More greeks and options

Discussion in 'Options' started by jwcapital, Apr 25, 2009.

  1. I have gone back and taken a look at my "market-neutral" trades (short straddles, iron butterflies, IC's). I looked at the greeks (delta, gamma, volatility, and theta). All of them show negative volatility and positive theta. Interestingly, deltas and gamma are negative (if the underlying moves up, the value of the portfolio moves down). This surprised me. I thought it would be the opposite. In other words, these market neutral strategies have the same characteristics as naked short calls or bear call spreads. There is an inflection point where delta is zero, but it is much closer to the short put than the short call. Therefore, I concluded that to use these market-neutral strategies, one must subscribe to reversion theory. If the market does shoot straight up or down, you get killed.

    Another point: I took a look at the last crash 2000-2002. The current chart looks a lot like the bottom from October and November from that time period. If history repeats itself, there will be one more leg down over the next four months-possibly to the 700 level before a bull market begins. Well, it will be interesting to see how all option strategies work in this situation. Also, the rate of descent this time was much faster and steeper. The recoveries tend to reflect the falls. Times have changed.
  2. 1) Each strategy you mentioned must have negative gamma and vega. But you can control delta and begin much nearer zero.

    2) If you prefer to neutralize vega, you can add some calendar-type spreads. Example, double diagonal vs iron condor for a portion of the posiiton.

    3) You can do better with gamma by adding a few long strangles. This also adds some positive vega.

    4) Any unidirectional market represents a losing situation for those who sell premium - unless you own inexpensive gamma protection (long strangles, for example)

    5) Times always change and today's most suitable strategy (for you) - will not be suitable tomorrow.

  3. Dont forget that each time you look at the greeks they're only a snap shot for that instant in time. All the variables change with time.

    In an IC for example. Even if the stock does not move from today through tomorrow, you'll be less short vega, less short gamma, and have lower theta.

    Think of the variables in the shape of a 6 sided cube. Time, vega, gamma, delta, rho, and fair value. Anytime one of them changes (and time is always changing) in order for the cube to remain a cube the others will have to adjust.
  4. I'm not sure I understand this. Can you explain further? Certainly shorting puts in a rising market is profitable, perhaps not as profitable as going long the underlying, but not a losing trade in absolute terms.

    - Ray
  5. You are correct.

    If you take a bullish, premium-selling position and the market rises, you win.

    If you take a bearish premium-selling position and the market tanks, you win.

    I was referring to market neutral strategies (sell straddle or trading iron condor).

  6. Ah, that makes sense.