option greeks

4 Key Option Greeks to Manage Risks Better

Do you know how to use the option Greeks to analyse the risks of your trades?

Today SlashTraders will discuss the major option Greeks (delta, gamma, theta and vega) so you have the tools to control risks when trading options.

What Is Delta?

Delta is the changes to options price with respect to changes in the underlying price. A positive delta indicates the trade will profit when the stock price goes up, and loses when the price goes down.

If we purchase a Call option at the market price, the trade is 0.50 delta. The Call option value goes up $0.50 for every $1 increase in market price. When the market price drops by $1, the Call option price lowers by $0.50.

buy 0.50 delta call
A long Call has a positive delta, so changes to stock price lead to changes in Call value of the same direction.

Buying an ATM Put option is -0.50 delta, which means the Put option value drops by $0.50 for every $1 rise in stock price. If the market price goes down by $1, the Put option value goes up by $0.50.

buy 0.50 delta put
A long Put has a negative delta, so changes to stock price lead to changes in Put value of the opposite direction.

If we look at the long Call deltas at different strike prices:

  • ATM Call is 0.50 delta.
  • OTM Calls have a lower delta.
  • ITM Calls have a greater delta.
moneyness call delta
ATM Call is 0.50 delta, OTM Calls have a lower delta, while the delta gets larger as Calls move ITM.

Delta is a good way to estimate the chance of ITM at expiration.

DeltaITM chance
0.7575%
0.5050%
0.2525%

Buying and selling different option types result in different signs of deltas.

Options strategiesDeltaDirection to profit
Buy CallPositiveBullish stock price
Buy PutNegativeBearish stock price
Sell CallNegativeBearish stock price
Sell PutPositiveBullish stock price

So we can use the combined delta to see whether we are bullish or bearish in our investment portfolio. We can use trades of opposite deltas to hedge and protect our investments.

Use Positive Delta for Bullish Trades

The Bull Put Spread Screener uses historical chart analysis to find bottom out stocks that have a high probability of an upward correction that we can sell Bull Put Spreads to profit from the dip.

We want to find heavily undervalued, bottomed out underlying that have a high probability of going up.

  • Long Days indicates the number of trading days since the most recent bullish signal, based on technical analysis. A small number means we can enter the trade at the start of the bullish trend.
  • Long Signal Price shows the recent dip based on technical analysis. We can be confident the stock price will not fall below this price level in the short term.
  • Fundamental analysis shows us the Fair Value of the underlying. Then it compares with the Last value to find the potential Upside. The higher the Upside, the greater the confidence of the stock being undervalued.

We can combine the 3 bullish signals in the screener to execute high probability bullish trades. The screener also helps us find high Return on Capital 0.50 delta ATM Bull Put Spreads.

bull put spread screener
We sort the stocks by Long Days to find the start of bullish trends, then find undervalued stocks with Upside.

Then we can use the Spread Details to find the ATM Bull Put Spreads with the respective Return on Capital.

Let's pick the highest probability and high return Bull Put Vertical Spread entry points.

By combining Long Days and Upside, out of all bullish stocks that started within 2 trading days, FB is extremely undervalued with 97% upside. So it has a high probability of a bullish trend.

fb bull put spread screener
FB is undervalued and trending up.

The FB price chart shows it reached a low point at Long Signal Price of $169 2 trading days ago, and has been bullish ever since.

fb chart analysis
FB reached the low Long Signal Price around 2 trading days ago, and has been bullish since.

Considering FB is heavily undervalued, we can be confident of a bullish outlook.

We can sell a FB Bull Put Spread option that expires next month. If the Meta stock price does not fall before expiration, we can profit 103% from the trade.

fb bull put spread roc
A FB Bull Put Vertical Spread that expires next month has a maximum return of 103%.

Use Negative Delta for Bearish Trades

The Bear Call Spread Screener uses chart analysis to find overvalued stocks with a high probability of a downward correction that we can sell Bear Call Spreads to open.

We want to find heavily overvalued underlying that have a high probability of going down.

  • The options screener uses fundamental analysis to calculate the Fair Value of the underlying then compare that with the Last value to find the potential Upside of the stock. When the Upside is less than -30%, we have high confidence in a bearish outlook.
  • Short Signal Price shows the topped out price from our technical analysis. So we know the stock price will not rise beyond this price in the short term.
  • Short Days indicate the number of trading days has passed since the last short signal. As soon as the short signal appears, there is a high probability of a bearish move.
  • We also need to avoid Ex-Dividend Date before options expiration. On one hand Ex-Dividend Date usually lead to rising prices and assignment. On the other hand, if you get assigned, you might need to pay dividends for shorting the stock.

Since we are strongly bearish about our trade, we can use -0.50 delta ATM Bear Call Spread to calculate Return on Capital. This gives us the highest return when we are right, and the lowest maximum loss if we are wrong.

So we can look at the screener for the best ATM Bear Call Spread ideas.

bear call spread columns
We sort Upside by descending order to find the most overvalued stocks, then use Short Days to find the most recent down-trending opportunities.

