Ask Doubts on Option Greeks

[travi]

Hello Senior members ,

I have just started my research on options and my questions might be a bit basic .
So , given that we are options writer and have a put written at a certain level X , when the markets approach X the delta of the options increases to +0.5 .
Now in order to hedge it , we try to make it delta neutral either by :
1. Selling a few calls whose deltas add up to -0.5 or close to it
or
2. Buy puts such that it comes to become -0.5 in order to hedge it .

My questions is , despite bringing the deltas to 0 or close to 0 and the time to expiry being only 10-15days (effects of volatility wouldnt be much ) , would we still suffer a loss ? and if so , to what extent (other than the cost of hedging)

can seniors kindly throw some light on this question pls

Thanking ,
Jack of Trades

Its a balancing act.
This is how you can look at it.
The act is not controlling one greek, its all 3: Delta vs Theta vs Gamma

Which one goes like this:
1. Either you are NET Option Buyer and want to protect downside Theta.

2. You are an options writer and want to benefit from Theta, Time decay.

In most strategies, Delta will be favourable in a range and then act against the strategy.
Only in some strategies like Iron Condors etc will Delta not affect that much but even experts agree adjusting these complex ones is also not easy.
If you have sold a pair of PE/CE and bought a pair of PE/CE, how do u manage?
What can you roll? the entire 4 leg needs adjustment and become complex.

My questions is , despite bringing the deltas to 0 or close to 0 and the time to expiry being only 10-15days (effects of volatility wouldnt be much ) , would we still suffer a loss ? and if so , to what extent (other than the cost of hedging)

Plain vanilla answer is just by keeping delta 0 will not necessary keep you profitable. Your original position has already lost enough that hedge isn't compensating OR cost of hedging etc may end up in loss.

Secondly, if you are trying to gain from Theta (option writing), then along with Delta even Vega needs to be managed.

In short, any two of the greeks will need to be managed to profit from the third.

If you have a specific strategy, then u can get a specific answer.

 

[lemondew]

If the price you get by holding the trade till near expiry is greater than the price you pay for managing delta then you will make money. Vice versa you will suffer a loss

Not sure who fall in senior member category

Hello Senior members ,

My questions is , despite bringing the deltas to 0 or close to 0 and the time to expiry being only 10-15days (effects of volatility wouldnt be much ) , would we still suffer a loss ? and if so , to what extent (other than the cost of hedging)

 

[JackofTrades8]

Its a balancing act.
This is how you can look at it.
The act is not controlling one greek, its all 3: Delta vs Theta vs Gamma

Which one goes like this:
1. Either you are NET Option Buyer and want to protect downside Theta.

2. You are an options writer and want to benefit from Theta, Time decay.

In most strategies, Delta will be favourable in a range and then act against the strategy.
Only in some strategies like Iron Condors etc will Delta not affect that much but even experts agree adjusting these complex ones is also not easy.
If you have sold a pair of PE/CE and bought a pair of PE/CE, how do u manage?
What can you roll? the entire 4 leg needs adjustment and become complex.


Plain vanilla answer is just by keeping delta 0 will not necessary keep you profitable. Your original position has already lost enough that hedge isn't compensating OR cost of hedging etc may end up in loss.

Secondly, if you are trying to gain from Theta (option writing), then along with Delta even Vega needs to be managed.

In short, any two of the greeks will need to be managed to profit from the third.

If you have a specific strategy, then u can get a specific answer.

Thank you for sharing your valuable knowledge Sir .
But , wouldnt hedging dealt , vega and gamma all together be almost impossible unless we have a huge amount of capital , as the greeks can be of any combination for different strikes ?

I dont have any strategy as such sir , just doing my research and started paper trading in banknifty (planning on trading nifty , but banknifty on paper trades would give me 8 trades in 2 months and as it is volatile , once it hits the strike , I want to get used to hedging it and want to see how things work )
For now , I think best thing to do is to start off with a Short OTM Straddle .

On nifty , for it to move and close above 5%+ or fall 5%- the chances seem to be low (although i am a bit afraid of that put ) . I am looking on building my knowledge in options on how to handle the hedging and choosing the optimum strategy to reduce my risk/eliminate risk and maximize the returns accordingly .

Would love to know your views on hedging a Short OTM Straddle and how to face the hedging of it , so we dont end up loosing .... My aim is for a 2-5% returns per month . 5% is on the higher end .

