# Calculating Options Greeks That Matter: Delta, Gamma, Theta - Raj Malhotra

https://www.youtube.com/watch?v=Qs0jNUtHnVc

[00:05] All right everyone, I'm Raj Malhotra.
[00:08] All right everyone, I'm Raj Malhotra.
[00:12] That's me, I like my resume around me at all times.
[00:16] So don't worry about it.
[00:17] Anyway, we're gonna be talking about option Greeks today, the ones that matter.
[00:20] Delta, Gamma, Theta.
[00:22] And I promise you this will be interesting and exciting.
[00:27] So let's talk about it, a few misconceptions about options trading.
[00:28] You all here, they're very sophisticated.
[00:31] They're very risky.
[00:33] They're hard to understand and they need to be taught with payoff diagrams.
[00:39] Like we're a boring economics class.
[00:41] Those are all lies.
[00:44] Those are what option guys tell girls at bars to make themselves sound smarter.
[00:49] And what we tell our bosses so we get paid more.
[00:53] So it's not all, it's not a total loss.
[00:56] So I'm gonna teach you at options in a way, a more interesting way.
[00:58] And it hopefully you guys will enjoy it.
[01:00] So what are some, it's about option Greeks.
[01:05] There are also.
[01:07] It's about option Greeks; there are also some misconceptions, so let's talk about them.
[01:08] Some misconceptions, so let's talk about those.
[01:10] They'll tell you Greeks are the most important thing to understand when deciding which options to buy.
[01:14] That's something that finance professors will tell you because they don't know how to make money trading options.
[01:16] They'll tell you if you can calculate the Greeks properly, you will make money trading options.
[01:22] I know plenty of guys that can calculate Greeks and have no idea how to make money trading them.
[01:30] They'll tell you Greeks, calculating Greeks is more the more it's more important than coming up with good fundamental ideas.
[01:33] Listen, you can come up, you can know bet options backwards and forwards if you pick if you buy calls and stocks that go down, you will never make money.
[01:43] If you know Greeks, still be okay.
[01:45] I figure out that one strike, that one maturity that will always make you money.
[01:49] Question I always get their asses, which is the right option to buy?
[01:51] Well, nobody knows until after the fact.
[01:58] But having said that, there are reasons why you should know, learn about the Greeks.
[02:03] What key Greeks help you do besides totally [ __ ] up your banking system?
[02:10] So if you get a firm grasp of the Greeks, they will help you judge which option is the best one to trade based on your outlook.
[02:20] Once you have an idea of where you think a stock is gonna go, if you understand fully how the Greeks work, they will actually help you maximize your P&L in a trade.
[02:32] They can help you predict what will happen to the price of an option as the market changes.
[02:35] It's not always that simple how an option price changes prior to maturity.
[02:41] Without understanding how the Greeks actually work, because if a stock moves X percent in, say, an option expires two months from now, it's not easy to predict.
[02:51] If the market moves 10%, how much the option is actually gonna move.
[02:56] If this stock rallies 10% in ten days, it's not always it's not that easy to predict unless you actually understand how the Greeks work.
[03:04] And if you don't understand the Greeks, you'll have no idea what your potential P&L will be in a trade idea.
[03:10] P&L will be in in a trade idea and obviously that's the most important.
[03:14] Obviously that's the most important thing that for you to predict.
[03:16] Like don't you want to know, you want to have an idea how much money you're gonna make?
[03:19] Idea how much money you're gonna make when you when you do an option trade.
[03:21] And honestly that's one of the biggest mistakes most retail traders have.
[03:22] Honestly that's one of the biggest mistakes most retail traders have.
[03:24] They'll buy don't just decide to buy an option because they think because they like it.
[03:27] They'll buy don't just decide to buy an option because they think because they like it.
[03:29] They have a trade idea they think okay apples gonna go down I'm gonna buy puts but without any understanding of how much money they're gonna make or why that's gonna happen in their specified time period.
[03:31] They have a trade idea they think okay apples gonna go down I'm gonna buy puts but without any understanding of how much money they're gonna make or why that's gonna happen in their specified time period.
[03:34] They think okay apples gonna go down I'm gonna buy puts but without any understanding of how much money they're gonna make or why that's gonna happen in their specified time period.
[03:36] But without any understanding of how much money they're gonna make or why that's gonna happen in their specified time period.
