Options Mentoring

[wayneL]

In light of current events and my level of experience the bull put spread appears to be the preferred strategy out of the two.

I am trying to get my head around what it is to be long/short Greeks.

Using Wayne's example “The naked put is long theta and short vega gamma all the time” I interpret this as an increase in theta and decrease in vega gamma as advantageous to the position, if the position is a bought put would you say that you are short theta and long vega gamma ? , as the opposite is true.

Therefore does being long Greeks mean a positive move in the particular Greek advantageous to the total position and being short Greeks mean a negative move in the particular Greek advantageous to the total position.

Please steer me in the right direction if this is not correct.

Thanks Guys,

Cutz.

Not necessarily. Long and short mean slightly different thing when we talk about greeks.

Substitute long for + and short for - and that should help you understand the context.

Therefore long gamma is +gamma (or positive gamma). We don't necessarily benefit from an increase in gamma, but we benefit from being positive gamma.

Same with theta. Id we're -theta (short) it's working against us, but a decrease in theta might not necessarily be in our favour (e.g. we might have just had a volatility crush).

Vega is a bit different again, if you're long vega and increase will probably be most welcome.

(and visa versa on each example of course)

That should have totally confused you.

 

[mazzatelli1000]

That should have totally confused you.

Cutz, it would be better to understand what each Greek is trying to convey in terms of risk for each position.

Fire up Hoadleys or something similar and observe those 3D Greeks.
Then tamper with the parameters and observe the changes.

Should mess your mind up even more

 

[wayneL]

Cutz, it would be better to understand what each Greek is trying to convey in terms of risk for each position.

Fire up Hoadleys or something similar and observe those 3D Greeks.
Then tamper with the parameters and observe the changes.

Should mess your mind up even more

Indeed

...and agreed.

 

[cutz]

Thanks Wayne,

Substituting Short with –, and Long with + has cleared it up.

Do you guys use the full version of Hoadleys Strategy Tool; I notice it’s been mentioned several times on this site.

Regarding index options, I currently dabble in XJO index options, but I was curious to know whether there are many differences in the dynamics between XJO and SPI options, ( apart from contract specs. of course).
I assumed there would have been higher turnover in the SPI options but looking at the SFE website depth page quotes are far and few between.


Cutz.

 

[wayneL]

I use the full version because I look at position greeks and do a lot of delta hedging, which you can't do with the free version (without a lot of number crunching)

 

[cutz]

Hi,

I have been playing around with the Hoadleys Strategy Tool but I am having a little bit of trouble with the Greeks, I will start with delta which is easiest to understand.

Using a BHP sep08 42.00 short call by 4 contracts @ $0.915 set up today, (example only), delta is 0.31. Reading the payoff diagram along the right edge, position delta reads -1300 at $38.8 (approx today’s closing price), does this mean the position will lose $1300 for every $1 increase in underlying ? Also what does (ESP) stand for on the position delta axis?

Position theta makes sense, it peaks ATM,

Position vega also seems to make sense peaking out ATM ($200 loss per 1% increase in underlying volatility.)

Position gamma peaks out ATM which reads off at -300 on the position axis, I can’t seem to get my head around this one, as the theoretical price calculator on my brokers site shows gamma 0.001.

Sorry guys,
I realize time has already been spent on Greeks, just trying to tie it in with the Strategy Tool.

Last of all, does the full version of Hoadleys Strategy Tool download prices and historical underlying volatility off free sites or does it require a data vendor for the volatility.

Cutz.

 

[elbee]

Cutz,

Yes the position described will at the moment lose about $1300 for a $1 increase in the underlying - delta of about .31 x postion size of 4 X 1000 unit size.

ESP is equivalent share position - ie. the option position is the equivalent (at the moment) of holding approx. 1300 shares.

The Hoadley tool can download option chains from free providers (including ASX delayed) and historical underlying prices for volatility calculations from Yahoo.

 

[cutz]

Hi Guys,

RE post #166.

