Dimensions Trading Lab Sean Tseng. Trading Greeks. Greeks based trading strategies. Sean Tseng s presentation


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1 Trading Greeks Greeks based trading strategies
2 Position and Greeks position Delta Gamma Theta Vega Long Short Long call + (0 to 1) Long put Short call  (1 to 0) (0 to 1) Short put + (1 to 0)  + 
3 Market scenario Bull/ Vol. up Neutral/ Vol.up Bear/ Vol.up Bull/ Vol.flat Neutral/ Vol.flat Bear/ Vol.flat Bull/ Vol.down Neutral/ Vol.down Bear/ Vol.down
4 Thinking of Greeks, on single position Long call OTM, ATM, ITM Short term, long term. Short call Delta, Gamma, Vega, +Theta OTM, ATM, ITM Short term, long term. Long put Delta, Gamma, Vega, +Theta Short put Delta, Gamma, Vega, +Theta
5 Thinking of Greeks, on multiple position Long call and its variants. Long put and its variants. Call spread, Put spread and its variants. Long / Short straddle and variants. Long / short butterfly and variants.
6 Delta trader Directional trade. Long call, long put, short call, short put. Which strike? How are the Greeks? Maturity? What is effective leverage? How about the short side? Long/short call spread, Long/short put spread. Which strike? How many? How are the Greeks?
7
8 1. Better the leverage, less likely to be 2. Closer to ATM, higher time value
9 The sensitivity analysis on effective leverage Effective leverage rate OTM One week to maturity One year to maturity ITM Effective leverage equity price
10 The wider the spread is, the more it is like futures
11 The narrower the spread is, the more it is like digital option How can we justify the asymmetric P/L in a spread trade like this?
12 High Delta, with little decay in time value
13 Buy insurance, also a little hope for market crash
14 Delta trader Option portfolio for directional trade Bull trade Aggressive directional trade(momentum trade) Build up a high Delta portfolio with the least capital. Delta goes higher as price goes higher. Defensive directional trade (Reversal trade): directional trade (Range trade) Delta goes lower as price goes higher Bear trade: Build up a negative Delta portfolio
15 Aggressive Delta trade TXF c c c c
16 Aggressive Delta trade
17 Defensive Delta trade TXF c c c
18 Defensive Delta trade
19 Gamma trader With Delta neutrality, not directional trade Long Gamma. Rebalance Delta after price move. Make money regardless either way the market goes Assumption: price will move sharply in either way. Risk: price stays put, but time flies. Lose time value.
20 Gamma trade P/L chart Price fluctuation Time decay
21 Gamma trade implementation Long option and use futures to neutralize Delta. Long call and short TXF, or long put and long TXF Long call and put to neutralize Delta. Case study: July 29 TXF =5318, expiration 8/19, IMV = 29% Alternative one: put, +13 TXF Alternative two: call put Transaction cost TXO: % * Premium TXF: % * contract value
22 Gamma trade
23 Long put and TXF Low time value decay, also low Gamma benefit.
24 Long call and put
25 Long call and put Higher time value decay, but higher Gamma benefit.
26 No commission only tax Without commission, Gamma trade is much easier. The only concern is time decay.
27 Two more thoughts If IMV changes, IMV up, Vega can make up some losses. IMV down, Vega will make loss worse. If Gamma is higher. Around the money and near expiration. Easier to benefit from Gamma Much worse in time decay. Implication:?
28 IMV up 4% To benefit from then increase of IMV. So, Vega contribute more profit, and shift all the curves up. It will be better to make from Both Gamma and Vega.
29 3 days to expiration
30 When Gamma is high. Easier to make money from price fluctuation. Nevertheless, if the price doesn t move, then loss on Theta could be very high. Implication?
31 The tradeoff between Vega and Gamma Gamma and Vega are both highest at the money. On second thought: Gamma is getting higher when approaching expiration around the money. While, Vega is diminishing when approaching expiration. So, even though it is very likely to benefit from Vega and Gamma, the question is which one is more? If this is a tradeoff between Gamma and Vega, what shall we choose?
32 Theta trader The opposite of Gamma trader Time is the best friend, volatility is the worst enemy. Long Theta and short Gamma by holding short option positions. Pick the short term option to enjoy the highest Theta value. Assuming: Nothing will happen. Risk: Something does happen. Rebalance Delta when necessary.
33 Theta trade Time decay Price fluctuation
34 Theta trade implementation Short option and use futures to neutralize Delta. Short call and put to neutralize Delta. Case study: July 29 TXF =5318, expiration 8/19, IMV = 29% call put Transaction cost TXO: % * Premium TXF: % * contract value
35 Long Theta and short Gamma
36 Long Theta and short Gamma The idea is to make money from Theta, when price stay unchanged. Nevertheless, if price does change, we will lose from Gamma( Delta imbalance). So, what can we do?
37 Managing a long Theta/short Gamma position Stay put, then wait and see. (That is directional trade). Or, dynamic rebalance the Delta position. Assuming this case: Four days later(8/2), TXF down to 5200 from Our Net Delta position become +7.5 million(or 7.2 TXF). We have to short 7 TXF to rebalance our Delta risk. At the same time we lose more on the put we short and profit less on the call we short. So, we will end up with only a little profit even receiving the time value for four days. After rebalance, if price goes up again, we have to buy back futures to rebalance, and encounter another loss.
38 Why Rebalance? Hedging slippage 1,500 Net Delta (in shares) Net Delta ( in $ ) 1, (500) (1,000) (1,500)
39 Short Gamma
40 So, actually the profit of Theta trade is : Time value received Loss from rebalance delta
41 Distribution of P/L
42 The difference in vol spread converge over time
43 The trick of Theta trade Timing to short At times we believe the market volatility is getting lower. So, the time value we received can be higher than the hedging loss in the holding period. Short when actual volatility is high, when market is over shooting. Short when IMV is trending lower. Hedge Be patient, but be alert. Stay put before market makes decisive move. Hedging is actually a series of speculation. In smaller scale, and in shorter time span.
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