The Greeks: Sometimes Friends, Sometimes Foes

From the Journal of a Stay-At-Home Trader: Struggles on the Journey

I admit it. I actively avoided the Greeks for a very long time. When I came across Dan Passarelli’s Trading Option Greeks — the first edition — I added it to my Amazon wish List. And there on that list the title sat … for years. Every once in a while, I would look at all the trading books I had on my wish list — and purposefully not buy that one. The Greeks intimidated me, and I didn’t want to face them.

In November 2015 I was once again browsing trading books on Amazon. Lo and behold, I saw that the aforementioned Mr. Passarelli had released a second edition of Trading Option Greeks in 2012. I sighed. I remember thinking, “OK, I guess he has more to say on the Greeks. I should just buy it.” So I did.

Then the monthly calendar page turned. December 2015 was a pivotal point for me in my options education because amazingly that was the very month that Dan was offering his Thursday classes on the Greeks. It seemed pretty providential to me, that I had finally broken down and bought his book and then, not even a month later, I could sign up for classes from the author himself. How great is that?

That first series, my first-ever experience with Market Taker Mentoring, was really eye-opening for me. I intently studied each section in Dan’s book on the particular Greek he was going to discuss that week. Being able to ask questions of Dan directly was a very valuable experience. I’m sure that at least half of what he said in those classes went over my head, but for the first time I started to believe that I really could begin to understand the Greeks.

Then attending John Kmiecik’s group coaching helped solidify the Greeks for me: watching him dissect trades with their Greeks with live market charts, hearing his daily lessons, listening to him repeat his favorite sayings over and over … they all gradually sunk in. Now two years later, I no longer fear the Greeks, and actually sometimes I prefer looking at them first in the morning in the option chains, rather than going straight to the visual stock charts. The Greeks have become my pilot’s instruments during flight, which matter a great deal more to me than the P&(L) at-expiration diagrams — since I rarely hold options trades until expiration. John’s frequent quizzes have been absolutely critical to my improvement in Greeks understanding. Even after taking several of his quizzes every week, he still stretches my mind.

Here are some of the things the Greeks have helped me do:

Delta: I sleep better at night. Analyzing my delta position near market close lets me know if my position is sized properly so I can sleep. If it’s too large for my personal comfort level, I can close some or all of the position or hedge in some way. I know how much of a dollar move against me I am willing to absorb.

Gamma, theta and vega: Friends or foes? The way that my position currently stands in relation to the underlying — are these Greeks helping or hurting me? Do I need to hedge in some way or remove risk?

I still remember my “aha” moment of truly grasping John’s saying, “Gamma is never your friend on out-of-the-money credit spreads.” My lightbulb in simple terms: If the underlying goes in my direction, negative gamma means I make money more slowly, and if the underlying moves against me, negative gamma means I lose money more quickly. Both are bad, but I get it now. If my negative gamma on a position has become too big, I am aware of it and can take action.

Pretty much everyone loves positive theta on credit spreads, but how many people use positive theta to their advantage on vertical debit spreads? I learned that from John too. It’s a great technique to give a trader some extra edge.

Vega? Well, to be honest, I don’t pay much attention to vega because I try to avoid earnings and other such known volatility events like the plague. I’m not much of an earnings trader right now. Or maybe never. But at least I know how to keep my position vegas small.

In hindsight, I’m not sure how I ever would have had a shot at trading success without learning the Greeks. And from who better to learn them than the man who brought the Greeks to the retail options trader through his book? Thanks, Dan Pass. I still have a ways to go on my journey, but I do know that my feet are on a solid path with my MTM education.

By A.K.

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