[03:38] Understanding of how much money they're gonna make or why that's gonna happen in their specified time period and they'll have no idea what pl what their pl will be.
[03:41] And they'll have no idea what pl what their pl will be.
[03:44] And they'll have no idea what pl what their pl will be and if you know the Greeks an option trader can make a more informed decision about which ones to trade and when to trade them.
[03:47] Be and if you know the Greeks an option trader can make a more informed decision about which ones to trade and when to trade them.
[03:52] Trader can make a more informed decision about which ones to trade and when to trade them.
[03:53] About which ones to trade and when to trade them.
[03:55] Trade them you never come up with a trade idea and say I always I always want to trade options.
[03:57] Trade them you never come up with a trade idea and say I always I always want to trade options.
[04:00] In fact you'd be surprised more of my students I talked them out of trading options than into trading options.
[04:02] Want to trade options in fact you'd be surprised more of my students I talked them out of trading options than into trading options.
[04:04] Surprised more of my students I talked them out of trading options than into trading options because you have to have a reason why the stock is going to move.
[04:07] Them out of trading options than into trading options because you have to have a reason why the stock is going to move.
[04:09] Trading options because you have to have a reason why the stock is going to move.
[04:12] A reason why the stock is going to move in a certain time period.
[04:16] If you don't believe there's a couple students here.
[04:17] I've talked out of many option trades.
[04:21] So let's go through a few option basics.
[04:23] Some of you guys have never traded options before.
[04:24] So I'll explain it to you very, very simply and easily.
[04:27] Call option, the order of a call option gives the investor the right but not the obligation to buy a stock at a specified price.
[04:36] Which is a strike price at a certain time period.
[04:39] What does that mean?
[04:42] If you buy a call option, you want the stock to go up as much as possible before expiration date.
[04:47] That's all.
[04:50] The owner of a put option gives the investor the right but not the obligation to sell a stock at a specified price.
[04:57] Which is a strike price at a certain time period.
[05:00] Which is the expiration date.
[05:01] Again, very simple.
[05:05] If you buy a put, you want the stock to go down as much as possible before expiration date.
[05:08] Let's go through some other more option basics just so we can before we.
[05:12] Option basics, just so we can before we get to the good stuff.
[05:15] So the premium, that's what an option costs.
[05:17] If you see a price listed on your screen, you have to multiply that price times 100.
[05:21] Since each option contract represents 100 shares.
[05:25] So for example, if you see a call option is offered at $2, you have to pay $200 for that option.
[05:32] And that represents a hundred shares of that stock.
[05:34] Should you go through the strike price?
[05:37] The strike price, it's the price that you agree to buy or sell a stock at a later date.
[05:42] So for example, if the stock is trading $102, if you buy the $105 strike call, you're able to buy that stock at $105 at a later date.
[05:55] Hoping that the stock is above $105.
[05:58] So obviously, in that scenario, you'd want to buy a stock that's for $105.
[06:03] You want to buy a stock for $105 if it's traded $110 in the open market.
[06:06] In theory, then you could just sell it right out and then collect your premium.
[06:09] Collect your P&L.
[06:11] The expiration date, the last.
[06:15] Your P&L, the expiration date, the last day to exercise an option, the intrinsic.
[06:21] Day to exercise an option, the intrinsic value, that's basically what a stock is in the money at the moment.
[06:24] Like in that last example, the stock is very 110 dollars and the strike is 105.
[06:31] You have five dollars of intrinsic value.
[06:34] Five dollars of intrinsic value, the time value, that's what's that's the premium over the intrinsic value.
[06:36] Which is also referred to as the optionality left in an option.
[06:38] We'll go, we'll discuss a little bit more that later on.
[06:43] And the implied volatility, volatility is actually the only input in an option pricing model.
[06:47] That there was any debate, everything else to strike, the time to maturity, spot price, everything else is undebatable.
[06:49] But the implied volatility is the only thing where there is some debate.
[06:52] And that's actually what option market makers are betting on.
[06:54] What they're actually pricing, so unlike most retail traders that are trading for direction, option market makers are trading for volatility.
[06:57] So they're.
[07:17] Trading for volatility, so they're basically betting on that implied volatility.
[07:19] Basically betting on that implied volatility, so if you're, if you're trading an option versus a market maker.
[07:22] You guys both actually have different objectives and you can actually both profit off.
