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(1)

Trading Greeks

Trading Greeks

Greeks based trading strategies

(2)

Position and Greeks

Position and Greeks

position Delta Gamma Theta Vega

Long

+

0 0 0

Short

-

0 0 0

Long call

+

(0 to 1)

+

-

+

Long put

-

(-1 to 0)

+

-

+

Short call

-

(0 to –1)

-

+

(3)

Market scenario

Market scenario

Bull/

Vol.flat

Neutral/

Vol.flat

Bear/

Vol.flat

Bear/

Vol.down

Bull/

Vol.down

Neutral/

Vol.down

Neutral/

Vol.up

Bull/

(4)

Thinking of Greeks, on single position

Thinking of Greeks, on single position

• Long call

– OTM, ATM, ITM

– Short term, long term.

• Short call

– -Delta, -Gamma, -Vega, +Theta – OTM, ATM, ITM

– Short term, long term.

• Long put

– -Delta, -Gamma, -Vega, +Theta

• Short put

(5)

Thinking of Greeks, on multiple position

Thinking of Greeks, on multiple position

• Long call and its variants.

• Long put and its variants.

• Call spread, Put spread and its variants.

• Long / Short straddle and variants.

(6)

Delta trader

Delta trader

• Directional trade.

• Long call, long put, short call, short put.

– Which strike? How are the Greeks? Maturity? – What is effective leverage?

– How about the short side?

• Long/short call spread, Long/short put spread.

(7)
(8)

1. Better the leverage, less likely to be ITM @expiration 2. Closer to ATM, higher time value

(9)

The sensitivity analysis on effective leverage

The sensitivity analysis on effective leverage

Effective leverage rate

2.00 3.00 4.00 5.00 6.00 7.00 8.00 9.00 10.00 11.00 12.00 13.00 14.00 15.00 16.00 17.00 18.00 19.00 20.00 21.00 22.00 23.00 24.00 25.00 Effective leverage ITM OTM

One week to maturity

(10)
(11)

The narrower the spread is, the more it is like digital option

How can we justify the asymmetric P/L in a spread trade like this?

(12)
(13)
(14)

Delta trader

Delta trader

• Option portfolio for directional trade • Bull trade

• Aggressive directional trade(Momentum trade)

– Build up a high Delta portfolio with the least capital. – Delta goes higher as price goes higher.

• Defensive directional trade (Reversal trade):

– directional trade (Range trade)

– Delta goes lower as price goes higher

• Bear trade:

(15)

Aggressive Delta trade

Aggressive Delta trade

TXF 5600 100 5700 c 200 5800 c 300 5900 c 400 6000 c

(16)

Aggressive Delta trade

(17)

Defensive Delta trade

Defensive Delta trade

TXF 5600 1000 5500 c -1000 5800 c -300 5900 c

(18)

Defensive Delta trade

(19)

Gamma trader

Gamma trader

• With Delta neutrality, not directional trade • Long Gamma.

• Rebalance Delta after price move.

• Make money regardless either way the market goes • Assumption: price will move sharply in either way. • Risk: price stays put, but time flies. Lose time value.

(20)

Gamma trade P/L chart

Gamma trade P/L chart

Price fluctuation

(21)

Gamma trade implementation

Gamma trade implementation

• Long option and use futures to neutralize Delta.

ƒ Long call and short TXF, or long put and long TXF

• Long call and put to neutralize Delta.

• Case study:

– July 29 TXF =5318 , expiration 8/19, IMV = 29%

• Alternative one:

ƒ +112 5300 put, +13 TXF

• Alternative two:

Transaction cost

TXO: 50 + 0.125% * Premium

(22)

Gamma trade

(23)

Long put and TXF

Low time value decay, also low Gamma benefit.

(24)

Long call and put

(25)

Long call and put

Higher time value decay, but higher Gamma benefit.

(26)

No commission only tax

Without commission, Gamma trade is much easier. The only concern is time decay.

(27)

Two more thoughts

Two more thoughts

• If IMV changes,

– IMV up, Vega can make up some losses. – IMV down, Vega will make loss worse. • If Gamma is higher.

– Around the money and near expiration. – Easier to benefit from Gamma

– Much worse in time decay. – Implication: ?

(28)

IMV up 4%

To benefit from then increase of IMV. So, Vega

contribute more profit, and shift all the curves up. It will be better to make from Both Gamma and Vega.

(29)

3

(30)

When Gamma is high…….

Easier to make money from price fluctuation. Nevertheless, if the price doesn’t move, then loss on Theta could be very high.

(31)

The tradeoff between Vega and Gamma

The tradeoff between Vega and Gamma

• Gamma and Vega are both highest at the money. • On second thought:

– Gamma is getting higher when approaching expiration around the money.

– While, Vega is diminishing when approaching expiration. – So, even though it is very likely to benefit from Vega and

Gamma, the question is which one is more?

– If this is a trade-off between Gamma and Vega, what shall we choose?

(32)

Theta trader

Theta trader

• The opposite of Gamma trader

• Time is the best friend, volatility is the worst enemy.

• Long Theta and short Gamma by holding short option positions. • Pick the short term option to enjoy the highest Theta value.

• Assuming: Nothing will happen.

• Risk: Something does happen. • Rebalance Delta when necessary.

(33)

Theta trade

Theta trade

Time decay

(34)

Theta trade implementation

Theta trade implementation

• Short option and use futures to neutralize Delta. • Short call and put to neutralize Delta.

• Case study:

– July 29 TXF =5318 , expiration 8/19, IMV = 29%

ƒ -100 5300 call -115 5300 put

Transaction cost

TXO: 50 + 0.125% * Premium

(35)
(36)

Long Theta and short Gamma

The idea is to make money from Theta, when

price stay unchanged. Nevertheless, if price does change, we will lose from Gamma( Delta

(37)

Managing a long Theta/short Gamma position

Managing a long Theta/short Gamma position

• Stay put, then wait and see. (That is directional trade). • Or, dynamic rebalance the Delta position.

• Assuming this case:

– Four days later(8/2), TXF down to 5200 from 5318.

– Our Net Delta position become +7.5 million(or 7.2 TXF). – We have to short –7 TXF to rebalance our Delta risk.

– At the same time we lose more on the put we short and profit less on the call we short. So, we will end up with only a little profit even receiving the time value for four days.

– After re-balance, if price goes up again, we have to buy back futures to rebalance, and encounter another loss.

(38)

Why Rebalance?

Why Rebalance?

(1,000) (500) 0 500 1,000 1,500 107 105 103 101 100 99 97 95 93

Net Delta (in shares) Net Delta ( in $ )

• Hedging slippage

(39)
(40)

So, actually the profit of Theta trade is :

(41)

Distribution of P/L

(42)

The difference in vol spread converge over time

(43)

The trick of Theta trade

The trick of Theta trade

• Timing to short

– At times we believe the market volatility is getting lower. So, the time value we received can be higher than the hedging loss in the holding period.

– Short when actual volatility is high, when market is over shooting. – Short when IMV is trending lower.

• Hedge

– Be patient, but be alert.

– Stay put before market makes decisive move. – Hedging is actually a series of speculation.

References

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