Options Lambda / Leverage info?

[ironchef]

I am looking for some more information about Options Lambda or leverage. It would be interesting to see how leverage changes in options as they move further away from the strike as well as its relationship to the other greeks. Does anyone have any detailed resources? Books showing models? etc...

Not really a lot of info out there as It is considered a minor greek...I found this PDF article which isn't bad (although he misspelled Nick Leeson's name lol).

If you are a fellow retail, this is dangerous thinking, margin on options is leverage on leverage. Quite often it can lead to a very risky situation. It may be better to think of using options to juice your portfolio, like @Handle123 said a while ago.

If you are a pro, it is a different story. You know what you are doing and you trade OPM. My opinion does not apply.

 

[Spaghetti Code]

If you want to add options to your portfolio (QQQ), why do you want to limit gamma to 0 when going long (TQQQ)? I want gamma to be my best weapon instead of neutralizing it?

To be clear: I was trying to construct a portfolio of options that had the same return as TQQQ. The reason the gamma is zero is to match TQQQ maintaining a constant leverage ratio.

 

[ironchef]

To be clear: I was trying to construct a portfolio of options that had the same return as TQQQ. The reason the gamma is zero is to match TQQQ maintaining a constant leverage ratio.

Sorry I missed your point. In that case just make sure the commission + slippages is less than TQQQ expense ratio.

 

[zghorner]

If you are a fellow retail, this is dangerous thinking, margin on options is leverage on leverage. Quite often it can lead to a very risky situation. It may be better to think of using options to juice your portfolio, like @Handle123 said a while ago.

If you are a pro, it is a different story. You know what you are doing and you trade OPM. My opinion does not apply.

I think you have misunderstood my post. I’m not talking about using margin to provide further leverage. I’m talking about the option contract’s lambda, or inherit/built in leverage. Lambda = (Delta x underlying $ / premium $).

Options tend to provide around 5-15x leverage depending mainly on moneyness. I am wanting to learn more about lambda’s change as the underlying price changes. I’m sure Delta->gamma->speed can tell me more than I need to know but I am just curious about lambda specifically.

 

[Spaghetti Code]

I think you have misunderstood my post. I’m not talking about using margin to provide further leverage. I’m talking about the option contract’s lambda, or inherit/built in leverage. Lambda = (Delta x underlying $ / premium $).

Options tend to provide around 5-15x leverage depending mainly on moneyness. I am wanting to learn more about lambda’s change as the underlying price changes. I’m sure Delta->gamma->speed can tell me more than I need to know but I am just curious about lambda specifically.

One other thought here: I tried backtesting some LEAPS strategies based on their leverage ratio rather than their delta. Both measures ended up with a lot of failed portfolios, because delta and lambda get crazy as the option approaches expiration. For example, I tried backtesting buying leaps with a lambda of between 3 and 4, and selling when it went below 2 (I won), or above 6 (I lost). To avoid volatility drag, I only traded once every 2 weeks. This strategy performed pretty bad, because near expiration, a lambda of 6 is terrible, and will result in ruin. However, for options with 2-3 years left, 6 is actually great, because the underlying went up on average. My finding was that lambda was only relevant for entering the position, but the remaining time was more relevant for exiting the position.

 

[zghorner]

One other thought here: I tried backtesting some LEAPS strategies based on their leverage ratio rather than their delta. Both measures ended up with a lot of failed portfolios, because delta and lambda get crazy as the option approaches expiration. For example, I tried backtesting buying leaps with a lambda of between 3 and 4, and selling when it went below 2 (I won), or above 6 (I lost). To avoid volatility drag, I only traded once every 2 weeks. This strategy performed pretty bad, because near expiration, a lambda of 6 is terrible, and will result in ruin. However, for options with 2-3 years left, 6 is actually great, because the underlying went up on average. My finding was that lambda was only relevant for entering the position, but the remaining time was more relevant for exiting the position.

This is the kind of info I crave, thanks for the reply.

 

[ironchef]

I think you have misunderstood my post. I’m not talking about using margin to provide further leverage. I’m talking about the option contract’s lambda, or inherit/built in leverage. Lambda = (Delta x underlying $ / premium $).

Options tend to provide around 5-15x leverage depending mainly on moneyness. I am wanting to learn more about lambda’s change as the underlying price changes. I’m sure Delta->gamma->speed can tell me more than I need to know but I am just curious about lambda specifically.

My apology. I take it back, you can ignore my post.

 

[zghorner]

My apology. I take it back, you can ignore my post.

No worries man. Maybe one day I’ll have the nuts to gear up some directional options trades lol...it’s probably best that I don’t as of current.

 

[ironchef]

No worries man. Maybe one day I’ll have the nuts to gear up some directional options trades lol...it’s probably best that I don’t as of current.

I am used to losing.

Trading is a probability game, often a statistically significant number of trades are necessary to validate a profitable system, or to prove that it is not.