LOL. The OP's question was usage of the Greeks in determining when to sell covered call not how to be a better options trader. I'm open to suggestions as to how the Greeks can improve one's covered call timing. Got any for me?
The option Greeks are based on a theoretical model. "Theoretical" being the key word. The calculated delta is seldom the true delta so thus the Gamma is distorted. The IV is hardly ever the HV and fluctuates dramatically, thus the Vega seems worthless. Who can tell if the Theta is correct with the passage of time when the underlying keeps changing in price. As for Rho, who can predict a future interest rate change to make the information of any use. IMO if all the option trading wanna-be's would spend as much time analyzing the underlying in order to set ones expectations, time period involved and then apply the strategy that best meets that expectation and their risk tolerance as they do the "Theoretical" option price model and the Greeks, their success rate would improve dramatically.
I would disagree with this view, FWIW... The point of the greeks, such as Rho etc, is not to predict the future movement of various factors, such as rates, but rather to provide a measure of instantaneous sensitivity to these changes for a given position, based on current mkt prices. This enables you to hedge as you see fit using mkt instruments. As long as your pricing/risk methodology is self-consistent, you'll be able to fine-tune your exposure to specific factors. It's the beauty of partial derivatives, innit? As to the necessity for a proper analysis of the underlying, no disagreement there...
Because derivatives are just like geometry (take a look at Simons'background) they obey the same rules : reasoning with wrong figures to get the right result.
some interesting replies, so i just grabbed some... (tj just cant get away from delta....) master; geometry, yes, i had to think about it,and i agree, one of our early uses of derivatives, another example of "greeks" at work.... my world view has developed into that every thing is a derivative, man included... spindr0 07-16-10 07:32 PM You know what the focus of a CC position is? It's the timing and selection of the stock not whether you sell an "overvalued" premium. Timing and selection. And in reality, you have no way of knowing if the option is overvalued or if a higher IV is now the new volatility level. netmgr7 07-16-10 10:45 PM Larry McMillan's website, optionstrategist.com, has a free database of implied volatility history. On a weekly basis, he ranks the most recent composite value against the history and comes up with a percentile rank. Values in the 10th percentile or below are considered very cheap, while those in the 90th percentile or higher are considered very expensive. spindr0 07-17-10 08:17 AM. AFAIK, the more imp't issue in a CC is the underlying (support and resistance, news, earnings, sector perfomance, market direction) since it's a directional position. Again, AFAIK, you sell the call against the stock because of your opinion on the stock (bullish/bearish.neutral) not because of your opinion of the option. stoic 07-17-10 09:30 AM The option Greeks are based on a theoretical model. "Theoretical" being the key word. The calculated delta is seldom the true delta so thus the Gamma is distorted. The IV is hardly ever the HV and fluctuates dramatically, thus the Vega seems worthless. Who can tell if the Theta is correct with the passage of time when the underlying keeps changing in price. As for Rho, who can predict a future interest rate change to make the information of any use. IMO if all the option trading wanna-be's would spend as much time analyzing the underlying in order to set ones expectations, time period involved and then apply the strategy that best meets that expectation and their risk tolerance as they do the "Theoretical" option price model and the Greeks, their success rate would improve dramatically. tradingjournals 07-19-10 09:02 AM Quote from stoic: The option Greeks are based on a theoretical model. "Theoretical" being the key word. The calculated delta is seldom the true delta so thus the Gamma is distorted. Good insight! MasterAtWork 07-19-10 02:44 PM Quote from stoic: The option Greeks are based on a theoretical model. "Theoretical" being the key word. Because derivatives are just like geometry (take a look at Simons'background) they obey the same rules : reasoning with wrong figures to get the right result.
I am sorry, but can you clarify what HV stands for. I tried looking it up on acronym finder, and the only thing I could think of amongst that list was Hyper Velocity. But, that doesn't really match the context under which we are speaking.