It has finally clicked, looking at the chart, position delta reads -1300 at $38.8, and position gamma reads approx -280 therefore if underlying stock moves to $39.8 new position delta will -1300+ -280 = -1580.

Could someone please explain the thin blue curved line on the chart, my brain has locked up again.

Thanks,

Cutz.

 

[elbee]

If you mean the Hoadley Strategy Payoff chart then the thin blue line is the Profit or loss at the current time. The thicker darker blue line is the profit or loss at expiration.

Press the "cycle time to expiry" button at the top right of the sheet to see how these converge over time.

 

[cutz]

If you mean the Hoadley Strategy Payoff chart then the thin blue line is the Profit or loss at the current time.

Of course,

Thanks elbee.

Finally all pieces on the trial version have gelled, now to move onto the full version.

Cutz .

 

[cutz]

Hi Guys,

On the subject of Greeks, I have come to the realization that maybe I have been neglecting this area, for instance my main strategy has been short calls and short puts several strikes OTM near expiry on several stocks that I am familiar with, I will try to set up those trades around areas of support/resistance but my only consideration so far has been delta and to a certain extent theta, which give me an indication on the likelihood of exercise on stocks I have held for a long term which I want to avoid.

I have started shorting index options but I normally back these up with further OTM bought positions.

My question is how long do you guys spends analyzing Greeks before putting on a trade, is it just as critical with the simple trades I have described or are the Greeks more relevant for complex strategies.

Cutz.

 

[wayneL]

Hi Guys,

On the subject of Greeks, I have come to the realization that maybe I have been neglecting this area, for instance my main strategy has been short calls and short puts several strikes OTM near expiry on several stocks that I am familiar with, I will try to set up those trades around areas of support/resistance but my only consideration so far has been delta and to a certain extent theta, which give me an indication on the likelihood of exercise on stocks I have held for a long term which I want to avoid.

I have started shorting index options but I normally back these up with further OTM bought positions.

My question is how long do you guys spends analyzing Greeks before putting on a trade, is it just as critical with the simple trades I have described or are the Greeks more relevant for complex strategies, and what else should I be looking at for the strategies I have described ?

Cutz.

I a lot of delta neutral trades over the index (SP500) and some long gamma scalping on stocks when the planet are in line.

To me the greeks are paramount, particularly gamma and vega.

For instance if I sell an iron condor over the index, I want to know how much gamma and vega can hurt me. If IV is low, strikes will be closer, gamma will be higher and I am at significant vega risk if the index starts ploughing lower.

I like to delta hedge very frequently, and how I do that will be decided by the greeks and my volatility forecast. Also I want to hedge that vega, because that will hurt if IV takes off. I might do this by superimposing calendar spreads over the top of the condor, or I might use double diagonals instead.

And there is a big tip in that - Know how volatility changes are going to affect the greeks.

At times I might want to start adding delta and take a directional bias to some degree.

In other words, rarely will I have an off the shelf strategy in place.

It's a bit hard to consider everything when you're fairly new, but it is definitely the way folks should be thinking.

 

[mazzatelli1000]

My question is how long do you guys spends analyzing Greeks before putting on a trade, is it just as critical with the simple trades I have described or are the Greeks more relevant for complex strategies.
Cutz.

How long analysing?
As long as you feel comfortable you understand the risks you are exposing yourself to.

Is it critical only for complex strategies
It is just as critical for these "simple" trades as it develops analytical skills and these simple trades are often building blocks for "complex strategies".

When I first began trading options, I spent time analysing how the Greeks worked for each particular off the shelf strategy e.g. credit spreads, butterflies, DD, IC, but after a while you will just know that for instance Condors are negative gamma, long theta and short vega.

After this stage of focusing on individual trades - I found myself with a portfolio of trades e.g. Condors overlapped with Calendars and which sometimes included stocks and futures as well. I started to contradict myself about what was making money and what was not, and what "net" risks I was exposing myself to.

