Trade The Journey

Trade The Journey

Reflections VI: Greeks

Top of the Morning. This weekend some states in the United States returned to mask mandates for both indoor and outdoor activities. Vaccinated or not, masks have made their return as a requirement. Sometimes I reflect as to how a dangerous virus became a statement of ideological differences.

Wearing a mask has become a statement of freedom to some people and, in others, a symbol of the growing distrust they have in their government. A legitimate few are afraid of a vaccine so quickly released and wonder about the potential effects.

The truth is no one knows the long-term effects of being vaccinated or unvaccinated. This virus produced a situation where your choice of vaccination is based on your beliefs.

Last week, we saw a surge in the number of infections and deaths. Vaccination rates have slowed, and some states face a precarious dilemma.

 

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Last week, growing concerns of rising Covid infections worldwide resulted in the Market dropping on Monday. Most US indexes fell on Monday and recovered during the latter part of the week making new highs.

Watching CNBC brought back memories of the brief recession that occurred at the height of the Pandemic. It was the shortest and most volatile recession we had in history, lasting just two months. I remember most stocks being sold at a price far below their value. I also remember seeing the bottom half of every financial news station reading, “Market Sell-Off.”

Because vast amounts of people worldwide need access to the vaccine or have refused to take it, supply chain disruptions will be ongoing. Prices for raw materials are increasing, and specific industries are forecasting long delays in alleviating shortages.

Companies like Chipotle are increasing prices to cover their margins, and others may follow. Employees are demanding wage increases to keep with the rising cost of living. Inflation worries have been subsiding, although it remains a significant concern.

The Russell 2000 index is the only index that remained in a sideways pattern. The Nasdaq, Dow Jones, and S&P 500 each reached all-time highs. The economic reports also show a decrease in consumer sentiment and slowing trends in spending. Housing is also concern with rising prices and a limited number of available homes available. The dollar has remained strong, as have crude oil prices.


This week, I wanted to reflect on my understanding of the greeks. Most of what is written on this post are my personal opinion, so it won’t read like the typical informational site.

I am still quite foggy on how the greeks exactly work. I understand that Delta covers the directional risk of the option. Delta is also a stated probability of the success of the option, and the number of shares the option position mimics.

An option delta of 0.45 could also be considered 45 shares since every equity option equals a 100 share option contract. The gamma is known as the rate of change or speed of the Delta. It is the slope of the Delta and could also be thought of as the “Exposure to the Market.”

You can adjust the gamma of a position to reduce the directional risk or Delta of the options position.

The Vega is the exposure of the option to implied volatility. Initially, I thought the implied volatility determined the price, but it’s the opposite. The price of the option influences the implied volatility. So when buying and selling increases affecting the prices, the implied volatility of the position responds.

The Theta is the measure of time decay. An options contract is a wasting asset that loses value as the contract nears its expiration date. Options are intriguing to me because they are traded contracts. It’s equivalent to valuing and trading an implied agreement without the total amount needed to satisfy the contract completion.

There are so many levels too trading options that I think the possibilities are endless. What I like most about Options is the inherent ability of creativity.

Once you understand how they work, you can adjust the Delta or directional risk of your portfolio. By using puts, you can hedge against downside risks.

With the greeks, you can adjust your options to profit solely from volatility, gamma, or Theta.

By selling options and credit spreads, you’ll benefit with time. While the buyer of options positions will lose money as their option position nears the expiration date.

The greeks change as the underlying changes but not all the greeks respond to changes in the underlying. For instance, the “theta” time value is a function of the option and contract and reflects the passage of time only.

There are other relations between the greeks. Often, traders have extended the use of the greeks by comparing them with each other.

The greeks assist the trader in measuring the risk in their options positions in ways very few assets do. With stocks, you have two choices, buy or sell. Besides the indicators available, trading stocks is subjective, with an emphasis on risk management.

With an option, you see how the value of the contract is changing in response to the underlying movements. An option is also a leveraged contract; instead of purchasing 100 shares of Company XYZ at $5.00 share, you can control the same amount of shares for much less. If a call options price is $0.45, the total paid for the contract would be $45, meaning the same 100 shares of Company XYZ could be controlled for $45 for a state period.

For example, I can claim ownership of 100 shares for a month without directly owning the shares. With a small account, options can be a trader’s dream if they understand them.

I recommend opening an options position with money you can afford to lose to see how the greeks move in real-time. At-the-money options greeks move differently to in and out-of-the-money options.

The Delta of at-the-money options is around .50, meaning there’s a fifty/fifty chance of profitability. I’d imagine the gamma would also be relatively high.

In the future, I’d like to create courses on options trading for people who have small accounts. The one aspect of options trading I cannot change is the learning curve. It took me three years to how to understand how options work, and I’m still learning.

The reality of trading or any endeavor you undertake is that it will take time, effort, and discipline to master.


Past week’s Cash Flow:

I increased the percentage saved per check to 20% from 10% regardless of fluctuations in my income. This change has caused some difficulties in available cash flow but I can manage the shortfall.

Old habits die hard. I still have spending habits that are purely for entertainment purposes. If I were to eliminate the expenses, would it make much of a difference?

I suppose it would; for some reason, I’m not convinced. If I were to do a total clean-up, I could save an additional 10%, which would total 30% saved of my current income.

With this post, I am committed to reaching this goal by the next post.

Every day I make a decision that will determine the success of my future. Time, the most limited resource we have available, warps the outcome of our choices. Time is also the only asset we have that compounds if we use it wisely.

If we make better choices today, we broaden the available choices tomorrow. A dollar saved today and wisely invested can total ten dollars in a month’s time. If you repeat the process successfully, millions can be made over time.

The returns produced with knowledge can be compound endlessly.

Grade: C
Reason: Steadiness.

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