Options Education - Got a Website / Book / PDF You Like? Post It Up

[Windlesham1]

It really depends on what you're trying to do.
If all you trade is front month verticals, i.e. you're using options spreads as a way to trade delta I more or less agree.

However, it ends right there. All other combinations and especially the market neutral ones are really subject to changes in the price of optionality which basically is IV.
On top of that, IV changes your delta profile, meaning that if you for example buy a +gamma call spread and IV goes down, your delta goes up which increases your risk. As soon as the market trades towards your short strike and IV increases, your delta decreases.

The more you go out in time, the more prominent these IV changes will be.
So absolutely do not discard these variables as meaningless, because they have a huge influence on your performance

I totally 'get it' but the practicality of trading means placing the trade before you can know the Greeks, due to spreads. -Would you for example, by calculation, choose to trade iron condors in today's S&P?

 

[MrMuppet]

I would not trade iron condors at all. I buy cheap options, sell expensive ones and try to be as neutral as possible. In order to do that, you need to know the greeks before you push the button.

I would not even know how to assess a potential trade without knowing how an option behaves because the P/L always depends on the cost of the hedge.

The beauty of options is the fact that an individual option is very illiquid and very rarely traded opposed to the underlying. But the market for greeks is extremely liquid. Which means you can always find a cheap hedge somehow but you have to know how much you need.

Greeks describe your exposure so they're the only way to figure out the quantities for a hedge

 

[.sigma]

I would not trade iron condors at all. I buy cheap options, sell expensive ones and try to be as neutral as possible.

DEEDLE-DEEDLE QUEEP

 

[.sigma]

passarelli’s book was a great read. One of the better books on optionality out there!

 

[ironchef]

im not going to mention conventional books, I’m going to try and offer the less talked about. I’m going to save the real gems for later, for now here’s a few goodies.

I suggest you guys google “squeeze metrics” and read all of his publishing’s. Fascinating papers. As well as Ayache. Both have unique perspectives on optionality.

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If I only have time to read one book and I want to be a butterfly trader, which book should I read?

I have already read McMillan and Hull.

Thank you sir in advance.

 

[ironchef]

I buy cheap options, sell expensive ones and try to be as neutral as possible. In order to do that, you need to know the greeks before you push the button.

Question: How do you decide if they are cheap or expensive from the greeks?

 

[.sigma]

If I only have time to read one book and I want to be a butterfly trader, which book should I read?

I have already read McMillan and Hull.

Thank you sir in advance.

im actually collecting an epistolary of random butterfly quotes from books, articles, posts, material pertaining to flies, it’s extensive.. a probably the best overall “book” about flies. But I’m not done, maybe when I am I’ll send you a copy.

also, what’s a butterfly trader? Do you mean a trader who uses butterflies?

Unfortunately there’s no single book that covers strictly flies, except one. Which is “The Bullshit Free Guide To Trading Butterflies” by Gavin McMaster. This author has published numerous books with the same type of title (not a fan of the title) on different topics.

it’s a pretty good “book” but it’s pretty vague. Although it goes a bit deeper than most option books that usually explain a spread for 4 pages then move on. The book I mentioned earlier Passerli’s has a section on flies which is pretty good. I’ll add more later

 

[MrMuppet]

Question: How do you decide if they are cheap or expensive from the greeks?

You don't. But let's say you sold an option with 50% IV which has 0.4 delta and 0.03 gamma and 10 vega. Somehow you need to hedge it with another option to stay neutral.

You look at the options chain and see an option that is 40% IV, has 0.1 delta 0.01 gamma and 3 vega. If you buy 3 of it, your portfolio has 0 gamma, -0.1 delta and 1 vega.

Greeks don't provide an edge. Greeks will show you how much the option price varies under the influence of time, spot price and volatility. This information helps you to put together a portfolio that satisfies your risk parameters.

And that's it.

 

[ironchef]

You don't. But let's say you sold an option with 50% IV which has 0.4 delta and 0.03 gamma and 10 vega. Somehow you need to hedge it with another option to stay neutral.

You look at the options chain and see an option that is 40% IV, has 0.1 delta 0.01 gamma and 3 vega. If you buy 3 of it, your portfolio has 0 gamma, -0.1 delta and 1 vega.

Greeks don't provide an edge. Greeks will show you how much the option price varies under the influence of time, spot price and volatility. This information helps you to put together a portfolio that satisfies your risk parameters.

And that's it.

I see. Appreciate your answer, it gives me something to work on.

Thanks.

 

[cesfx]

You don't. But let's say you sold an option with 50% IV which has 0.4 delta and 0.03 gamma and 10 vega. Somehow you need to hedge it with another option to stay neutral.

You look at the options chain and see an option that is 40% IV, has 0.1 delta 0.01 gamma and 3 vega. If you buy 3 of it, your portfolio has 0 gamma, -0.1 delta and 1 vega.

Greeks don't provide an edge. Greeks will show you how much the option price varies under the influence of time, spot price and volatility. This information helps you to put together a portfolio that satisfies your risk parameters.

And that's it.

Thanks Mr, I also appreciate your clear contribution. It's getting me to think. I will the read Passarelli book.
I have a question on maintaining neutrality in practice.
If I sell premium and want to stay as neutral as possible, what would be a valid method of adjustment? An X deviation of delta or gamma to be adjusted with shares or option depending on what's needed, or a time (daily, weekly, monthly) adjustment toward neutral? Or both?