Searching for TOP mentoring program in options
- Thread starter temtbv
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1. Yes I was talking about sensitivity on absolute terms. The percentage distort the overall picture a bit. I agree that the OTM example you gave moves 50% versus the ITM move of 7% but looking at the bigger picture the ITM has greater sensitivity viz a viz delta/gamma relationship to the underlying which is the main point. Your example shows the option moving $0.05 but with the bid/ask spread it will most likely not move at all as far as ability to close for profit. Remember my examples of LEAPS v. Stocks how the % loss on the portfolios distort the picture of both portfolios losing the same amount of money, just one requires less initial capital. So I do not disagree with you but in general terms the main point is for us all to understand sensitivity in general in relation to strike price.
2. In saying great if you are long deltas, shitty if you are short deltas, you can swap delta for gamma here in general. If you are short OTM puts you are short deltas and short gammas and being short gammas on a down move is not great.
I am sorry but for a newbie, I am confused at this point (going flat? short puts gamma?, etc). Would it be possible to use actual trades and I will just follow along and ask questions? I am lost at this time unable to bridge the materials discussed with actual trades and feel like I am just reading, at the same time unable to fully understand what I am reading since there are no actual example of trades to associate the materials with.
??? Short puts give you long deltas. Short gamma, yes, but gammas are not why you'll lose money on a down move in this example.
Ok I don't want to interfere in this discussion, just trying to prevent misconceptions.
There's nothing wrong with negative gamma. Especially if you play for income, as it goes hand in hand with positive theta. Gamma hardly "kills." It is a greek to be managed, just like delta, theta, and vega should be. Lke the others, the more you understand it, the better you'll be able to manage your risk. If risk management is job number 1, understanding greeks is job number 0.
As for your metaphor, I like to think that if delta is your speedometer, gamma is the gas pedal - or the brakes
Or a rising hill, or going downhill. Or some onboard (and uncontrollable) nitro, or a badly tuned engine that keeps seizing up. Or...The best way to communicate gamma imo is visually, on a graph. Positive gamma gives you a curve that rises, and as a curve does, it keeps rising faster (read - you get more profitable at a faster rate, and lose money at a declining rate). Negative gamma slopes downward, as a curve (read - your loss increases faster as you move down the curve, and the reverse for your profit). Seeing it on a risk graph is the easiest way to get it across. And again, nothing wrong with negative gamma, just something else to managed.
Hate letting this get off on a tangent but... I'm here to learn also.
I thought gamma and theta are inversely related like that - positive theta will give you negative gamma, and vice versa. It's a trade off. Not pulling this out the air, in the Natenberg book he says "If a trader has a positive (negative) gamma position, he will necessarily have a negative (positive) theta position." It's on page 363.
Could someone explain to me where that's not the case? Not trying to be snarky, but just contribute to the discussion with the background I have, plus learn and become a better trader - What's a position a retail trader could open with positive theta AND gamma? (and from the other side, perhaps more importantly, why would a floor trader willingly open a position that is both negative theta, AND negative gamma?)