Adjusting with the Greeks


I have been spending a great deal of time lately looking into making adjustments and all the various methods people use as part of developing my overall plan. I understand and subscribe to your idea that first and foremost you MUST want to own the adjusted position as a new position not just to save yourself from a "loss".

I have gone back and read some of your old posts about the three stages of adjusting and about your kite strategies. I am wondering if now would be a good time to post a refresher and maybe some new examples of the various ways one could consider adjusting positions and how to focus on Greeks when making different adjustments.

Thanks again for the great Blog and book. 


 Thanks for the suggestion.

My business is doing my best to help others learn about options – especially those in the earlier stages of their learning or trading careers.

Option trading is not mathematics. It is not an exact science. One problem I face is that when I express an opinion, some readers accept that as THE TRUTH. While that may be flattering, it's not my purpose. I believe in offering ideas that I'd like readers to consider. Obviously I believe each idea is sound, and is a reasonable alternative for the given situation.

When making such comments, I never know my audience on a personal level. Some readers are more sophisticated and can tackle more complicated ideas. Others are in position to seek higher gains and are willing to take greater risk to achieve their goals. Still others are very conservative traders who abhor risk.

The point is that it's difficult to give general advice that is appropriate for everyone. With that in mind, I'll tackle Scott's request.

Focusing on Greeks

is an intelligent method for reducing/eliminating specific risk. Good idea. The one aspect of option trading that separates it from all other forms of investing is that it allows specific risks to be measured.; You can measure delta (ok, so can any stockholder), but you also have the ability to measure the rate at which delta changes (gamma). You can determine the effect of time passage on the value of your positions, etc.

It's not so much a matter of focusing on the greeks and making specific trades related to the greeks that's important. Scott, if you look at your vega (or any greek) and let’s say you find that you are short 600 vega and that a 5-point jump in implied volatility will theoretically (the greeks provide an estimate of how the option prices will change; they do not provide a guarantee) make your position lose $3,000.

You can decide:

a) That's ok. The position can stand that much swing or perhaps, ouch. If the former describes how you feel, no vega adjustment is needed. If the latter holds true, then you want to buy some vega. It's not complicated. You could cover some short options, or perhaps buy a new positive vega spread.

b) Such a move is likely, so if 'ouch' is how you feel, you should take some risk-reducing action.  Or, you may feel that although it would hurt, it's so unlikely that you won't adjust.

You measure risk; then decide whether you want to take that risk or reduce it.  That's how to use the greeks.  It's not more complicated than that. When you have a good handle on risk, you are in position to take appropriate action.

Kites are too complicated for a review. At least not right now. I never finished all I had to say about them – because so much detail is needed.

I will say this about kite spreads. Any time you can own a naked long option at a cost that you deem acceptable, it does take a lot of risk out of a major market move.  But, it's not for everyone.


My basic premise on adjusting is that any one trade can illustrate what's possible. Almost any trade that reduces risk is helpful. For iron condor traders, that means reducing delta exposure, and perhaps reducing negative gamma and vega as well.

Examples are just that. There are always alternatives. Your individual needs and comfort zone boundaries often define how to adjust.

Let's say you traded 10-lots of a credit spread (or a whole iron condor) and the call portion is in trouble. With stock trading near 200, 15 points higher than when you opened the trade, you are short a 210/220 call spread that expires in 45 days.

If we take this as the given situation, some traders will object that they would never own this position unadjusted. They would have done something earlier, or say that 10-lots is too many (or too few). Others would say 'what's the problem?' The fact that such positions can be looked at as very risky by some while getting no more than a shrug of the shoulders by others already tells us that any 'examples' may be considered as unrealistic by the majority.

If adjusting a credit spread, iron condor, butterfly – any limited loss trade that has changed the position into one you are no longer willing to own, something must be done. The two obvious choices are to close or reduce. However, if you see something that turns the position into something desirable, then go for it. I don't know how to provide a list of possibilities that may appeal to any trader or group of traders.

A trader could buy calls or puts, buy debit spreads for delta, sell credit spreads for delta – but get even shorter gamma and vega. He/she could own calendars that widen where risk is now greatest. There is truly a large list of potential trades to help any position – depending on how you want to 'help' it. I use a limited number of adjustment trades in my repertoire, but each of us is limited only by our imaginations.


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5 Responses to Adjusting with the Greeks

  1. Robert D. 03/04/2011 at 2:14 PM #


    I have a basic question regarding the option Greeks. Gamma determines the change in delta with respect to price. Theta determines the change in value wrt time. Vega determines the change in value wrt IV. What determines the change in gamma?


    • Mark D Wolfinger 03/04/2011 at 3:11 PM #


      The rate of change in Gamma with respect to changes in the underlying price is measured by Speed.
      Sometimes it is also referred to as the gamma of the gamma. Speed is known as the third derivative of the value function with respect to the underlying spot price. When delta-hedging or gamma-hedging a portfolio, speed can be important to monitor.

      • Robert D. 03/04/2011 at 9:10 PM #

        So gamma is price-driven as well. That makes me wonder what, ultimately, drives these changes. Mathematically, you can just keep taking higher-order derivatives, but it seems there would have to be a chain of real-world events that determine these variables’ values. I’m trying to grasp fundamental pricing concepts here, but maybe I’m just entering a philosophical quagmire…

        • Robert D. 03/04/2011 at 9:33 PM #

          Nix that last post– I just answered my own question: The value function can be expressed as a polynomial in p, with delta, gamma, etc. as the coefficients. Ultimately p is driven by supply and demand.

          Yeah. It’s been a long week. 😛


          • Mark D Wolfinger 03/04/2011 at 10:25 PM #

            Thank you Robert