Usefulness of Option Greeks

[Larry1234 10]

Hello,

 

This thread has been created to understand the Option Greeks. I would like to say that we, as an individual trader, least focus on the importance of the option greeks before taking a position in options. Let us discuss about the option greeks and its importance -

 

Basically there are five option greeks. They are -

 

(1) Delta - It measures an options sensitivity (i.e. option price) to changes in the price of the underlying assets.

 

(2) Gamma - It measures the delta's sensitivity to changes in the price of the underlying assets.

 

(3) Vega - It measures an option's sensitivity to changes in the volatility of the underlying assets.

 

(4) Theta - It measures an option's sensitivity to time decay.

 

(5) Rho - It measures an option's sensitivity to changes in the risk free interest rate.

 

These five option greeks are really plays an important role in trading decision making.

 

I hope this will help.

[Larry1234 10]

This thread is created for those who wants to post any thing related to option greeks whether their understanding and their experience with the option greeks .....

 

Hello,

 

This thread has been created to understand the Option Greeks. I would like to say that we, as an individual trader, least focus on the importance of the option greeks before taking a position in options. Let us discuss about the option greeks and its importance -

 

Basically there are five option greeks. They are -

 

(1) Delta - It measures an options sensitivity (i.e. option price) to changes in the price of the underlying assets.

 

(2) Gamma - It measures the delta's sensitivity to changes in the price of the underlying assets.

 

(3) Vega - It measures an option's sensitivity to changes in the volatility of the underlying assets.

 

(4) Theta - It measures an option's sensitivity to time decay.

 

(5) Rho - It measures an option's sensitivity to changes in the risk free interest rate.

 

These five option greeks are really plays an important role in trading decision making.

 

I hope this will help.

[Larry1234 10]

Hey all,

 

Kindly let me know where can we get the data regarding option greeks ? I mean the should be readily available and it should be updated one.

 

I believe option greeks really helps in taking a decision. How people are using this to achieve max return ?

 

Need input..

[Larry1234 10]

I guess none of the member is interested to discuss about option greeks but I would say these option greeks really play a vital role in option trading and helps in creating effective option strategies.

 

Lets us discuss about these greeks in this thread more.

[SIUYA 11]

what do you want to discuss?

 

All they are is a measure of what characteristics (sensitivities) an option has at any particular time.

The best use of them is in combining multiple options and underlyings in order to get to a single measure OR combined portfolio sensitivities via the Greeks.

 

Of course they play a vital role in understanding the options, but not sure exactly what you want to discuss about them that cant be easily found in any text book.....or better yet in an option simulator that has moveable variables in order to see how the options might move over time, price etc.....There is not much to discuss really unless you have specific questions.

Do you want to talk about them and their applicability to trading? If so how so.....

[Larry1234 10]

We all know that all greeks are basically how sensitive is option price w.r.t to Underlying assets value, Risk free rate, time decay and volatility.

 

I just wanted to know whether the traders are actually using them to formulate trading strategies ? If yes, then how ?

 

e.g. always sell options with high theta compared to low theta ?

[SIUYA 11]

We all know that all greeks are basically how sensitive is option price w.r.t to Underlying assets value, Risk free rate, time decay and volatility.

 

I just wanted to know whether the traders are actually using them to formulate trading strategies ? If yes, then how ?

 

e.g. always sell options with high theta compared to low theta ?

 

Yes - some traders sell options that have low amounts of theta - these are usually the cheap out of the money puts (or calls) They usually do this until they blow up - but its not usually determnied by the theta - but by the amount OTM they are.

Some traders make markets in options around a theoretical fair value depending on what the historical and implied volatility relationship is.

Some traders sell options over a portfolio of stocks looking for the best call away yield at the time

Some traders buy or sell volatility thinking they want a directional move

Some traders will do spreads allowing them to take a view on interest rates, or dividiend amounts

some traders might always use spread strategies across months or strikes to implement a view...

 

IMHO - all of these are not reliant on the greeks, they are more reliant on the over all strategy and THEN the Greeks will show you your position/exposure. Or the Greeks might show you the best relative way to implement your strategy.

 

(Its a bit of a chicken and egg argument really )

[Larry1234 10]

All else being equal, with the help of greeks, we can easily formulate better option strategies and can make arbitrage profits.

 

Yes - some traders sell options that have low amounts of theta - these are usually the cheap out of the money puts (or calls) They usually do this until they blow up - but its not usually determnied by the theta - but by the amount OTM they are.

Some traders make markets in options around a theoretical fair value depending on what the historical and implied volatility relationship is.

