|
Welcome to Part 8 of my series on the Greeks. In the previous 7 articles we covered all four Greeks in considerable detail. Now it’s time to piece them altogether. In this article we will look at the concept of choosing which Greeks you want to be the dominant ones in your trade and which values, be it positive or negative, you may like to give each Greek.
Why would we want to choose these attributes ourselves? The Greeks tell us how a trade is going to behave in the areas of directional movement of the underlying stock, time decay and so on. When we take a certain view on direction and volatility levels it’s important that the Greeks match up with our view.
Let’s first go through some of the Greek language. Occasionally option traders use the terms ‘short’ and ‘long’ to imply negative or positive. For example if you have negative Gamma, the trader may say “I’m short Gamma”, or for positive Vega, the trader may say “I am long Vega”. With Delta and Theta, traders tend to just use the terms ‘positive’ and ‘negative’. For example, “I’m Delta positive”, or “I’m Theta negative”. The term neutral, for example in “Delta Neutral”, means that the value of the Greek just has to be as close to “0” as possible. In reality it will be almost impossible to get it exactly at zero so it will probably be a little positive or negative, though very close to zero.
When constructing a trade, we take a view on 3 areas – Direction, Volatility (IV), and Time. Some example views are:
-
“I’m bullish, volatility is high and may come down, and I think the move will happen within the next 3 months”
-
“I’m not bullish particularly, it will either go sideways or up, just not down. Volatility is low, and I think the move will happen within the next 30 days”
-
“I’m not directional at all, I don’t mind if it goes up or down, I just know it won’t be going sideways. Volatility is low and will probably go up, and my time frame is 2 months”
Each view here requires the Greeks to be a certain way in order for the trade to have the potential to make money if your view is correct. Here’s what the Greeks should look like for the above scenarios:
-
+ Delta, + Gamma, – Vega, – Theta.
-
+ Delta, – Gamma, + Vega, + Theta
-
Delta Neutral, + Gamma, + Vega, - Theta
These examples should help you check that their Greeks match up with your view. The Optionetics Interactive Computer Trading (ICT) class and Masters ICT class focuses heavily on the Greeks and teaches the trader how to manage them and construct them. Part 9 of my article series will delve into this a little more.
Manage your Greeks!
Matt Baker
|