Using the Greeks

Gamma:

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.

Options Greeks

Delta:

Positive Delta positions gain value as the price of the underlying instrument goes up, while Negative Delta positions gain value as the price of the underlying goes down.

Buying calls creates a Positive Delta position.

Selling puts creates a Positive Delta position.
Buying puts creates a Negative Delta position.

Selling calls creates a Negative Delta position.

Options Spreads - will provide Deltas equal to the positive Delta Options minus the negative Delta Options, and the final result can yield negative or positive Deltas depending on the composition of the spread.

A Credit Spread Call Vertical (Bear Call Spread) that is set up OTM will be a negative Delta position, since the negative Deltas of the short strike will be larger than those of the positive Deltas of the long strike.

A Credit Spread Put Vertical (Bull Put Spread) that is set up OTM will be a positive Delta position, since the positive Deltas of the short strike will be larger than those of the negative Deltas of the long strike.

Delta Size:

A long call will generate positive or “long” Deltas equivalent to the number of contracts traded times the actual Delta value of that Option. A long put will generate negative or “short” Deltas equivalent to the number of contracts traded times the actual Delta value of that Option.

Gamma:

Is the measure of the change of an Option’s Delta value with respect to a one point move in the price of the underlying instrument.

As Options sellers, we will almost always be dealing with Negative or Short Gamma positions. Negative Gamma positions lose value as the price approaches the position.

When Options are well out of the money, Delta values change very slowly with changes in the underlying price. The closer that the position gets to the money, however, the faster that Gamma ramps up and “accelerates” the movement in Delta.

A Credit Spread position has Negative Gamma characteristics which means that it will lose value as price approaches the short strike price.

A Debit Spread position has Positive Gamma characteristics which means that it will gain value as price approaches the short strike price.

Theta:

Is the measure of the change in an Option’s value with respect to a one-day change in time.Should be positive, If this “Theta” number is positive, then it illustrates how much your position is gaining value every day as a result of Theta.

If you see a positive number that represents the Theta of your entire position, then you’re doing something right with your Option selling strategy.

Selling Puts creates a Positive Theta position, and Selling Calls creates a Positive Theta position.

Selling a Credit Spread means that the Positive Theta of the short Option is larger than the Negative Theta
of the long Option, so the position will be Positive Theta overall.

Vega:

Is the measure of the change in an Option’s value with respect to a one-percent change in volatility.

If this number is positive, then it illustrates how much your position will gain with a rise in implied volatility.

Generally when you sell an Option, it’s better to have volatility contract after you’ve entered the position, as opposed to expand after you’ve entered the position.

Credit Spreads and Short Options are SHORT VEGA positions, which gain value when implied volatility drops.

Debit Spreads and Long Options are LONG VEGA positions which gain value when implied volatility rises.

Credit spread is a Short Vega position, it will gain value as the implied volatility drops.

Much like Theta, the effects of Vega dissipate with time.

The effects of a change in implied volatility will have the most dramatic effect on longer-term Options vs. those about to expire.


For the purposes of a Credit Spreads you want:

Delta:      Neutral
Gamma:  Negative
Theta:     Positive
Vega:     Negative