Understanding Greeks

Discussion in 'Options' started by CrimsonTyde, Mar 21, 2004.

  1. The greeks are chinese to me! If anyone can help shed some light on the greeks and their affects on options prices and different strategies, it would be greatly appreciated.

    Generally I trade OTM Credit Spreads and Iron Condors.

    I'd like to trade verticals, but based on what some of you have been saying about understanding the greeks first, I thought I post this question before experimenting.

    If you do respond, if you could provide an example, it would be greatly appreciated.
     
  2. def

    def Interactive Brokers

    If you really want to understand the Greeks, you should pick up and read an option text book and perhaps ask questions here along the way - I'd recommend Sheldon Natenburg, "Option Volatility & Pricing".
     
  3. vega

    vega

    Don't mean to sound rude, but how can you trade OTM spreads and condors without knowing the greeks ?? I'll echo Def and say get Natenburg and do a search here on ET for other ideas on books to read, then trade, unless you want your education to be very very very expensive.

    Vega:D
     
  4. "Don't mean to sound rude, but how can you trade OTM spreads and condors without knowing the greeks ?? "



    You know what, you're probably right, and I will go out and purchase the book you've recommended.

    With regards to the strategies I use, so far I've had close to a 90% success rate with my OTM credit spreads. Although my returns are only 8-14% per month, the probailities are in my favour. From what little I know about greeks, I would say that Delta could be a problem for me especially if prices gravitate towards my short strike. I also know that implied volatility will hurt me especially if it rises, benefit me if it drops.

    I'm not sure how theta, vega, and gamma work in all of this? I'm probably wrong in saying this, but I would think that delta, vega, gamma and theta play a more important in the aggressive strategies.

    Be rude if you like, I'm here to learn and if it requires someone being blunt, GO FOR IT!!!

    Thanks for all your constructive criticism.
     
  5. Sahmi

    Sahmi

    With regards to the strategies I use, so far I've had close to a 90% success rate with my OTM credit spreads. Although my returns are only 8-14% per month, the probailities are in my favour. From what little I know about greeks, I would say that Delta could be a problem for me especially if prices gravitate towards my short strike. I also know that implied volatility will hurt me especially if it rises, benefit me if it drops.

    I'm not sure how theta, vega, and gamma work in all of this? I'm probably wrong in saying this, but I would think that delta, vega, gamma and theta play a more important in the aggressive strategies.




    I would back this up.
    I`m trading options for over 1 year now and made nearly similar experiences...
    But i also think it is important to know the Greeks, even without trading a aggressive strategy.

    Never stop learning!
    :)
     
  6. Stop what you're doing and learn your Greeks immediately! With vertical credits and IC's, besides being negative vega in a low, but recently rising volatility environment, theta is your friend and gamma your enemy. I strongly suggest you understand why and how you might hedge those risks before you establish another position.
     
  7. Contrarian view here.... and prefaced with the hope that your returns are for a longer period than just a few months..... but if you are making the returns you say you are making consistently... then I disgaree that you need to know all about the greeks.

    Your common-sense approach to the market has allowed you to profit. When you start overloading with information that just might not be important to you... it becomes troublesome.

    I disagree that just because you are using spreads you need to know the greeks. For example, it isn't necessary to know the greeks for condors or butterflies, or straight-forward bull and bear spreads.

    When you read thru McMillan or Natenberg etc., they will school you on the greeks, but when you read their presentation of the condor etc etc, they make no mention of the greeks at all as part of the strategy selection process. In fact, McMillan repeatedly prefaces strategies with "if you are bullish... or bearish... or neutral..." on stock or market direction then so-and-so strategies are good.

    If you're buying a condor, you want one thing to happen... the underlying to close within a certain range at expiration, which has nothing to do with the greeks.
     
  8. In, I have to respectfully disagree. While it is true that for certain strategies such as OTM credit spreads, assuming you hold to expiry and the market behaves in accordance with your directional outlook, what happens to the Greeks during the life of the trade may be seen as irrelevant. However, it is dangerous, to say the least, to enter into an option position totally ignorant of the Greeks and the implications of changes among them.

    First, the Greeks together with volatility in conjunction with standard deviation analysis will determine the expectancy of an options position, as well as the relative risk:reward profile of a trade at a given point in time. I really can't imagine anyone entering into an options position without knowing in advance what their expectancy might be and the probability of profit.

    And neither would Natenberg, which is why it's not entirely correct to say that he discusses the appropriateness of a given strategy only in the context of a directional bias. Rather, he says that a directional AND a volatility bias are necessary to determine whether a credit spread, for example, should be used vs. some other strategy. He also discusses edge and risk management at length, both of which are inextricably tied to the Greeks. So too is the important subject of relative pricing of the options in a multi-leg spread, such as an iron condor. Hence, even McMillan in his largely nuts and bolts treatise touches on those subjects.

    So, while one might be able to make money using options without regard to the Greeks, it strikes me as reckless to do so over the long-run. I believe Shelly would agree with me on that.
     
  9. ktm

    ktm

    I've made money over the long haul and pay no attention to the greeks whatsoever. I have a solid understanding of Delta and of volatility and the effects on pricing. Aside from that, I have yet to read anywhere what is so important about this knowledge void that I have maintained all these years.

    The things I do understand about my positions:

    1) Maximum exposure, now and through expiration

    2) The effects of extreme volatility on the market value of my positions between now and expiry - and the margin required to maintain these positions

    3) When and if hedges will be placed or positions will be offset and the anticipated prices of those contracts based on all plausible scenarios.

    Aside from some other small considerations, that's the jist of it for me. I pretty much write index options, will sometimes use spreads and generally stay within 8 weeks of expiration, so maybe some of the statements made here don't apply to me.

    I realize that understanding what I do probably makes me somewhat knowledgeable of the greeks without really being able to articulate that. As far as expectancies and probablities of a trade being successful, I plan on all of them going straight to hell.
     
  10. deepitm

    deepitm

    If you are interested in the Sheldon Natenberg book "Option Volatility and Pricing" please PM me. I have a copy for sale.
     
    #10     Mar 22, 2004