Hello, my friend, and welcome to this tutorial on Option Greek Strategies. In this post, we will look into Option Greek strategies, definitions, and calculator for the missing element for trading options Greek. Enjoy!
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Option Greek Strategies – Video
Hey traders, Berry Burns here with Top Dog Trading, and today we’re going to talk about option trading the missing Greek; sounds very dramatic, very curiosity-provoking, but it is very important – and I rarely hear option traders talk about this. So, let’s jump right into it and reveal the missing Greek and why it’s so important if this really is critical to eruption trading.
So in the last video, by the way, this is a little series on option trading. I’ll put the links down in the description below for the other videos. If you want to follow the whole series along, we talked a little bit about theta, that is, time decay. If you were buying options, basically, you want to buy them 90 days out away from expiration because time decay has a parabolic move and decays faster. As we get closer to that expiration, if you’re selling them, usually, we sell less than 30 days out from expiration to put data on our side. Now Delta and Gamma we’re going to talk about these, I can’t emphasize them too much. We talked about them in the last video, though, when we talked about buying options. So Delta is simply the speed at which the option price; remember, that’s the option price, is expected to move for every dollar move in the stock.
Recap – Option Greek Strategies
So, as we talked about in the last video, if you want to buy options, we have a problem and that problem is to overcome the cost of buying the option before we break even on the stock. If you buy a stock, you’re great, given right away. If you buy the option on the stock, you are not because you’ve got the premium and you go to overcome the cost of that premium before you break even on the stock. So if you’re gonna buy options again have options that really move, especially if you hold to expiration. So Delta is very important if you’re a buyer all right but remember, and I’m setting up for where we’re going here with the missing option. It’s the speed at which the option price is expected to move for every $ 1 move in the stock. Now gamma, then, is the acceleration of the options price.
What is Delta and Gamma, and Why are They Important?
So it’s the rate at which the Delta will change based on a dollar change in the stock price, so again we’re talking about these option prices in relation to how fast they will move to the stock price. Now, if you remember in the last video, I talked about how many option traders neglect really learning to read the underlying or the chart of the underlying market because options are derivatives, the derivatives of the stock or commodity or forex market, whatever you’re trading. And so you really need to begin with understanding the underlying market before you make your choice about options, the Greeks, the strategy is all that kind of stuff, those come later. But if you don’t understand the stock your trading, the dynamic, the money flow, the energy, the chart pattern, and what you expect it to do, then really options is just a fool’s errand.
Get into the Details – Option Greek Strategies
It’s really sad. And then Vega we haven’t talked about Vega yet, we’ll do another video on that that references volatility often commonly misunderstood. So today, though, we’re going to talk about what is this missing Greek. Actually, there are two missing Greeks, so one is talked about a little more, that is Rho, so most people have heard of Rho, but they don’t really use it even in their option trading.
So I’ll do another video on Rho as well because if you don’t use Rho, that can really destroy your option trading account and again most people dismiss it like it’s not important. That’s a big mistake, so we’ll dedicate another video to that. Today, the missing Greek I want to talk about is Beta. So if you’ve been really listening to what I’ve been saying, you can understand how important this really is and yet rarely talked about in option trading. So Beta is the rate of change in a stock price, not the option price like Delta and Gamma.
Understanding Beta – Option Greek Strategies
Those were the changes in the option price, but now Beta is the rate of change in the stock price relative to a benchmark. Usually, the S&P 500, especially if you’re trading equities. So now, why is this important again? Because Delta and Gamma are changes in the option price relative to the change in the stock price. So we better have some sort of feel, some idea of what that stock price is going to be, and if you want to buy options, you want that stock to really take off and then the option prices are more likely to expand as well.
All things considered, put this all together right, and it’s like a little puzzle. Each one is a piece. Put them all together and you’re goldenBarry Burns
Understand the Foundation of Options Trading
All things considered, put this all together right, it’s like a little puzzle. Each one is a piece put them all together and you’re golden, you miss one and you’re not going to have a pretty picture and your trading account is not going to look pretty at the end of the month, so this is where it actually begins. This, actually, my friends, is the foundation of option trading and, of course, now, if you’re selling options and you’re trading some sort of option strategy where you really don’t want the market to move. This is still very important because then you want a low Beta. So beta is defined as 1.0 means that if the S&P moves up say 0.5%, then the stock should move up 0.5%. That makes sense, 1 even right to move in concert with each other.
A beta of 2.0 would mean that if the S&P moves up 0.5%, then the stock should move up 1.0 percent, in other words, twice as much the rate of change should be twice as much would be great for option buyers if you’re buying a stock. What kind of stock do you want?
You want one that has a beta of 1.0, or would you rather have one that has a beta of 2.0? I think you know the answer now. Let’s take a quick look over at ThinkOrSwim.
Option Greek Strategies – Analysis
Let me show you how you can analyze this, look at it, and make some decisions. Hold on one second, as they bring up my ThinkOrSwim platform. So now you should be able to see a watchlist here, and this is simply of the S&P 500. I brought up and we’ll move this over a little bit so you can see the symbols better, okay, and so we’ve got our columns here and you can set up different columns and by the way, different charting platforms.
Obviously, the functionality is going to be a little different. I’m sorry, I’m not familiar with all the charting platforms, so I can’t help you with that. But I’ll show you how to do it in ThinkOrSwim and then, if you use a different trading platform, just contact your software provider and ask them how to do it in theirs. They know theirs better than I do because, well, they made it and they do have a support team for you, alright. So what we’re gonna do is click on this little gear.
See a little gear and I guess went off the side there, but it’s called customized, and then what you can do is customize your columns, so we’re just gonna go down here and we are going to choose Beta. I like to use the regular beta and items so here’s your current set of columns, click over there, and there we go. So now, I’ve got a column for beta, alright.
ThinkOrSwim Demo – Option Greek Strategies
Remember, we know what our numbers are right. We understand that 1.0 means that the stock is basically moving the same as the S&P 500, above that or more. So, we can sort by this and let’s put the biggest numbers at the top. Let’s say that you know you’re not necessarily going to bring up the S&P 500, but let’s say that you’ve done some work and you’ve created a watchlist, a number of candidates that you feel they’re good trades based on whatever your criteria are, alright, so you bring them up into this, and you can start by saying well Kelly: I’ve got maybe whatever 20, 30, 50 candidates. How do I choose which one I want to trade because I don’t have a big enough trading account to take option positions in all of them?
This is one part of the puzzle: again you can sort by Beta and you can look over here and say: oh wow, that one’s got a beta of almost 3! 2.6 and go right down the list, alright, and so this would be one way to sort out some of the candidates to narrow it down to which ones will be the best and again that’s pretty much it. That’s just one criterion, it’s that simple again, you would not do this alone and only trade based on this. Obviously, but it’s one other piece of evidence, so we’re looking for a preponderance of the evidence of the best candidates and if you’re buying options and you want something to really take off, then this would be another piece of evidence that you could use along with others that you use and add it to your criteria, and I think it would be very, very helpful. So try it out test it see anything like it. I find it to be very, very powerful and again most people weren’t doing this and that’s why they wonder how come?
How come my options didn’t move you know what’s going on? Or why did my option all of a sudden take off and I’m selling it and I don’t want it to move and they did? So this would be one criterion as to why.
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