Regards,
Jack Of Trades

 

[JackofTrades8]

If the price you get by holding the trade till near expiry is greater than the price you pay for managing delta then you will make money. Vice versa you will suffer a loss

Not sure who fall in senior member category

Thanks alot for sharing your knowledge Lemondew .

haha ! by senior member I mean anyone who has traded options .
I have never traded options , just starting off with my research .
and wouldnt it be a loss if hedging cost > premium collected (looking at only options selling , option buying is dependent on the magnitude of movement and predicting the time frame of the move , from what I know it seems to be really difficult to predict the timeframe and magnitude both at the same time )

Regards,
Jack Of Trades

 

[lemondew]

A loosing call side ITM call can be hedged by shorting twice ATM puts. Generally tho it depends on scenario ATM strikes ve a delta of 0.5 while ITM closer to 1. But if it reverses just realise ur ATM puts will start having higher delta as it goes to ITM while the delta of your calls will lower. That could lead to losses due to adjustment. So just plan all of it in advance and knowing why it is done will help us.

PS: I aint anti adjustment. I just like to keep in mind how thinks can go wrong.

Thanks alot for sharing your knowledge Lemondew .

haha ! by senior member I mean anyone who has traded options .
I have never traded options , just starting off with my research .
and wouldnt it be a loss if hedging cost > premium collected (looking at only options selling , option buying is dependent on the magnitude of movement and predicting the time frame of the move , from what I know it seems to be really difficult to predict the timeframe and magnitude both at the same time )

Regards,
Jack Of Trades

 

[travi]

Thank you for sharing your valuable knowledge Sir .
But , wouldnt hedging dealt , vega and gamma all together be almost impossible unless we have a huge amount of capital , as the greeks can be of any combination for different strikes ?

That's why I said its a balancing act. To be profitable, its not like cricket or football match where you need to score a winning run or goal.
Here, you need to define ranges for any two greeks that you want to profit from.
For option writing,
Eg. ForDelta, closing range of 8800 - 9300 anywhere will give you a profit.
Similarly, as long as IV increases by 1% per day (Theta protecting Vega rise)
you'll be profitable and so on.

I dont have any strategy as such sir , just doing my research and started paper trading in banknifty (planning on trading nifty , but banknifty on paper trades would give me 8 trades in 2 months and as it is volatile , once it hits the strike , I want to get used to hedging it and want to see how things work )
For now , I think best thing to do is to start off with a Short OTM Straddle.

You need to really work on this part bcos like different strokes in cricket, you need right strategy for mkt conditions.
Short straddle can really backfire when you write options at low or average IV unless you guarantee mkt to stay in a small range.
Make a chart for strategy and its relevant mkt condition.

On nifty , for it to move and close above 5%+ or fall 5%- the chances seem to be low (although i am a bit afraid of that put ) . I am looking on building my knowledge in options on how to handle the hedging and choosing the optimum strategy to reduce my risk/eliminate risk and maximize the returns accordingly .
Would love to know your views on hedging a Short OTM Straddle and how to face the hedging of it , so we dont end up loosing .... My aim is for a 2-5% returns per month . 5% is on the higher end .
Regards,
Jack Of Trades

Ideally, enter a straddle with enough time to expire, atleast 20 days on NS and ideally 40 days.
But to predict mkt 40 days ahead also is tough, but if you get theta for 1st 20 days then you can manage the trade for next 20 days.

While entering a short straddle, make sure IV is atleast 25-30% above Annualised Volatility of underlying.

Option writing is capital intensive, if anybody is contra to this, its a hoax.

 

[JackofTrades8]

That's why I said its a balancing act. To be profitable, its not like cricket or football match where you need to score a winning run or goal.
Here, you need to define ranges for any two greeks that you want to profit from.
For option writing,
Eg. ForDelta, closing range of 8800 - 9300 anywhere will give you a profit.
Similarly, as long as IV increases by 1% per day (Theta protecting Vega rise)
you'll be profitable and so on.


You need to really work on this part bcos like different strokes in cricket, you need right strategy for mkt conditions.
Short straddle can really backfire when you write options at low or average IV unless you guarantee mkt to stay in a small range.
Make a chart for strategy and its relevant mkt condition.

Ideally, enter a straddle with enough time to expire, atleast 20 days on NS and ideally 40 days.
But to predict mkt 40 days ahead also is tough, but if you get theta for 1st 20 days then you can manage the trade for next 20 days.

