Reading thru your blog, I feel I have a lot to learn. I noticed
the graph you use above. Is there any software you recommend for us?
When I look at Greeks of the positions (I use OptionsXpress), there
are Delta, Pos.Delta, Pos.Gamma, Pos.Theta and Pos.Vega. What is the
difference between Delta and Pos.Delta?
I may know the definition of each
Greek, but I have no idea what the numbers represent.
For instance, -59
for Pos.Delta, -3.12 for Pos.Gamma, 14.66 for Pos.Theta and -7.49 for
Pos.Vega.(I have an IC with some kite) What message do those numbers
You do have a lot to learn. It' not difficult to understand what an option is. Options are not complex. But putting everything together so you can understand what your position is supposed to do to make or lose money requires an education. I understand that you are a rookie
option trader and I don't know where you are in your education process. Take your time. You have the rest of your life to trade.
It's important to be able to speak the language of options and to understand the terminology. However, memorizing definitions without knowing how to translate those definitions into real world terms, does not help you learn what it is you want to know. Let's see if I can clear up any
difficulties you may have with the Greeks.
First: Choosing software is personal. I have not found anything I like – at least nothing that is available at no cost. I don't require complex software, and look at the cost-free alternatives. For my needs, my broker's offering is good enough.
Now on to the important discussion.
I'm sure you understand that each option has certain properties. For example, you know that a call option has positive delta. In the options world, each of those properties is represented by a Greek letter (ignore the fact that vega is not from the Greek alphabet).
Collectively those characteristics of an option are knows as 'the Greeks.'
What purpose do those Greeks serve and why should you care? The Greeks are used to quantify (in terms of dollars gained or lost) the estimated risk and reward that you will realize for a specific option, or group of options, if certain market events occur. Because you must understand how much you can make – and more importantly, how much you can lose – if the stock moves 5 points, or if three weeks pass, or if the implied volatility increases by 4 points, it's necessary to pay attention to the Greeks. They allow you to make a very good estimate of just how much money is on the line at all times.
That 'group' of options may be a simple spread, such as a calendar spread or an iron condor.
However, the group of options can include more individual options, such as the entire collection of options in your portfolio. Using different words, those are all the options that comprise your option POSITION. Thus "Pos. Delta" represents your 'position delta' or the sum of the individual deltas associated with each of the options in your entire position.
Your position delta is calculated by adding the delta of each option you own and subtracting the delta of each option you are short (i.e., sold). If you own 10 RGTO Dec 80/90 call spreads, your position delta = 10 x the delta of the 80 call, minus 10 x the delta of the 90 call.
**Remember that calls have positive delta and puts have negative delta. Thus, when you sell puts, you subtract a negative number, and position delta increases. When you buy puts, position delta decreases.
What's the point of knowing position delta, or any other Greek, such as position gamma or position vega? As mentioned, the Greeks provide a good estimate of risk (and reward). In your example, the message to be derived from: position delta = -59 is:
If the underlying asset moves higher by one point you can anticipate earning that number of dollars. In this case that is -$59. In other words, a loss.
Instead of getting confused by positive and negative numbers, look at it this way: If you have positive delta, you are 'long' and should profit when the underlying rises. When you have negative delta, you are 'short' and should profit when the underlying falls.
Keep in mind: Each Greek is merely an estimate. The market does not 'promise' to deliver a $59 profit if the stock declines by one point. Other Greeks are in play, and sometimes the effects are additive and sometimes they offset each other (more on that in Part II).
Repeated for clarification: The Greeks don't do anything. They don't make money. They don't make positions risky. Greeks allow you to measure risk. the Greeks allow you to measure potential gains and losses. They serve no other purpose.
When you measure risk, you have a choice. You may live with the risk, or you may hedge that risk. That's why the Greeks are essential for risk management. When you measure a risk factor (delta, time decay, etc,) you can hedge, or reduce, that risk. You can ignore the risk or offset all or part of that risk.
When you trade stock, if you believe you are too long and uncomfortable with the risk, all you can do is sell some shares.
When you trade options, there are many reasonable alternatives to get 'less long.' One choice is to sell positive deltas or by buy negative deltas. And that does not mean you must buy or sell calls or puts. You can hedge (adjust) the position (or portfolio) with any combination of options, including a kite spread. Obviously some choices are more efficient to trade than others, but knowing how to hedge a position is one of those matters you learn from experience or by reading Options for Rookies.
When you understand how position Greeks translate into real money, you are well-placed to make important risk management decisions. When the definitions of the various terms are merely a blur, you cannot function efficiently.