Hi, I'm new to trading options and in particular the greeks, so would like to get some clarification. If I had a position on that looks like this: - 55 delta -1.70 gamma +132 theta -360 vega am I correct in saying that if the underlying falls by 5 points & IV goes up by 5 points my position should be something close to this: -55 d X 5= -$275 -360 v X 5 = -$1800 +132 t = + $132 = - $1393 I know it's not an exact science but am trying to get a better understanding of my overall position. Thanks in advance.
You're short delta so if the underlying falls 5 points you will make money, not lose it. Also keep in mind that you are short gammas, so the delta will change in the direction that is unfavorable to you as the underlying moves. In other words, as the underlying falls your deltas will become less short. So you will make less money than your deltas would seem to predict (if the underlying moves in your direction) or lose more money than the deltas predict (if the underlying moves against you).
Maybe I do not understand option greeks the way I thought I did but: 1) I agree with Dmo, if you are short delta you want the stock to move down all other things being equal. 2) This sure looks like the greeks of someone who is short a FOTM call... I do not think the calculation you made gives you a proper representation of your risk, let me explain: the call is FOTM so the underlying would have to move alot for you to risk being assigned. This is illustrated by the fact that your Vega risk is many times higher. If I were in such a position, the main thing I would look at is volatility. If you want to check what would be the theorical value in the example you gave, just try some free online options calculator instead of doing it by hand. Try optionslab, it works fine. In your case what you need to be able to see instantly when you look at the position is what puts you at risk. Basically that trade is a bet on volatility more than anything else and that is what you need to focus on. You want to figure out a) if vol is actually what you want to play on and b) what you need to do to hedge yourself if you answered no to the first question...
Hi falcon, Just like dmo said, you need to correct the sign, and add gamma because "you will make less money than your deltas would seem to predict" - 55 delta * (-5) -360 vega * (+5) +132 theta -1.70 gamma * (-5)*(-5)*0.5 =-1414.25 To add the gamma term you need to multiply gamma by half of stock move squared. So your PL is smaller by -1.7*25*0.5=-21.25
Thanks DMO for the explanation on gamma, I understand being short delta means I will make money all things being equal, but what Im having trouble comprehending (either Im still very green or a slow learner) is my -vega is much larger than my -delta so should'nt I end up losing money with a downward move as my large -vega value will grow more than my gain on - delta with IV going up on a downward move? heiasafari, It's not a FOTM call, it's a 20 lot IC. Im not concerned with being assigned just trying to decipher how much vega will impact on this position. My portfolio overall is hedged with additional vega in another position so what I'm essentially trying to find out is the type of value my position will move by. Thanks dd4nyc, I have now lear'nt how to calculate gamma into the value of price change for my position.
All of this would be a lot easier if you just dropped the position into a modeling program. Pick whatever later date and IV you want and click ENTER. A graph of the position will give you a much more accurate idea of potential results with a fraction of the mental gymnastics.
I think your misunderstanding is in comparing delta with vega directly. It's true that your delta (55) is a smaller number than your vega, but that has no meaning. You cannot compare those numbers directly because the vega is a dollar number, while the delta represents your position in the underlying (literally it should be .55 in your case, about half a futures contract, not 55, which would be 55 futures contracts). So overall I think you have the right idea, but keep in mind that delta and vega are entirely different numbers based on entirely different concepts, and cannot be compared directly. Rather, compare the DOLLAR SCENARIO of what happens if - in your case - the underlying drops 5 points and IV goes up 5 points. With the vega, you can just multiply your vega times 5. But with the delta, you have to figure out how much you would make or lose (depending on what the underlying contract is) if that underlying dropped 5 points, then multiply that amount by .55 (the delta).
To get the actual answer, there's no substitute for for a modeling program. But as a learning exercise, I think it's a great idea to struggle with problems and things you feel fuzzy about as Falcon is doing in order to develop conceptual fluency.
Agree completely. The software gives you the immediate answers (which you do need to manage risk). But your goal right now is to LEARN and UNDERSTAND. Shortcuts do not help you accomplish either objective Mark