While entering a short straddle, make sure IV is atleast 25-30% above Annualised Volatility of underlying.

Option writing is capital intensive, if anybody is contra to this, its a hoax.

Hello Sir ,
Thanks for the amazing post !
regarding the delta , I understand the ranges but I dont get the volatility part ... how do i measure 1% per day and see if my theta is covering it ?

"you need to really work on this part bcos like different strokes in cricket, you need right strategy for mkt conditions."
sir would it be fine if you could elaborate on this ?
cause from what I can see , low IV = better to buy options and High IV = sell options . But having a proper mathematical clarity on picking the strikes/strategy is something I lack . Could you let me know your views on how to do this?


Looking forward to your valuable reply ,
Jack Of Trades

 

[travi]

Hello Sir ,
Thanks for the amazing post !
regarding the delta , I understand the ranges but I dont get the volatility part ... how do i measure 1% per day and see if my theta is covering it ?

"you need to really work on this part bcos like different strokes in cricket, you need right strategy for mkt conditions."
sir would it be fine if you could elaborate on this ?
cause from what I can see , low IV = better to buy options and High IV = sell options . But having a proper mathematical clarity on picking the strikes/strategy is something I lack . Could you let me know your views on how to do this?


Looking forward to your valuable reply ,
Jack Of Trades

Your questions are a bit complex, as in a few posts will not answer them thoroughly.
You can follow 1-2 other threads like Path to consistency etc which are relatively new and gain from there.

Just quick recaps to your queries:

I dont get the volatility part ... how do i measure 1% per day and see if my theta is covering it ?

Its just odds, its as tough as predicting the mkt. To safe guard, enter when IV is near the highs so the odds are stacked in your favour.
Avoid entering before key events.
Short straddle hugely benefits immediately key event results when IV deflates.

strikes/strategy

Most of the time short straddle/strangle will not work, need very high IV. You can buy deep OTM to create small wings as a safeguard.
study iron condor/iron butterfly for non-directional and
credit spreads for directional in which you adjust if trade goes against but negating with opposite directional spread.

Most of the strategies, strikes chosen are OTM for condor/calendar/credit spreads and ATM for straddles.

But its not that easy to explain.
Only PUT/CALL Butterflies may have an ITM but generally ITM strikes are rarely used.
Choosing b/w ATM and OTM comes when u expect a small directional bias which is always present.

 

[JackofTrades8]

Your questions are a bit complex, as in a few posts will not answer them thoroughly.
You can follow 1-2 other threads like Path to consistency etc which are relatively new and gain from there.

Just quick recaps to your queries:

Its just odds, its as tough as predicting the mkt. To safe guard, enter when IV is near the highs so the odds are stacked in your favour.
Avoid entering before key events.
Short straddle hugely benefits immediately key event results when IV deflates.


Most of the time short straddle/strangle will not work, need very high IV. You can buy deep OTM to create small wings as a safeguard.
study iron condor/iron butterfly for non-directional and
credit spreads for directional in which you adjust if trade goes against but negating with opposite directional spread.

Most of the strategies, strikes chosen are OTM for condor/calendar/credit spreads and ATM for straddles.

But its not that easy to explain.
Only PUT/CALL Butterflies may have an ITM but generally ITM strikes are rarely used.
Choosing b/w ATM and OTM comes when u expect a small directional bias which is always present.

Thanks alot sir . Yes , strategy selection is something I need to work on . I have also gone through a good amount of the thread "path to consistency" . looks like there are people like me who want decent returns (2-5% pm) consistently and want to compound their capital overtime .


Sir , if you know any books that could introduce me to the mathematics of options . that would be helpful . like modeling of IV , Thetas relationship to other greeks etc...

Thanking ,
Jack of trades

 

[travi]

Thanks alot sir . Yes , strategy selection is something I need to work on . I have also gone through a good amount of the thread "path to consistency" . looks like there are people like me who want decent returns (2-5% pm) consistently and want to compound their capital overtime .


Sir , if you know any books that could introduce me to the mathematics of options . that would be helpful . like modeling of IV , Thetas relationship to other greeks etc...

Thanking ,
Jack of trades

To be honest, I've never read a particular book.

For basics/theory, have a look at Zerodha Varsity. ITs explained really well.

For the strategy part, I've read as much as I can on the internet.
Different authors have different views, so read as much as u can and find your edge.