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Larry1234

Usefulness of Option Greeks

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Do you think that retail investors use option greeks ?

 

Larry, no Options trader should trade without the Greeks - retail or otherwise. Why don't you check out what the Greeks are and decide for yourself..My previous post has a link to my course on Greeks. It will give you free access..

 

Hari

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Larry, no Options trader should trade without the Greeks - retail or otherwise. Why don't you check out what the Greeks are and decide for yourself..My previous post has a link to my course on Greeks. It will give you free access..

 

Hari

 

Hello Hari, thanks a lot for the link. As I have read the book Financial Risk Management by J.C. Hull so I am very much aware with option greeks. IMO I don't think retails investors (in emerging economies) use option greeks before taking a trading call. I am not sure about Europe and USA.

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Hello Hari, thanks a lot for the link. As I have read the book Financial Risk Management by J.C. Hull so I am very much aware with option greeks. IMO I don't think retails investors (in emerging economies) use option greeks before taking a trading call. I am not sure about Europe and USA.

 

Larry, you're only now mentioning emerging markets. The problem in emerging markets is Options is too new to them, and they don't have platforms that come close to Thinkowswim. If they did, they'd start paying attention. Too bad, they're flying a plane without any instruments. I'm sure the market makers are only too glad to give these retail traders a fill in emerging markets.

 

Hari

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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

 

Thanks, a very good link.

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Join the course, its free Kevin

 

I'm learning a lot with an excellent software I've downloaded a few weeks ago, has built-in education tools and I'm learning a lot, if you are interested here it is

www.tradoroptions.com

I find many usefull functions along with a special wide view of any position.

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I'm learning a lot with an excellent software I've downloaded a few weeks ago, has built-in education tools and I'm learning a lot, if you are interested here it is

www.tradoroptions.com

I find many usefull functions along with a special wide view of any position.

 

Is it free of cost ?

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Thanks a lot for the info.

 

Glad to help, my friend pointed me to it and we share ideas and functions, so if you find

something interesting, I'll be glad if you share it to me.

Learning period will be shorter.

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Larry - you keep saying lets discuss.....

The problem is option greeks are simply like the dashboard of the car/airplane

 

They tell you information but they dont tell you how to drive/fly, or give you a strategy.

 

What exactly is it that you want to discuss as you keep claiming they are good for a strategy?

Option tiger offers his courses and websites and it looks pretty good except they cost - if people find value there good for them - , other information is freely available on the net. There are plenty of books on options theory around - ranging from the simple to the complex.

Do you want to discuss option strategies, how market makers may work, buy and write funds, calendar spreads, jelly rolls (and other stupid names), the issues around volatility and skew?

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Suiya,

 

Options greeks are used to frame delta neutral hedging strategy. Generally portfolio managers use these greeks to frame such a strategy.

 

I am not a portfolio manager. But I am interested to know more usefulness of these greeks from the traders or investor or portfolio managers, regarding how and when they use the same and cost benefit analysis of the same

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Suiya,

 

Options greeks are used to frame delta neutral hedging strategy. Generally portfolio managers use these greeks to frame such a strategy.

 

I am not a portfolio manager. But I am interested to know more usefulness of these greeks from the traders or investor or portfolio managers, regarding how and when they use the same and cost benefit analysis of the same

 

The Greeks are useful only for telling you where you are at - they are not great at telling you why you are there.

In other words - they are a measure.

 

As for strategies there are a number of strategies whereby you are trying to capture various components of the option pricings as well as the underlying movements.

 

Also I do know various people call things different strategies - a jargon thing - but this is how I see it and have been used to calling it. Some of these strategies are also by no means stand alone strategies - some are combinations and similar, and not all thats available. The joys of options.

 

(for ease of understanding I assume......book greeks=portfolio greeks=single instrument greeks)(Underlying=actual instrument=stock=future=index)

eg;

Gamma Trading - constantly rehedging small moves in the underlying to 'job' around the underlying based on changes in the delta of the book. Usually as the trader is long volatility this is done to help pay for the time decay of the options.eg; long vol

 

Volatility trading - buying or selling options whereby the implied volatilities are cheap or expensive compared to the historical volatilies and hence the trader expects the implied volatilities to move - not as much concerned with direction. eg; long short straddles, strangles, or calendar spreads.

 

Dividend strips - in certain places (and less so due to changes in tax laws) dividend strips whereby various tax rate payers could make the most of collecting dividend payments and yet keeping exposures with the options, or hedging the risks. eg; collars, synthetics ( longs and shorts using the options.)

 

Corporate actions - various exposures can be obtained cheaply using options whereby payoffs for certain events such as takeovers are huge with smaller exposures. eg; ratios, collars

 

Interest rate component - changes in interest rates can have a huge impact on various funding costs eg; calendar spreads, synthetics

 

Dividend changes - trades taken with little directional or volatility risk can be made whereby changes in dividend amounts or dates can affect the option prices.

 

Directional trading - straight forward (or complex) trades purely based on underlying moves

 

Spread trading - spreading between different months or over various strikes to try and capture directional trades with less risk, or spread views with less directional risks.

 

Market making - pure market making whereby constantly trading and keeping a hedged book and taking a small edge for each trade around a theoretical price (see put call parity for more understanding) Providing liquidity and marking markets also can combine various strategies, but you can view 'pure' market making as simply proving liquidity and taking the edge with little exposure to other risks.