[07:27] You both of you can be profitable, it's not an options, it's actually not a zero-sum game.
[07:34] An option market maker that's actually smart can actually make money while you're also making money.
[07:39] Which is how a lot of Wall Street firms actually make money.
[07:44] That's how we would make money, we were if we were trading with smart hedge funds like my friend over here.
[07:52] We would all what we would provide liquidity for them in options.
[07:54] But no, but with us knowing what they're doing, we could both profit off that.
[07:59] So that's a partnership that hedge funds and market makers or Wall Street firms have.
[08:04] That we can worse mutually beneficial, so we can discuss that offline a little bit more if you want.
[08:11] The option Greeks, let's define them and then let's discuss how why they're important.
[08:15] So the Delta, the Delta is how.
[08:21] Important, so the Delta, the Delta is how much the value of an option should change when the price rises by one dollar.
[08:24] So simply, if the stock goes from a hundred dollars to one hundred and one dollars, if the Delta is 50, that means the option price should go up by fifty cents.
[08:33] And if it goes down from a hundred to ninety nine dollars, it should go down by fifty cents.
[08:37] The Gamma is the rate of change in an option's Delta per one point moving the underline.
[08:43] So like if a stock goes from hundred to 101, it probably has a different Delta at that point.
[08:50] So how much that Delta changes is actually the Gamma.
[08:54] So Delta is how much it moves, Gamma is how much it changes.
[08:57] Theta is the time decay an option, it's a dollar amount an option losses per day.
[09:04] Since an option has an expiration date, it's worth a little bit less every day and that's and that is the Theta of an option.
[09:11] Vega is how much an option price changes per one move of volatility.
[09:17] So for example, so if implied balls go up
[09:23] For example, so if implied balls go up, all option prices go up and apply balls.
[09:27] All option prices go up and apply balls go down, all all option prices go down.
[09:31] Go down, all all option prices go down, so let's talk about options pricing.
[09:34] I'll just put all these up at the same time.
[09:37] This is not super important right now.
[09:39] But I mean, I just want to go through a little bit each one.
[09:42] The most important ones are when pricing options, when affecting option prices are the intrinsic value, the time value, and the implied volatility value.
[09:48] I touched on those a little bit already.
[09:53] There are other factors that influence option prices, but they're not super important.
[09:57] But the dividend rate, prevailing market conditions, is it's, you know, as a whole market becomes more volatile, all option prices across all stocks tend to go higher.
[10:03] And lower, as you know, the VIX is historically at a near a very historical low.
[10:09] What's at 11 something? If the VIX goes up to 20, you'll see option prices across every equity go higher.
[10:17] Supply and demand for options matters, especially in.
[10:24] Demand for options matters, especially in names that are more or less liquid.
[10:27] Names that are more or less liquid, you know, as the market makers are setting positions.
[10:29] You know, as the market makers are setting positions, if they get, if they get keep getting taken on one side of the market.
[10:35] They're gonna move their markets around to reflect the to way volatility and interest rates.
[10:38] To way volatility and interest rates also matter a little bit.
[10:41] This is the nature of options chain after the presentation.
[10:46] You'll understand what all these things mean.
[10:53] This is strictly from TradeStation.
[10:55] So let's go through Delta first.
[10:59] Delta is, like I said, how much the value of an option moves when the underlying moves by $1.
[11:04] All call options have it between a 0 and a 1 Delta.
[11:08] That's simply because if you're a long call, as the stock price goes up, the call option always is worth more.
[11:17] So it's always a positive Delta.
[11:24] Put options haven't a contrary I have a
[11:25] Options haven't a contrary, I have a negative delta, so as stock prices go higher, puts become worth less.
[11:31] Therefore, they have a negative delta.
[11:34] I touched on this a little bit before, but at-the-money call delta has around a 50 delta.
[11:37] Which is basically because when something's at the money, it's a 50/50 coin flip whether the stock goes up or down.
[11:43] So therefore, it's around a 50 delta.
[11:46] Now, at-the-money call options typically have somewhere people zero in at 50 delta.
[11:51] I mean, at the money usually has to be doing 50 in a 1 delta, never understand why that is.
[12:00] If something is far out of the money, it doesn't change as much, but as something's weighing the money, it changes per per dollar.
[12:08] I'll explain this a little bit more on the next slide.