So analysing the Greeks on a portfolio basis and being able to quantify the amount of delta (for delta hedging), will help.

So basically, you CANT SKIP THE GREEKS...

I am a mean bast**d for suggesting this, but you should also learn how to dissect positions - which is covered by an author by the name of Charles Cottle.

This will keep you thoroughly confused for months to come

 

[cutz]

Hi guys, thanks for your inputs on Greeks.

Quick question on volatility,

Entering historic volatility into the modeling tool along with the contract specs gives us a theoretical value on the contract, entering last trade price in price override and hitting calculate implied volatility gives us implied volatility, obviously traders are bidding contract prices up or down which in turn drives imp vol depending whether they are feeling bearish/bullish on underling.

But from what I have been reading option prices are valued based on future imp vol therefore the above calculation is done in reverse, implied volatility first then theoretical value calculation is made, so if theoretical price does not match up with market prices the trade is not done.

Is this how you guys come up with an option value and how would you come up with future volatility, is a judgment call made using charted imp vol history? If this is the case what sort of software do you guys find useful to track the Aussie imp vol?

Cutz.

 

[mazzatelli1000]

Is this how you guys come up with an option value and how would you come up with future volatility, is a judgment call made using charted imp vol history? If this is the case what sort of software do you guys find useful to track the Aussie imp vol?

Cutz.

Firstly cutz - i recommend you trawl through these forums as many of these questions have come up and been discussed at length!!

Option Value - pretty much - Black Scholes model has all its variables you need to input to spit out an option value.

Implied volatility which looks forward, is extracted from theoretical price by rearrnaging the Black Scholes formula.

It is very subjective IV. Yes you can look at past IV and find a period which closely correlates to current conditions now to try and forecast volatility movements.

You can also watch how HV and IV move in relation to each other to try and forecast IV and the magnitude of movement.

You can also watch how IV and HV reacts to stock price to make assessments again. As WayneL alluded to before, often stocks and indices, when they start ploughing lower, IV tends to increase but not always and not for every stock/index/ETF.

Also be aware that volatility (HV or IV) in the long run tends to mean revert.

With regards to Aussie IV, i dont trade Aussie options so can't help a great deal.

There is www.ivolatility.com.au - heard good things

Also premiumdata.net has IV as an indicator option which can be imported into AmiBroker and MetaStock programs to make the appropriate analysis.

But that is all i know.
This has come up in other threads if i recall correctly, look for posts by sails.

Cheers

 

[fimmwolf]

There is www.ivolatility.com.au - heard good things

Just wondering, should this URL be: http://www.impliedvolatility.com.au/

 

[mazzatelli1000]

Just wondering, should this URL be: http://www.impliedvolatility.com.au/

Yeah, i shouldn't be so lazy with my posts.
Apologies people

 

[cutz]

Hi All,

I have a synthetic long on at the moment, the underlying stock is going ex div. tomorrow, the long call leg of the position is in the money with only intrinsic value in its price, will I expect to see a drop in the value of the call by the amount of the dividend tomorrow ? Or has the dividend loss already been priced into the call, I didn’t expect to be holding a position through it ex div. I overlooked that aspect when I put on the trade.(another lesson learnt)

Thanks,

Cutz

 

[elbee]

The option price will already have the dividend factored in.

 

[cutz]

Thanks for the reply elbee,

So the following should happen, stock price should drop, call should remain stable therefore losing some intrinsic value and picking up some time value,

I guess a couple of clues should have pointed me to the fact that the underlying was going ex div, the fact that an ATM call was trading with intrinsic value only with a month remaining, I thought that was quite strange,but didn't look into why.

When I set up the position a couple of weeks ago I punched the figures into Hoadley’s, the short put leg was showing an IV of 85% and the long call was showing an IV of 37%, I was quite chuffed at this thinking I scored the call on the cheap but looking back it was trying to tell me something else, (i.e. ex div shortly)

cutz.