just wondering out loud here, but is there anything in the ratios of the greeks? theta/gamma or vega/delta etc. perhaps lower volatility stocks tend to have a higher vega compared to delta etc...... Im playing around with some different volatility strategies and notice some pretty big differences between the greeks and these ratios of different stocks. Im just wondering if these can be compared (for a similar strike, say ATM) when choosing stocks to use for a certain strategy.....
Theta/gamma is obviously meaningful... Wouldn't think you could say the same about vega/delta and many others.
Thanks for the reply. Guess I just threw them out there to illsutrate without really thinking. Probably oversymplifying things here but if I wanted to trade gamma, the more gamma I could get for my theta the better right? therefore I would want pick a stock with aÂ@higher gamma/theta ratio. But is there a reason though why one would have a higher/lower ratio than another stock? Or is this a valid point to compare different stocks on?
For the most part all listed options are running a close or near similar price model as far as the buy side is concerned and on account of this you'll be able to use a similar understanding of greeks across the board. Your nominal numbers will always be different, but if there was cheap gamma anywhere on the market people would certainly buy it and if there was a ton of expensive gamma (or overinflated IV) hanging around, in a normalized market it will get beat out. That's not to say that sometimes some instruments are a better sale than others, but when dealing with individual equities, I'm usually weary of 'free' gamma lasting for more than a few days, or just through an event/announcement.
minj, I can't give you good answers, since your questions are about equities, about which I know very little... In general, in the world of options, the thing you care about is not so much theta/gamma per se (as this ratio is easy to calculate and is implied in a simple fashion from Black-Scholes; it's, approximately, -0.5 * S^2 * sigma^2, if memory serves). What I do, instead of looking at theta and gamma, is look at the expected implied/realized vol ratio (you can use the historical ratio as your guide), as well as daily breakevens.
I would agree with this. Seems that this fraction approaches zero as time passes. I have found that the effects of gamma far outweigh the effects of theta the week of expiration. Therefore, I my short optionshahve very little time value left, I exit them (typically the Friday or Monday before expiration). Overall, the greek ratios mentioned seem more academic than useful when placing initial positions. Correct me if I'm wrong.
Thanks guys, Im actually using these ratios to compare between stocks. some stocks have a much higher gamma to theta ratio than others. all other things being equal Im trying to figure out if this is actually a reliable ratio to compare stocks.
I am assuming you are looking at the same expiry in each product right? All gamma was not created equally, but theta is theta is theta. As vol goes higher, an option will show less gamma risk, but will have more premium to decay. The problem is that while theta is normalized naturally by the actual $$ decay, gamma is NOT normalized. Gamma is a function of the delta change over a one point move in the underlying. As vol goes higher the daily standard deviation also increases. Therefore gamma goes lower, as it is measured by a 1 point move. There is also the problem of underlying price. A $100 product at a 16 vol will have a $10 daily standard deviation, whereas if it split 10 to 1, the very same product now (with the exact same risk characteristics) will have a standard deviation of $1. Therefore measuring the delta change over a full st.dev. vs measuring the pre split delta change over a 1/10 st.dev. (post-split gamma vs. pre split gamma) is not measuring apples to apples--though it is measuring gamma to gamma. In this scenario your theta would not change, but your gamma would go up 10 times without your actual risk changing AT ALL. If you normalize gamma by standard deviation, i.e. look at the delta change over one standard deviation move rather than over a one point move, you might start to get some valid results. As it is, I would only try to compare gamma/theta ratios within one exiration of one product.
Jerkstore, I think that might be getting closer to what Im trying to understand. I was looking at different products on the same expiration.