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Gamma and theta are the same thing, like matter and energy. See for instance the explanation on Dr Niederhoffer's site, http://bit.ly/j5nr1f
That tired old russian roulette analogy again. http://www.monthlycashthruoptions.com/ReturnOnInvestment.htm How can you argue with their results? You can't. Think they're liars? Probably not. Even if they showed you their long form birth certificates (along with all their brokerage statements)... still wouldn't be enough to convince you guys. No trading strategy out there, none, zip, zero, has positive expected outcome, over the long term; except buy and hold - decades. Credit spreads work great in these types of market conditions... goal is to make your money, then get the hell out.
Looking at their returns with a closer eye... and you'll see they're doing exactly that: playing Russian Roulette. For god's sake, they some how managed to lose 33% in March 2010 on a "relent-less 20 day up trend". You'll also note that they ended up "flat" in both April and May 2010. That caught my eye, since we had a huge bear + flash crash during that time period. If you read the description, you realize their ROI numbers are not real... they are only on the basis of *closed* trades. They simply didn't close any of their positions in May (not officially); they instead rolled their ATM bear put spreads into June at "no cost". And while doing this, they showed a zero loss for the month. Now that's risk management for you. They then give a long-winded explanation for how wise they were for knowing that May 2010 would be the bottom, and that equities would bounce back by June. What really happened is that they went double for nothing, and got lucky. Those guys are destined for blow-up... but they'll do it quietly, just like hundreds of others before them. One of these days, the website simply won't be updated any more.
Matter and energy are related precisely by an equation. Gamma and Theta have an approximate relationship per your reference. Even if they were precisely related as are matter and energy one prefers to talk energy in some circumstances and mass is others. Momentum (m*v) is easier to understand when thinking mass than energy. It is not just a difference in units, it is a difference in frames of reference. I'm sure that there are some who prefer speed measurement in units of furlongs per fortnight. At least, unlike mass and energy, they are in the same frame of reference. It just makes things harder to understand for those of us who use milers/hr on a daily basis. So, back to my question. Why the preference for gamma over theta when discussing the risks associated with credit spreads?
Those that contend that trading credit spreads must eventually blow up may be correct. I just have not seen an explanation of this contention that I can understand. In fact, most just state it as though it were so obvious that anyone can see it without proof. I'm just not one of those so gifted. If I grant the premise for a moment then the question remains, is this Russian Roulette (1 in 6) odds or living in San Francisco odds. Few play Russian Roulette on purpose knowing the odds. Many live in San Francisco knowing the odds.
It can be proved mathematically based on historical data of market behaviour going back hundreds of years, in any timeframe (intraday timeframes to monthlies) I may add. Therefore the emphatic arrogance of those making the affirmations, some of whom have actually proven it mathematically to themselves and others.:eek:
I haven't published my proof and do not intend to. You can prove it to yourself in a couple of days with some knowledge of statistics and probability, although several PhD's have almost kissed my hand in the past for showing it to them.