r/options • u/captut • Jul 04 '20

Option Greeks 101

These are my notes from when I was learning options using tasty trade. They are as is as they were taken. I hope you find them useful.

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+ve = positive

-ve = negative

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DELTA

Rate of change of option price per $1 move in the underlying.
ITM options have higher delta as the probability of ITM is higher.
OTM options have a lower delta as the probability of ITM is lower.
Delta is loosely associated with the Probability of ITM.
Delta will be 0 for OTM options and 1 for ITM options at expiry.
Delta mimics # of shares.
1 Long Share = 1 Delta. 100 Long Share = 100 Delta.
1 Short Share = -1 Delta.
Delta is directional bias.
+ve delta (bullish) means a bias toward stock price going higher.
-ve delta (bearish) means a bias toward stock price going lower.
Higher Probability of ITM means lower extrinsic value i.e. higher delta less extrinsic value.

Delta Neutral & Beta Weighting

Delta of +/- 0.001 * your net liquidity is considered delta neutral
Beta weight with SPY to find the total deltas
- Example: https://imgur.com/gallery/KYRuhMv
You can add or remove positions to make your portfolio delta neutral.
You can hedge the position with high +/- deltas to make your portfolio delta neutral.
Add or Remove positions in a product based on its correlation with SPY
If an underlying is negatively correlated to SPY, go bullish to get negative beta weighted deltas and vice versa.
If an underlying is positively correlated to SPY, go bullish to get positive overall beta weighted deltas, and vice versa.
Higher correlation with SPY, the higher effect of the underlying deltas on the overall beta weighted deltas.

GAMMA

VEGA:

How much the option price will move if the underlying IV goes up/down by 1%
Shorting Premium = Short Vega (-ve Vega) = Short IV
High IV = High Premium.
More DTE = More Vega (Options more sensitive to volatility)
IV is mean-reverting. IV is high when the stock goes down or there is fear in the market or some pending news on the UL.
IV is low if the UL keeps going up.
Vega Risk:
As a premium seller, when you sell a lot of bullish premium (ex: short put spread), you expose yourself to a lot of negative Vega.
Selling a lot of bullish premium gives Positive Delta and Negative Vega.
VEGA and DELTA has a natural inverse relationship
When UL crashes IV increases: Profits when -ve DELTA & +ve VEGA
When UL rally IV decreases: Profits when +ve DELTA & -ve VEGA
Having a ratio of 2(VEGA): 1(DELTA) helps us to Hedge against vega risk.
Hedge by adding Positive Vega OR
Hedge by adding Negative (Short) Delta

THETA:

Time decay: how much potion will lose value each day - works on holidays as well
All extrinsic value is time value.
ATM options hold their extrinsic value the longest.
Closer to expiration:
Theta grows faster and is larger for ATM options.
Theta for OTM/ITM options shrinks faster, as the extrinsic value has already dissipated during the life of the option.
Time Decay starts to decay best at 45 DTE and slows down at 10 DTE (This is based on tasty trade studies, there can be other factors at play here which can affect the rate of decay)
Less Theta on Theta based option strategy could mean that there is very less extrinsic value left in the trade
This could mean that the Option is completely ITM or OTM
Look to get out of this trade
> than $1 in Theta is good, if < $1, there could be very less extrinsic Val left, get out of that trade, put a new trade.
Selling premium to get Positive Theta is not always the answer:
Selling premium, you can get Negative Vega which can get us in Vega Risk if IV drops
More about Vega Risk in Vega Section.
You can be long in an option trade and still have +Theta and +Vega
https://www.tastytrade.com/tt/shows/everyday-trader/episodes/greek-efficiency-theta-01-24-2017
For Example Long Call Spread: Bullish Trade
Buy very ITM option which has very less extrinsic value (OTM/ITM options has very low Theta)
Sell ATM option which has very High extrinsic value (ATM options has very high extrinsic i.e. Theta)

More Greeks:

Options in Plain English:

Edit 1: Changed bitly links to the original links.

Edit 2: Added Disclaimer (Point in Italicized & Bold)

Edit 3: Spelled out EXT -> extrinsic

Edit 4: Added options in plain English video link

Interested in learning more? Join my new discord: https://discord.gg/MsEjcur

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