[12:13] And now, at-the-money put delta has between 0 and 0.5 delta.
[12:15] And then at the money has between a 50 and a 1 delta.
[12:19] And as the underlying price moves, the delta option changes by the gamma.
[12:27] Option changes by the gamma now let's discuss what Delta actually does for you.
[12:31] This is the most important thing about Delta, even if you don't trade options.
[12:35] This is one thing you should learn if you look at the options market.
[12:38] This can be a very, very valuable tool for you to look at Delta's of options.
[12:43] Well, it's not entirely accurate.
[12:45] The Delta of an option is approximately the probability that an option finishes in the money.
[12:49] But for example, a deep in the money option that's virtually certain of finishing the money, say 99% chance, will have something like a 99 Delta.
[12:58] If you look at an option chain, you'll look all the very deep in the money options have 99 Delta's or 100 Delta's.
[13:02] Meaning that just they just go up and down.
[13:04] One dollar move means a one dollar move to the option.
[13:08] One day I'll move the underline means a one down move to the option because it's it's gonna be in the money.
[13:14] It's a hundred percent, it's almost a hundred percent certainty that this is gonna be in the it's gonna fish in the money.
[13:18] So it's actually more valuable for out of the money options though.
[13:22] Like a far out of the money option you'll see have with no chance of expiring the.
[13:30] Have with no chance of expiring the money will have a zero Delta and like.
[13:32] Money will have a zero Delta and like Anton talked about earlier and at the.
[13:34] Anton talked about earlier and at the money option has a 50/50 probability of.
[13:36] Money option has a 50/50 probability of being in the money because so because.
[13:38] Being in the money because so because there's a 50-50 chance of the stockholm.
[13:40] There's a 50-50 chance of the stockholm up or down in one day and as you if you.
[13:43] Up or down in one day and as you if you look up the chain if you look at higher.
[13:45] Look up the chain if you look at higher strikes you'll see if you see like a 38.
[13:48] Strikes you'll see if you see like a 38 Delta that's approximately a thirty.
[13:51] Delta that's approximately a thirty eight percent chance that that option.
[13:52] Eight percent chance that that option will that's that the stock will trade.
[13:55] Will that's that the stock will trade above that price by expiration so.
[13:57] Above that price by expiration so therefore Delta can be a very valuable.
[13:59] Therefore Delta can be a very valuable tool to estimate probabilities so.
[14:02] Tool to estimate probabilities so there's clear there's a clear linear.
[14:04] There's clear there's a clear linear relationship between Delta and.
[14:05] Relationship between Delta and probability and it's really this is.
[14:09] Probability and it's really this is really this is especially good if you're.
[14:11] Looking around earnings and other catalysts driven events it can be a good.
[14:13] Catalysts driven events it can be a good way to actually estimate what are the.
[14:16] Way to actually estimate what are the chances of you making money of this.
[14:18] Chances of you making money of this stock getting to this price by this time.
[14:27] When you get really good at deltas you.
[14:29] When you get really good at deltas you can start you talking with two other.
[14:30] Can start you talking with two other option traders using in everyday life.
[14:32] Option traders using in everyday life like, like what? Like what? What like if?
[14:35] Like, like what? Like what? What like if you say, 'Hey, what are the chances you'd be showing up tonight?'
[14:36] That's about a 50 Delta or what the chances of that girl go home with you?
[14:38] Zero or the chance of your friend Bob getting an STD in Vegas?
[14:48] 200.
[14:57] Again, the most important thing is make sure you understand that linear relationship.
[14:59] Because it is varied, it could be a very valuable tool.
[15:01] Let's talk about Gamma.
[15:05] Gamma, we talked about its change, its to change any options Delta per one point move the underlying assets price.
[15:11] So basically, any time you're long an option, you're long Gamma.
[15:13] Anytime you're short an option, you're short Gamma.
[15:16] Gamma can also be useful to describe, describe life events.
[15:19] Like, let me ask you a question.
[15:23] If you were working an investment bank and you were the lowest?
[15:31] Investment bank and you were the lowest man on the totem pole if you were like.
[15:33] Man on the totem pole if you were like there was 12 guys in the desk and you're.
[15:35] There was 12 guys in the desk and you're number 12 do you think you're a long.
[15:36] Number 12 do you think you're a long gamma or short gamma who thinks long.
[15:39] Gamma or short gamma who thinks long gamma who thinks short gamma you're.
