Option Traders like to talk technical. I know that the readers have come across all the above terms, applied their mind to learn about them. achieved some partial success or failure in understanding and most of us would like to find a way of profitable trading without ever worrying about these greeks.
Well, life is simple until and unless we make it difficult for ourselves.
This blog will complete 4 years in another 4 months.
The methods and trades suggested here have been profitable over this period. And we never did mention any of these greeks.
That means one can trade profitably without these.
I had written on Quora in July 2017 about the option greeks. For those readers who might have missed, here is that post:
My Views on Delta, Gamma, Theta, Vega etc.:
I read a story while in school about a mathematician’s family crossing a river.
He was a tall person himself. He took a pole and measured the depth of water at various points. Then measured the height of all family members.
Average height of family was more than average depth of river.
He concluded that it was safe to cross.
One be one the family members were washed away and drowned. Sorrowfully he took the depth measurements again. Checked the averages and found them to be same.
Everything being the same, why the family was gone was the arithmetical paradox to the mathematician.
But not to a normal guy on the street.
Markets are like a river. They are subject to sudden currents.
These currents are known as VOLATILITY in technical terms.
The point where the average was taken may not have been the point while walking in the water. In market terms it is called imperfect pricing.
Taking averages is like working on some empirical formula. They may work at times but when they fail, you lose everything.
Now coming to the question:
Does Pramod Kumar use the concepts of delta, gamma, theta and vega to do option trading ?
May I ask a counter question ?
How many of us use the principles of thermodynamics, internal combustion engines, stopping sight distance, speed control on super elevation, torque and transmission etc while driving a car on a highway ?
Are we asking these questions from all those who drive ?
Even without answering these questions one can drive and drive well.
This is the main problem with the people who talk about option trading. They have made it too complicated for a normal person.
As for me, I am a civil engineer by profession, was very good at mathematics long ago, maybe I am still good enough. I can understand and work out all the option pricing formula, but believe me, you do not need them for profitable trading.
If you are doing good option trades, sub consciously you will be following these concepts.
After all these are just definitions.
Delta is one of four major risk measures used by option traders. Delta measures the degree to which an option is exposed to shifts in the price of the underlying asset (i.e. stock) or commodity (i.e. futures contract). Values range from 1.0 to –1.0 (or 100 to –100, depending on the convention employed).
The option’s vega is a measure of the impact of changes in the underlying volatility on the option price. Specifically, the vega of an option expresses the change in the price of the option for every 1% change in underlying volatility.
Theta is a measure of the rate of decline in the value of an option due to the passage of time. It can also be referred to as the time decay on the value of anoption. If everything is held constant, the option loses value as time moves closer to the maturity of the option.
The option’s gamma is a measure of the rate of change of its delta. The gamma of an option is expressed as a percentage and reflects the change in the delta in response to a one point movement of the underlying stock price.
My Using of Concepts :
After entering the trade, Delta is left to the markets. The pricing never follows the mathematical relation as spelled out in the definitions.
I trade in high volatility options without naming it VEGA. It is the volatility which gives me profits.
Gamma is not something we can do anything about.
Theta ( Time Decay ) is the one factor which bothers me in my trades and I take care of it by exiting at a loss some time or moving to a better strike where the DELTA is better and would take care of THETA DECAY.
Did it make any sense?
It should if one knows the option Greeks.
It should if such a technical question is asked.
But it really does not matter if the above few sentences were pure drivel to you.
It will not make you a lesser trader.
To Summarize :
I use the concepts with my own understanding.
Most of the concepts are already built into the trade.
I would like to go for a happy drive and not looking under the bonnet to see how the engine works.
And certainly would not cross the river by working out the averages.
I trust this answers the question.
Image : Google Images ( for illustration only— it is unrelated to the story )
Greeks Definitions : The definitions are taken from theoptionsguide.com. Acknowledged with thanks.
Similar Question Again:
How can I use PCR, Max Pain, Option Chain Analysis, Theta, Gamma and Alpha in options trading in India?
This question was in December 2018.
Now few more names are added.
I fail to understand why we can not keep trading simple?
My simple answer to the above question:
What a wonderful question with so many terms mentioned in one single sentence.
Looks like a prescription for a disease that is not yet diagnosed. supposedly something will work and patient will be alright. But option trading is a different ball game. Even with the support of all these big sounding names, profits may remain elusive.
Humor apart, let us come to the proper question.
I started writing on Quora just to make a statement that option trading could be simple. And have been successful in that aim to a considerable extent. Many readers have found that simplicity works and makes money too.
But we love to complicate our lives. We do not want good health through just good food habits, a morning walk and a simple life. We try to get it through exercise in a gym and diet supplements. We look for complicated solutions to problems that are easy.
I have already written two answers on the subject and points raised in the question.
These answers will tell you that Option trading can be done very profitably without all these wonderful names you mentioned.
And I sincerely believe that people come to trading to make money not for doing research on esoteric subjects.
Read about these things and learn about them. Money is made by simple rules. The simplest of them being:
Thanks for reading.