Buying and Selling Options Details

Discussion in 'Options' started by Nater, Jun 27, 2012.

  1. stoic

    stoic

    Yes the Greeks are very good at forecasting the past.

    Once again the ET participants spew out their spurious-intellectual price model jargon while failing to comprehend any substantiation that proves my point.
     
    #11     Jun 28, 2012
  2. sle

    sle

    Define hedging, to begin with.
     
    #12     Jun 28, 2012
  3. TskTsk

    TskTsk

    You've misunderstood completely. The greeks aren't meant as a forecasting tool. They're meant as a tool to understand what risks your portfolio is subject to. If you want forecasting, go buy a crystal ball.
     
    #13     Jun 28, 2012
  4. stoic

    stoic

    If they can't forecast anything,...how can they be a tool to understand risk.

    The crystal ball works just as good as the Greeks.
     
    #14     Jun 28, 2012
  5. sle

    sle

    They allow you to separate risk by various risk factors - price of the underlying, implied volatility, time etc. For a large book, they also help to understand P&L.

    If all you are doing is expressing views on stocks and are going to wait for expiration, there is no reason to ever learn or think about Greeks. All you'd need is breakeven levels. If you are trading options as convexity products, you do need to understand what contributes to your risk.
     
    #15     Jun 28, 2012
  6. TskTsk

    TskTsk

    Because forecasting is not the same as understanding risk. You're still confusing the terms.
     
    #16     Jun 28, 2012
  7. stoic

    stoic

    You stated that the Greeks are a tool to understand risk. So just how is this done?

    (From glossary on optiongrees.org)

    Delta: A option delta is the sensitivity of an option’s theoretical value to a change in the price of the underlying.

    If one calculates the Delta based on the variables at hand. And the Delta is .65, just what is one to do with this value, A 1 point move in the underlying should be 65 cents in the option. Is this not a forecast? The calculated Delta is rarely the true delta. If not a forecast then whats the point of using a complex formula to make the calculation. Just divide the option move by the move in the UL and bodda-bing bodda-boom you got the real delta.

    Gamma: The sensitivity of an option’s delta to a change in the price of the underlying entity. In other words, gamma measures the rate of change of delta in relation to the change in the price of the underlying entity. From this information you can make a more informed decision on predicting how much can be made or lost based on the movement of the underlying position.

    Since the calculated delta is rarely the true delta, what is the value in calculating the Gamma for the past or future expectations. Ex. The UL moves up 2 points, the Call falls .15 (negative delta on calls???) ET ers will tout that this is caused by a drop in IV (Duh), this seems to imply that IV is an operand in error.

    Theta: This is the sensitivity of an option’s theoretical value to a change in the amount of time to expiration.

    "Theoretical Value" being the key word here.

    Vega: Vega refers to the sensitivity of an option’s theoretical value to a change in volatility. It measures the risk exposure to changes in implied volatility and tells traders how much an option’s price will rise or fall as the volatility of the option varies.

    ET'ers tout selling or buying volatility and that's fine. But once again if the Greeks are not ment to forecast than why make the calculation for the theoretical value on being long or short vol.

    So, you state The Greeks calculated today will NOT forecast any future values. The Greeks calculated the next day could be very different (most likely will) then the Greeks today. Confusing the terms ?! I think not.

    Here's your chance!!! Do what no one else on ET has done. (despite my many challenges) Show us how the Greeks are a valuable tool in understand risk, show us how the Greeks aid in your trading decisions, show us how one finds opporunities with the Greeks that would be missed without. I don't want gobbely goop jargon, use real prices, real UL and as real time a can be. Real Examples !!!
     
    #17     Jun 28, 2012
  8. newwurldmn

    newwurldmn

    You can't argue with willful ignorance.
     
    #18     Jun 28, 2012
  9. TskTsk

    TskTsk

    The greeks tell you what risks you are exposed to and how much. A forecast on the other hand, is a prediction of where what you are exposed to will move (i.e will the UL move up or down, IV up or down and so on).

    Gamma corrects for the convexity of value, it tells your exposure to changing deltas. This is essential if you're maintaining a delta netural portfolio.

    Calls have positive delta, however if the price moves up and call price decreases, this is due to vega exposure being higher than delta exposure on that spesific option.

    Not sure what your point is. Because it's "theoretical" it's somehow useless?

    Again, the calculations are made to explain risk, not forecast.

    Yes, the greeks change around all the time, and higher order greeks help explain the risks inherent in these changes.

    It should be clear now how the greeks are a valuable tool in estimating risks, from my posts and others in the thread.

    The greeks aid in all kinds of trading situations. An example is gamma PnL of a delta neutral portfolio, given by (1/2 * gamma * dS * dS). Say I'm short vol and tolerate a $500 loss per rehedge, I can solve for my tolerance in the formula above and predict my next rehedging point, and put in a limit order ahead of time.
     
    #19     Jun 28, 2012
  10. stoic

    stoic

    Just as I thought.......more smoke !!!

    mmmm......."predict my next rehedging point" :p
     
    #20     Jun 28, 2012