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Welcome to part 15 of my series on the Greeks. Over the last several months we have gone over a lot of issues on the Greeks including their meaning, practical application, how they behave, and how to manage them on a trade level and over a whole portfolio. Where to from here?
In this week’s article I would like to take it back to the basics. First of all I would like to thank all my readers out there who have given me such encouragement in continuing the series and are enjoying them. I met a few just this week at the Melbourne MICT who have printed off all 14 parts! We’ll have a book published in no time!
With all the new knowledge the last 14 chapters on the Greeks have given us, still sometimes I look at the Greeks and see a bunch of numbers.“What am I meant to be seeing here?” I may ask myself.
I can usually work this out if I simply ask myself that question: What are they trying to tell me? You can imagine if you like, that each Greek had a little voice, shouting out to you from the risk graph. If they did, what would they be saying?
A positive Delta of 70? Well he or she might be saying “The stock must go up! I'm only going to be of any good to you if the stock goes up! If it does I’ll make you $70, but if the stock goes down I'm going to hurt you!”
It may seem silly but this was the actual approach I took in October 2008 during the crash when I was trading an Iron Condor on the Russell 2000. When the RUT was testing support I adjusted my trade, but still thought the RUT could recover as it had been in a strong sideways channel for such a long time. It broke through its support, I did another couple of adjustments, but it kept breaking through. When I asked myself my view, I was bearish, but something was wrong here. I was ‘hoping’ the Russell 2000 would recover as I'm sure many of us were, but when I asked myself my true prognosis now, I answered “bearish”. Yet why was the trade losing money?
I looked at my trade Greeks and asked myself, what is Delta trying to tell me? When Delta answered me, I thought this was ridiculous! I'm bearish, yet I still have positive Delta. Once I realised what Delta was telling me, my next adjustment move was simple. I adjusted the trade so I ended up with negative Delta, and positive Gamma. It was a beautiful thing. The RUT went on to tank and I made some serious money.
So when it comes to the Greeks it is essential that you stay on top of your basics, because sometimes the simplest thing can make all the difference in a trade.
Listen to your Greeks!
Matt Baker
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