Thursday, September 20, 2012

Using the Greeks


Negative Gamma means that this is a Short Options position, therefore we want the price to go AWAY from the position….in the case a  of Bear Call spread down since it’s a short position.

Secondly, it’s shows us how much the Delta will change if the stock moves up or down one point.

If the price goes higher, then the Delta of the position will increase by the Gamma amount, If the price goes lower, then the Delta of the position will decrease by the Gamma amount.

The Gamma Risk is that as the price comes closer to this short Bear Call Spread Options position, the Delta Risk will rise faster and faster; it creates an “acceleration” of risk.

** if delta is -ve and the stock goes up you loose.
** if gamma is -ve and delta is -ve and the stock move up, the delta will increase by gamma amount.
** if gamma is -ve and delta is +ve and the stock moves up, the delta will decrease by gamma amount.

++ flat delta, flat gamma, flat vega and a +ve theta is what you would like to achieve.

The Bull Put spreads contribute long deltas.
The Bear Call spreads contribute short deltas.

If delta is -92 that means that for the first  point that the SPY price rises, my position will lose $92 of value.

If the Gamma value is about -50 and Delta is -136, that  means that if the SPY rises one more point, the Delta value will be about (-136)+(-50) or about -186.

If Delta is -370, and Gamma is -68.46:
What it will do to Delta the next 1 point move higher in the underlying SPY, we see that the Delta will read (-317.56) +(-68.46) = -386.02. This shows the importance of using Gamma to be proactive.

So if the value moves beyond our Delta Threshold you can adjust the position by adding some Long Deltas.
We can added a synthetic position by selling a put at the 109 strike, and buying a call at the same strike.

The “acceleration” effect of Gamma tends to intensify the further that we get into the expiration month, and the closer that the price gets to a short strike of a credit spread.

If Delat for the postition has moved to +111 Deltas, which is now telling us that the price needs to go UP for the position to gain value.

Determining a DELTA THRESHOLD based on position size and personal risk/reward criteria will allow you to set an objective trigger point to adjust.

Once your Delta Threshold has been exceeded, you will add Long or Short Deltas to bring the overall position back within your Delta Risk threshold.