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Welcome to Part 12 of my series on the Greeks. In this article and the one following we are going to focus again on choosing your Greeks but this time on the level of the whole portfolio, rather than just in individual trades. We started to look at this topic in Part 8 where we learnt how to select the Greek signs you want for individual trades. I would strongly suggest you go back to Part 8 first and review what I discussed there. Here is the link: http://www.optionetics.com/market/articles/20193
The first step in assessing the overall Greeks in your portfolio is to be able to see the Greeks of all your trades and the totals. Optionetics Platinum has this feature in the “Profit/Loss” page. Under Profit Tools, click Profit/Loss and at the top of the page checkmark the box “Show Greeks” and then click Go.
The first issue to address is that sometimes overall Portfolio Greeks can be deceiving. For example let’s make the statement that when the market goes up, gold goes down. Of course this is not always the case, but a lot of the time this can happen. Let’s say that our two trades, to trade the overall market and gold, were positions in the SPY (S&P500) and GLD (Street tracks Gold ETF).
In the example let’s say very simply that we had one Long Call on each, and each Call had a Delta of 50.
| SPY |
Delta |
50 |
| GLD |
Delta |
50 |
|
Total Delta: |
100 |
It would be easy to look at the overall Greeks here and say we have 100 Deltas. Most of the time the trader might analyse their Portfolio here and conclude that if the market went up, we’d make $100 per point, or if the market went down, we’d lose $100 per point. But this is not necessarily the case. If the overall market (SPY) went up, we would expect Gold (GLD) to go down and vice versa too! So in theory we are actually Delta Neutral here, that is if Gold and the overall market hold their normal correlations. But I’m sure we see the message here – we have to look at the different sectors we are trading and understand how they correlate with each other in order to truly analyse our Portfolio in respect to the Greeks.
Another situation where the Portfolio Greeks can be deceiving is viewing them at different points in the expiration month. If we had 2 Theta positive trades open, for example one Calendar Spread and one short Put spread, and we were 30 days from expiration, we may not have a lot of positive Theta yet in relation to the risk taken, meaning it may not look like we have enough time decay in our favour. It could be tempting to load up more contracts and take more risk in order to get more positive Theta, but if we looked at the portfolio again with 15 days to expiration, Theta would look a whole lot different - a lot larger ! So it’s important to consider where we are in the expiration month, and know in advance how each Greek is going to change throughout the life of the trade.
Part 13 will continue with DPGM - Dynamic Portfolio Greek Management, now that we have been introduced to some areas to take into consideration.
Manage your Portfolio Greeks!
Matt Baker
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