 

Portfolio hedging - either individual instruments or over a portfolio as a whole depending on what risks you want to take out or reduce will determine the options to use. eg; Index collars, OTM put purchases

 

Portfolio exposure - trying to replicate portfolios using options and/or the underlying on combination. eg; ITM or OTM options, collars, ratios, spreads

 

Portfolio income - trying to capture extra income using buy and writes (covered call)

 

Convertible arb - trading between different instruments - often company issued warrants, and preference shares and the equivalent ETO options and the underlying.

..........

 

Just a brief off the top of the head over view of different strategies - all of them would be likely to use the the greeks to tell them where they are and to help stress test their books.....a lot of these strategies dont pay off until certain events happen - some are mainly arbitrage plays, some hedging, some exposure, some directional, some income......and dont forget the greeks change as each component changes particularly the underlying.

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Larry, with a good trading platform, you can simulate the 3 main parameters for Options - 1) Price movement 2) Changes in Implied Volatility and 3) Passage of time.

 

You can simulate all 3 at the same time as well. On the TOS platform, it'll show you what the Greeks will be for your simulation. In a simplistic sense, this is all you need..

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The gentleman is right "in a simplistic sense" they convey information. Unfortunately a simplistic understanding will generally put you in position to lose money....The following info may help;

 

One way to understand Greeks, is in terms of risk.....most folks understand risk as the possibility of loss.....using "Greeks" you can separate risk into specific elements. The value in this is that once you (really) understand how the Greeks display the elements of risk, you can use that information....

 

Since there is no reward without exposure to risk, people who understand what each of the greeks represent can choose (they can structure) their positions so that they manage (limit) certain risks, while using other elements of risk to make money (selling expensive premium for example).

 

Your best bet if you are serious about this subject is to get a book....Larry (Lawrence) McMillan's book "Options as a Strategic Investment" is the best one for amateurs....take your time and really internalize the information....it will provide you with a good starting point and from there you can move on in whatever direction you choose

 

Most beginners start out thinking that you either buy or sell premium....then they move on to creating directional or non-directional strategies....and from there they usually go in various directions depending on how sophisticated their understanding has become....unfortunately there isn't a shortcut to experience....take your time, keep your powder dry and be a good observer...

 

Best of luck to you

Steve

 

PS. To the original post....well as usual vendors circle like sharks on this site....so for the record, there is never a "problem" with learning the basics.....in fact learning the basics from a good text like McMillan's will stand you well for years to come....the value of practical experience on the other hand is debatable....if for example you take someone's "course" and it turns out to be crap...then you will have to UNLEARN it (and you have wasted your time)..My advice is to read a standardized text first (McMillan's has been used by aspiring professionals for years)...once you have that background under your belt, you will be better able to evaluate what vendors will inevitably try to sell you....

Edited by steve46

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The gentleman is right "in a simplistic sense" they convey information. Unfortunately a simplistic understanding will generally put you in position to lose money....The following info may help;

 

One way to understand Greeks, is in terms of risk.....most folks understand risk as the possibility of loss.....using "Greeks" you can separate risk into specific elements. The value in this is that once you (really) understand how the Greeks display the elements of risk, you can use that information....

 

Since there is no reward without exposure to risk, people who understand what each of the greeks represent can choose (they can structure) their positions so that they manage (limit) certain risks, while using other elements of risk to make money (selling expensive premium for example).

 

Your best bet if you are serious about this subject is to get a book....Larry (Lawrence) McMillan's book "Options as a Strategic Investment" is the best one for amateurs....take your time and really internalize the information....it will provide you with a good starting point and from there you can move on in whatever direction you choose

 

Most beginners start out thinking that you either buy or sell premium....then they move on to creating directional or non-directional strategies....and from there they usually go in various directions depending on how sophisticated their understanding has become....unfortunately there isn't a shortcut to experience....take your time, keep your powder dry and be a good observer...

 

Best of luck to you

Steve

 

Larry, Steve is right. There is no substitute for practical application and seeing the Greeks in action. The problem with a book is that most of the time, you don't get the practical side of things. I've mentioned this to you before, your best bet is to take up on my earlier post where I gave free access to my cutting-edge course. Take the course on Greeks, and you'll be clear in these concepts. Here it is - https://www.udemy.com/learn-options-trading/?couponCode=TLGreeks. Actually, anyone on this post is welcome to take it. There seems to be a lot of discussions and a lot of confusion on this thread..

Best

Hari

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Larry, Steve is right. There is no substitute for practical application and seeing the Greeks in action. The problem with a book is that most of the time, you don't get the practical side of things. I've mentioned this to you before, your best bet is to take up on my earlier post where I gave free access to my cutting-edge course. Take the course on Greeks, and you'll be clear in these concepts. Here it is - https://www.udemy.com/learn-options-trading/?couponCode=TLGreeks. Actually, anyone on this post is welcome to take it. There seems to be a lot of discussions and a lot of confusion on this thread..

Best

Hari

 

Most things in life that are free are not worth it. How much does paid access cost?

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Larry, Steve is right. There is no substitute for practical application and seeing the Greeks in action. The problem with a book is that most of the time, you don't get the practical side of things. I've mentioned this to you before, your best bet is to take up on my earlier post where I gave free access to my cutting-edge course. Take the course on Greeks, and you'll be clear in these concepts. Here it is - https://www.udemy.com/learn-options-trading/?couponCode=TLGreeks. Actually, anyone on this post is welcome to take it. There seems to be a lot of discussions and a lot of confusion on this thread..

Best

Hari

 

Hello Option Tiger,

 

Thanks a lot for sharing the materials on this thread. It's really useful.

 

As I have already studied various books on Option Greeks so I am theoretically aware of these concepts. The only thing is I am not sure on how to use them practically.

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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. :)

 

 

Thanks Larry. When trading options, I pay much attention to Delta and Vega. I mostly short options. :)

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