Understanding Greeks

[vega]

Stop all the bitching. I believe the point Hello was trying to make is that the more informed you can be about the product you're trading the greater the probability of success. With the exception of NOMOREOPTIONS, I like to think that then Options Forum isn't a place to be namecalling and mocking other posters.

If you're just trading spreads on a directional basis, maybe you don't need to know more than MOST of the time the spread will increase in value as the market moves your way. However because of the greeks sometimes this may not be the case and you lose on a trade when the market goes your way. That's all.

Vega

 

[steve46]

Hi Again:
I think InandLong has some excellent points to make. It is clear that you don't have to know Greeks to trade some types of positions. However there are some that do require that background. For Crimson's benefit (you like examples, thats good) selling straddles is one where you really need to know your greeks. If you do this without having a background knowledge of how things change you may find one morning that the delta of your position changed dramatically. For more examples, just check out McMillan's "Options as a Strategic Investment" (he talkes about this using short straddles as an example). If as InandLong suggests, you are taking directional positions (selling covered calls for instance) you will be fine, because indentifying a good underlying candidate is more important. In the long run you will be fine if you take it slow and are careful to understand what your real value at risk is. Good luck to you. Steve46

 

[LoosenUp]

Quote from ktm:

I've made money over the long haul and pay no attention to the greeks whatsoever. I have a solid understanding of Delta and of volatility and the effects on pricing. Aside from that, I have yet to read anywhere what is so important about this knowledge void that I have maintained all these years.

The things I do understand about my positions:

1) Maximum exposure, now and through expiration

2) The effects of extreme volatility on the market value of my positions between now and expiry - and the margin required to maintain these positions

3) When and if hedges will be placed or positions will be offset and the anticipated prices of those contracts based on all plausible scenarios.

Aside from some other small considerations, that's the jist of it for me. I pretty much write index options, will sometimes use spreads and generally stay within 8 weeks of expiration, so maybe some of the statements made here don't apply to me.

I realize that understanding what I do probably makes me somewhat knowledgeable of the greeks without really being able to articulate that. As far as expectancies and probablities of a trade being successful, I plan on all of them going straight to hell.

May I know which index options do you write? Are the Emini index options liquid enough? And, do you sell straddles or do u prefer to have a directional bias and sell accordingly? Finally, do you do vertical credit spreads?

Thanks

 

[osho67]

Returns mentioned here 8-14% per month. Is this possible consistently or I have misunderstood something. I would master all the greeks if I can even earn 4% (48% per annum) . Please educate me. Thanks.

 

[harrytrader]

I gave up ancient greek at school ... and I gave up options greeks later . I really don't see why to masturb his head on these letters when it's easier to trade futures and consider price directly by using market's action principles, now it can be a question of preference .

Quote from CrimsonTyde:

The greeks are chinese to me! If anyone can help shed some light on the greeks and their affects on options prices and different strategies, it would be greatly appreciated.

Generally I trade OTM Credit Spreads and Iron Condors.

I'd like to trade verticals, but based on what some of you have been saying about understanding the greeks first, I thought I post this question before experimenting.

If you do respond, if you could provide an example, it would be greatly appreciated.

 

[riskarb]

Quote from CrimsonTyde:

Whether you feel its a good trade or not is of little interest to me. There's probably several hundred readers implementing such trades as we speak and we could care less whether you feel this is a good trade.

God, I hope not!

With regards to risk vs. reward, I'm only risking 4.65 if I plan on holding no to it to the end. Do we ever do that when a position starts to go against you? NO.

I think that many of us are suprised at the risk/reward you're willing to take. I cannot imagine risking 13x my expectation, but to each his own.

Your greek exposure should be understood; as well as how greek-sign can change wrt price. Also a good idea to read up on the synthetic and arbitrage relationships. It will give you an intuitive-feel for how quickly the position will bite you in the ass.

Knowledge is power ;-)


Good luck.

 

[esu2]

How about OTM naked put instead
of credit spread?

For that HUI example, just sell the 200put
and forget about the debit.

That would maximize your risk reward
by giving you a better breakeven and
credit.

You could set a buy stop order if the option
goes up 50% giving you a 2 to 1 risk reward ratio.

 

[damir00]

Quote from CrimsonTyde:

There's probably several hundred readers implementing such trades as we speak and we could care less whether you feel this is a good trade.

understanding the greeks is not important unless you'd like to know why people are willing to let you take this position on. from your posts i gather that isn't important to you. it probably won't be important to you until the day you wake up to the maximum loss without ever having been given the chance to cut the loss short. it's not a question of "if" it will happen, it's only a question of "when".

but ya know, an awful lot of us had to learn the hard way, so please don't take this post as being harsh or condeming in tone.

good luck!

 

[damir00]

Quote from ktm:

As far as expectancies and probablities of a trade being successful, I plan on all of them going straight to hell.

LOL! best description of good money mangement yet!

 

[rrisch]

Quote from Hello_Dollars:

Well, I have nothing further to say with regard to the Greeks, not because they aren't important, but rather because I've been rendered nearly speechless after reviewing your trade. Have I misunderstood you or did you actually establish a position that netted you a whopping 35 cent credit with a max loss of 4.65?!? Son, if that's in fact what you did, it seems to me there are more basic trading tomes that you should read before graduating to the Greeks.

A bit unfair. We all take on even more lopsided ratios when we go on an airplane or eat in a new restaurant. You can't just compare the best and worst results. You have to estimate the expected value of the return.