Some traders sell options over a portfolio of stocks looking for the best call away yield at the time

Some traders buy or sell volatility thinking they want a directional move

Some traders will do spreads allowing them to take a view on interest rates, or dividiend amounts

some traders might always use spread strategies across months or strikes to implement a view...

 

IMHO - all of these are not reliant on the greeks, they are more reliant on the over all strategy and THEN the Greeks will show you your position/exposure. Or the Greeks might show you the best relative way to implement your strategy.

 

(Its a bit of a chicken and egg argument really )

[SIUYA 11]

All else being equal, with the help of greeks, we can easily formulate better option strategies and can make arbitrage profits.

 

really.... how?

 

You might be able to use the Greeks to compare options available to implement a strategy, but how are you using the Greeks to formulate strategies.

Its a bit like a cars dashboard - you need to be driving for them to be worth anything....otherwise its all theoretical.

 

For the discussion - how do you easily propose to use the Greeks to make arbitrage profits?

[ntrader 10]

Portfolio managers use the Greeks in order to better hedge their portfolio and remove some risk factors from their position. For traders calculating the greeks can give an idea if someone should open a position or not.

[Larry1234 10]

Portfolio managers use the Greeks in order to better hedge their portfolio and remove some risk factors from their position. For traders calculating the greeks can give an idea if someone should open a position or not.

 

I agree with you and would like to add more.

 

Option Greeks allow option traders to objectively calculate changes in the value of the option contracts in their portfolio with changes in the factors that affects the value of stock options. Options greeks help traders to hedge their portfolio or to construct positions with specific risk/reward profiles. So the importance of Option Greeks is priceless in options trading.

 

For the amateur trader, knowing the delta of their options position is the most important as it gives them an indication of how their option's value will change with movements in the underlying stock price - all other variables remaining the same. Knowing your time decay i.e. theta gives an indication of how much time value your options trading position is losing each day - all other variables remaining the same.

 

Apart from this, Professionals also use the Option Greeks to measure exactly how much they need to hedge their portfolio and to surgically remove specific risk factors from their portfolio. The Option Greeks also enable the measurement of how much risk the portfolio is exposed to, and where that risk lies.

[SIUYA 11]

knowing how to read the dashboard of a car, if you dont know how to drive is not going to help much......

 

you still have not explained how you think option Greeks will make you money, develop a strategy or make arbitrage profits.....all you are doing is measuring a position.

there is a big difference

 

You are just rattling off generic ideas about hedging a position, reducing risk and managing an existing position.....and if you have ever traded an option book you will know that the greeks move constantly, and just because you think your Greeks show a theoretical position you cant forget that the market might not give you the liquidity to represent that in real life (remember the mark to market issues many had in 2008?).....none of this is going to help you unless you already have a strategy.

[Larry1234 10]

knowing how to read the dashboard of a car, if you dont know how to drive is not going to help much......

 

you still have not explained how you think option Greeks will make you money, develop a strategy or make arbitrage profits.....all you are doing is measuring a position.

there is a big difference

 

You are just rattling off generic ideas about hedging a position, reducing risk and managing an existing position.....and if you have ever traded an option book you will know that the greeks move constantly, and just because you think your Greeks show a theoretical position you cant forget that the market might not give you the liquidity to represent that in real life (remember the mark to market issues many had in 2008?).....none of this is going to help you unless you already have a strategy.

 

What I said about option greeks is theoretical. As you rightly point out that the Greeks move constantly, so it really help us in making strategies and managing our position by reducing the exposure.

 

If you don't know how to read the dashboard of a car and you are driving the car then I think you are putting yourself into danger zone. Similarly, trading options without the knowledge of the factors which affects option pricing is a similar to one (like a car example). That is why more than 80% of the traders loose money to experts.

[SIUYA 11]

the Greeks move constantly, so it really help us in making strategies and managing our position by reducing the exposure.

 

 

Maybe I am being slightly pedantic here and the reason is that we agree the Greeks can help you measure your position and exposure......but if you keep insisting on how they will help you make your strategy then I would like to know how you think this is done?

 

To me, I have never seen anyone base a strategy purely off the Greeks - the strategy has a basis elsewhere -

eg; buying volatility for a volatility move up, a directional move or to trade the gamma.

selling vol as part of an overall portfolio type insurance yield enhancer

selling/buying options for pure directional plays

 

The Greeks can help you rank the relative attractiveness of the options to trade, or can help assess the timing but I am still not sure of the strategy.