[15:45] Gamma who thinks short gamma you're supposed to speak who thinks long gamma.
[15:48] Supposed to speak who thinks long gamma yes or no no.
[15:51] Yes or no no who thinks short gamma you're all wrong.
[15:55] Who thinks short gamma you're all wrong if you're a long gamma if you're the.
[15:57] if you're a long gamma if you're the bottom of the pole you want change if.
[15:59] bottom of the pole you want change if you want you if you're if you're the.
[16:00] you want you if you're if you're the bottom guy there you want 10 guys ahead.
[16:02] bottom guy there you want 10 guys ahead of you get fired.
[16:03] of you get fired because then you move up to number two.
[16:05] because then you move up to number two if you're Lloyd Blankfein do you think.
[16:08] if you're Lloyd Blankfein do you think you're a long gamma or short gamma.
[16:11] Correct right you're short you make 23.
[16:14] million dollars here why would you want.
[16:15] million dollars here why would you want anything to change you want no change.
[16:18] anything to change you want no change when you're at the top and at the bottom.
[16:21] when you're at the top and at the bottom you want as much change as possible so.
[16:24] you want as much change as possible so think of that in life you guys I could.
[16:26] think of that in life you guys I could tell her probably long gamma that's why.
[16:28] tell her probably long gamma that's why you're here maybe some one day you'll be.
[16:32] You're here, maybe someday you'll be here.
[16:34] So that'll be then, you'll be short gamma.
[16:41] So when an option is near the money, that's when gamma is at its largest.
[16:42] That may, that's clear, right?
[16:46] That's the most gamma there is.
[16:48] You're right, the money, that's what the most can change when adoption is deep out of the money or deep in the money.
[16:53] The gamma is small because the option prices don't change that much.
[16:57] Like if this stuff, like if you're the stocks trading $100 and is a 120 strike call, that stockman was up $2.
[17:05] It's option price not gonna change it very much because it's still, it's still pretty worthless.
[17:10] Gamma calculations are pretty worthless.
[17:13] Gamma calculations are most accurate for small changes of an underlying price.
[17:15] Yet gamma is constantly moving.
[17:17] So it could be a good way to predict a small at one point move, but a ten point move, it's hard to predict.
[17:24] Because the gamma, it will change over that the life of that move.
[17:26] So when a stock has a big move, it can be hard to estimate the P&L because the fact that the gamma is inconsistent.
[17:30] And that's why.
[17:35] The gamma is inconsistent and that's why it's the hardest one to predict.
[17:36] It's the hardest one to predict with a big market move and that's why sometimes calculating gamma it actually requires complicated software.
[17:42] It's not it's it's the hardest one this if you if you software for anything calculate gamma is probably the hardest one to estimate.
[17:52] However, understand this, this is very important.
[17:55] Gamma is the creek that adds the most of your P&L.
[17:56] If you're buying an option, you want to buy an option with a lot of gamma.
[17:59] And you want it to move a lot because when it expires it has this acceleration factor.
[18:07] So when you buy an OPS, you want to buy one with a lotta gamma.
[18:09] And then when he wakes pot when it expires you want it to be deep in the money and have a little gamma.
[18:17] You basically gamma is like basically like try a baby get getting the most bang for your buck.
[18:21] Everyone good with gamma?
[18:27] Alright, now let's talk about theta.
[18:31] The say you know theta is just simply the time decay.
[18:33] It's what it's what an option losses per day and there is no way to
[18:38] Losses per day and there is no way to mitigate the risk.
[18:40] There's no way if you buy an option, just understand you're gonna you're gonna you're paying data every single day and there's nothing you can do about it.
[18:45] It's greatest when it's closest to expiration at the money, just like gamma.
[18:50] And most options actually expire worthless due to theta because many retail traders will look at an option chain and decide, oh this one looks really cheap.
[19:00] They'll buy a far out of the money option, but the option will generally expire worthless before they before it actually gets to the price they need to get to.
[19:08] And therefore it's the Greek that's actually the most that the most misunderstood, even though to me it's actually the most obvious.
[19:12] It's actually the easiest to explain, but the most I'm just misunderstood, which is kind of surprising.
[19:20] Here's a graph of what theta actually looks like if you can see like, you know, from 120 days out to 90 days, it's it does it there's not that much theta.