By combining Upside and Short Days, we see ENPH is one of the most overvalued stocks, and has a short signal 8 trading days ago. It doesn't have an Ex-Dividend Date coming up. So it has a high probability of a bearish trend.

bear call spread screener enph
We combine Upside and Short Days to find the ENPH as one of the best ATM Bear Call Spreads.

By checking the Enphase price trends, we confirm ENPH reached a high point at $220, similar to the Short Signal Price in our Bear Call Spread list, 8 trading days ago, and has been bearish ever since. We expect ENPH to stay below Short Signal Price in the short term.

enph short signal price trend
ENPH reached the Short Signal Price $220 8 trading days ago, and has been bearish since.

We can sell an ENPH ATM Call Spread option that expires in 35 days. If the ENPH stock price does not rise before expiration, we have the potential to profit 86% from the trade.

enph atm bear call spread
An ENPH ATM Call Spread option that expires in 35 days has the potential to profit 86% from the trade.
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What Is Gamma?

Gamma is the changes to delta with respect to changes in stock price. It is also the acceleration to options prices with respect to changes in stock price.

If we use the example of SPY Calls, while the expiration dates are equal, ATM Calls have the greatest gamma. Gamma reduces as the strike prices move further away from the market price.

gamma at different strikes
ATM Calls have the greatest gamma, and gamma reduces as the strike prices move further away from the market price.

For options at identical strike prices, the closer to expiration the larger the gamma.

Days to expirationGamma
35 days1.26
6 days3.39

This means as an option gets closer to expiration, the gamma expansion increases the impact of delta to the options prices, leading to big unpredictable gains and losses with small price fluctuations.

So we usually close our options trades around 14 days before expiration to minimise gamma risk.

What Is Theta?

Theta is the changes to options value with respect to changes in time. Theta is negative because every passing day causes the option value to decay a little.

Here is the relationship between options time value and time to expiration. The gradient of the chart is theta.

theta decay
Theta causes the option value to decay a little every passing day.

We can see the theta decay is slower around 90 days to expiration, then the decay speed increases as time passes until the theta decay becomes quite large at less than 30 days to expiration.

This is the reason why we usually sell options that expire around 30 days, so the theta decay is fast enough for us to close the trade for a profit.

What Is Vega?

Vega is the changes to options value with respect to changes in IV. Vega helps us learn about changes to IV to buy low and sell high options for profit.

The Options Scanner shows SPY and MDB have similar stock prices at different IV values, leading to different option prices.

StocksStock priceIVATM Call value
SPY$459.8719%$9.38
MDB$497.8555%$34.50

So we make money by selling expensive options at high IV, and buying cheap options at low IV.

StrategiesVegaWays to profit
Buy optionsPositiveExpanding IV
Sell optionsNegativeContracting IV

Use Both Theta and Vega to Sell High Return Strangles

SlashTraders' Options Scanner is designed to find high probability and high return Strangles in seconds. Here are some tips to use the filtering function to find the best short Strangle entry points.

options scanner filter settings
Options Scanner settings to find high probability and high return on capital options.
  • We want to choose opportunities with longer than 30 DTE to get the safest theta decay.
  • IV Perc is the relative position of current IV compared to the range of IVs in all the trading days in the previous year. We can filter IV Perc >67% to find stocks with IV higher than 2/3 of trading days in the past year. So they have a high chance of contracting IV and vega in our favour.
  • Open Interest is the number of the total number of outstanding derivative contracts for the underlying. We can find stocks with Open Interests >100,000 to make sure the liquidity is good, so we get our trades filled easily.
  • By choosing Market Cap ($B) larger than 10 billion, we avoid choosing stocks that can get manipulated and explode like GME.
  • A good idea is to eliminate stocks with depressed price movement, because IV will expand soon after. So we need to choose Squeeze status as False.
  • To further reduce risks, we can limit the Strangle BP to less than $1000, so we can easily diversify our portfolio.

Finally, we can sort the Strangles ROC by descending order to get a shortlist of the highest return Strangles.

filtered strangles
Here is the list of the safest and highest return 0.20 delta Strangles at the moment.

You can see the Fair Value and Earnings Date for every underlying to help us fine-tune the selection and get the best entry points.

If the Fair Value is very close to the strikes listed in the Strangle Details, we can be even more confident that the Strangles will be profitable.

Earnings Date is an event that can cause large price movements, so we want to avoid selling neutral options strategy past Earnings Date.

strangles shortlist
Use Fair Value and Earnings Date to fine-tune the best entry points to Strangles.

We can see the top 3 stocks with highest return have upcoming Earnings, so selling Strangles for them are quite risky.

Instead, we can look at selling Strangles to SNAP because the Fair Value is close to the 0.20 delta strikes and it is a strong social media platform like Facebook.

sell SNAP strangle
Sell a SNAP Strangle that expires in 40 days for a 27% return on capital.

If we sell to open a Strangle for SNAP that expires in 40 days, it has a 27% maximum return if SNAP stock price does not exceed the Put and Call strike prices before options expiration.

Now you know the characteristics of delta, gamma, theta and vega, you can use the option Greeks to analyse the option prices then buy low and sell high for a profit.

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8 thoughts on “學會選擇權希臘字母才能輕鬆管控風險”

  1. Thank you for the great explanation of the options greeks, now I’m more confident in managing my options trades.

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