 

(I am being pendantic as too often threads get sidetracked with incorrect/misleading/ misunderstood/confusing jargon IMHO)

[ntrader 10]

Knowing the Greeks and applying them to your options investing strategies can greatly help your performance but the most important is that you have to choose the right strategy and open the right position

[Larry1234 10]

Knowing the Greeks and applying them to your options investing strategies can greatly help your performance but the most important is that you have to choose the right strategy and open the right position

 

I agree that using Greeks in options helps us in improving the performance but we know that Greeks are changing continuously that is why it is really difficult to apply them in decision making.

[Larry1234 10]

Maybe I am being slightly pedantic here and the reason is that we agree the Greeks can help you measure your position and exposure......but if you keep insisting on how they will help you make your strategy then I would like to know how you think this is done?

 

To me, I have never seen anyone base a strategy purely off the Greeks - the strategy has a basis elsewhere -

eg; buying volatility for a volatility move up, a directional move or to trade the gamma.

selling vol as part of an overall portfolio type insurance yield enhancer

selling/buying options for pure directional plays

 

The Greeks can help you rank the relative attractiveness of the options to trade, or can help assess the timing but I am still not sure of the strategy.

 

(I am being pendantic as too often threads get sidetracked with incorrect/misleading/ misunderstood/confusing jargon IMHO)

 

Generally Option greeks are used by Portfolio managers while re balancing the portfolio. Apart from this, they use this to make their portfolio delta and gamma free.

[SIUYA 11]

Greeks in drag - now you are worrying me Mit - even if we saw you we might not want to recognize you if you get all dolled up in that sort of outfit.....whoops, too many thoughts - you aint seen me right?

 

I am just going to disappear like a Cyprus bank account - look into my eyes, look into my eyes not around the eyes look into my eyes - nothing to see here - no Greeks no option strategy, no more explanations.

[Larry1234 10]

Actually the Greeks are a drag they should just opt out of the Euro and the Cypriots too.In fact most of these PIGS should get off the pot and learn to piss on their own 2 feet.The longest running train wreck i've ever..... ah...options.....i uh, thought you were talking about the Eurozone....you ain't seen me..right?

 

 

This thread is created to discuss Options Greeks (Delta, Gamma, Theta, Rho & Vega) not the Greeks in Eurozone.

[Larry1234 10]

:shocked:

You're kiddin'..who would have thought.How dumber and dumber of me,all i needed to do was read a few posts and i would have realized that.

You should go on mastermind,specialist topic stating the bleeding obvious.And after that round Larry,you scored full marks (applause,lights go up)

:applaud:

And there i was,thinking that actually this thread was all about finding out who knows what the hell they're talking about and who hasn't got a clue.

On that basis i declare this thread a success.:cinema:

:hmmmm:

Now,where's that gamma ray gun? Ineed to bore a hole in someones head so i can transplant a sense of humour in there.

 

Thank you. Your comments are invited to make the thread more successful.

[ntrader 10]

Understanding Greeks will let you maximize your potential gain, minimize your risk, or at least not allow you to aim for too great of a target.

[LaReindeer 10]

the only thing that is going to keep you from going for too large a gain is a good solid trading plan, that you have disciplined your self to follow. The greeks can't tell you anything about that.

L

[Larry1234 10]

The greeks can't tell you anything about that.

L

 

Greeks are generally used by Portfolio manager, not by retails traders. Greeks are really useful in mitigating the risk of the portfolio. One of the strategy is Delta Hedge Strategy, which is very common and popular among them.

[OptionTiger 10]

Friends, there seems to be a lot of confusion on this post on "Option Greeks". Let me simply say, if you're trading Options without looking at the Greeks, you're flying an airplane without any instruments..Seriously.

 

In the interests of clearing up (most of) your doubts on this subject, here is a course that includes an introductory but very detailed section on Option Greeks. This link will give you free access to my course.

 

Enjoy and DON'T TRADE OPTIONS WITHOUT LOOKING AT THE GREEKS.

 

Best

 

Hari

[Larry1234 10]

Friends, there seems to be a lot of confusion on this post on "Option Greeks". Let me simply say, if you're trading Options without looking at the Greeks, you're flying an airplane without any instruments..Seriously.

 

In the interests of clearing up (most of) your doubts on this subject, here is a course that includes an introductory but very detailed section on Option Greeks. This link will give you free access to my course.

 

Enjoy and DON'T TRADE OPTIONS WITHOUT LOOKING AT THE GREEKS.

 

Best

 

Hari

 

Do you think that retail investors use option greeks ?