and a strike at 1,5
-a call with a spot at 100 and a strike at 150 is worth 100 times a call with a spot at 1 and a strike at 1,5
-a call with a spot at 10 and a strike at 15 is worth 10 times a call with a spot at 1 and a strike at 1,5

It's a scaling effect, and it's sounds obvious.

The second point of RiskFreeTrading is less obvious but since we got an Euler's Theorem that states it

http://cepa.newschool.edu/het/essays/theorem/euler.htm

Best regards

Maw

 

[MasterAtWork]

Hey Sellin' my friend

"complete moron" Thanks for that. And how would you introduce yourself ?


". check their ip." Feel free to do so.

"i cannot imagine what life a person must lead that drives one to waste their time doing such. " Well, try your best.

 

[cdowis]

Quote from newguy05:


So basically it's close to delta neutral, and saying if:
1) 1pt increase on the underlying the straddle loses $19
2) 1% increase in iv, it losses $833
3) 1day passes, it gains $1033

Assuming without knowing this is a short straddle, the bias on the underlying based on just the greeks should expect low(er) volatility and playing on theta decay. Now my question, do you think like this in dollar values or more in term of the raw greeks. Ie:

The short straddle has a -0.03 delta, 2.08 theta, etc..

I am not optioncoach, nor a full-time trader, but I'll give you my answer, FWIW.

I look at the greeks in terms of risk, not dollars. The theta gives me the profit bias based on time decay -- the market price, and volty must move so many deltas or points to overcome the theta advantage that I have.

I like a position with lots of theta, and if I can correctly predict market movement and volty, I make money. If the market makes a major move, then it will "overcome" the theta.

Finally, this position should be placed in a high volty market, one which is unlikely to increase. If you are in low volatility, the risk is very high.

I would probably look for something to balance off the vega risk, e.g. a calendar embedded in the position. It is vega positive.

Bottom line, the greeks help me to understand the risks of the position, and how I make profit. Negative vega, for example, tells me that I should place it in high volty environment, positive delta tells me to place it where it is near the bottom of a move, etc.