[19:29] There's not that much theta, and as soon as you get too close to expiration, it almost falls off a cliff.
[19:35] So it's almost it's so inversely related to time, the
[19:40] It's so inversely related to time.
[19:40] The less time to maturity, the more there's less time to maturity.
[19:42] The more there's more theta.
[19:42] It's not like it's not like a more theta.
[19:47] It's not like it's not like a linear relationship.
[19:54] So the problem with a lot of bad retail traders, they never look at their theta.
[19:56] They they look at everything else except what it cost them every day.
[19:57] Remember this, this is very, very important.
[19:59] Remember not only if if you when you buy an app, not only do you have to be right, you have to be right in a specified time period.
[20:03] So you're actually when people tell you that you're buying options reduces your risk, that's not true.
[20:06] That's not entirely true.
[20:09] That's what people that don't understand how options trade tell you.
[20:11] They tell you, okay, this is now you have limited risk.
[20:13] Well, that's true in one sense.
[20:16] It's it you are adding timing risks to your trade.
[20:18] So for example, like if you have if you if you have a bright idea one day, you think this stock is gonna go up.
[20:20] It can, you could, it cannot go up for six months.
[20:23] And if you buy stock, you
[20:42] Six months and if you buy stock you won't lose any money.
[20:44] But if you buy options you're adding that time and risk too.
[20:46] And you won't lose money so you're adding that timing risk.
[20:48] Which is you can have a black ace that you can have a great idea.
[20:53] But it you can be wrong for example like Christian Bale's characters.
[20:59] Remember he based has the greatest trade idea in the world.
[21:05] And what in the history of trading one of the greatest ones.
[21:06] He basically buys puts on the housing market.
[21:08] And if you remember in the movie it's he's basically three months away from being bankrupt.
[21:16] What is when his investors tried to redeem if he did if he allowed them redeemed she lost 100 percent of his money.
[21:21] And said he end up making like what seven hundred percent or something like that.
[21:26] So that shows you how timing risk how important timing risk is in options trading.
[21:33] The best trade in the world could have been the worst trade in the world given three months time sake.
[21:41] If theta is like if you're dating a supermodel I mean.
[21:45] If you're dating a supermodel, I mean, I could look around this room and tell.
[21:46] I could look around this room and tell them that none of you ever date one.
[21:52] But think of it like dating a supermodel.
[21:54] But think of it like dating a supermodel, right?
[21:57] Each day your wallet's a little bit lighter.
[22:01] Each passing day becomes a little less attractive and way more annoying.
[22:03] And eventually falls off a cliff.
[22:06] So now that you know what all these are, what all the Greeks are, you could see if you look at this is TradeStation.
[22:11] You can see what all these columns mean.
[22:13] You can see what all the Greeks are.
[22:15] You can see what these columns mean.
[22:16] You can see what the implied ball is.
[22:18] You can see what the implied ball is.
[22:20] You can see what the fááá is, the gamma, the Delta, the deltas go higher as the strikes go higher.
[22:24] Which kind of makes sense.
[22:27] The gamma is that that's because they're too small.
[22:30] The Thetas are greatest at the at the at the money strikes.
[22:31] Now once you see all these numbers, you actually know what they mean.
[22:34] Now once you see all these numbers, you actually know what they mean.
[22:39] Now once you see all these numbers, you actually know what they mean.
[22:40] Now so glad for you. Alright, so let's see.
[22:49] Now, so glad for you. Alright, so let's see if you have learned anything.
[22:51] If you have learned anything, this is a little test.
[22:53] This is gonna require some interaction.
[22:55] So you guys ready? Get your thinking caps on.
[22:58] Alright, so how does the follow Totti actually affect the other crease?
[22:59] How does like each one obviously they have they affect each other, right?
[23:01] They have they affect each other, right?
[23:03] They're not, they're not uh, they're not on, they're not on an island.
[23:08] They, each, each Greek affects the other one.
[23:10] So let's see if you can pass these tests.
[23:12] Right here, so when implied volatility goes up in an option, what happens to the Delta?
[23:16] So let's examine each one.
[23:21] So, and if implied volatility goes up, what happened to an out-of-the-money Delta?
[23:26] Does it go up or down?
[23:32] Who thinks up? Who thinks down?
[23:37] You're supposed to speak.
[23:40] Alright, well, I'll let you up took the first one.
[23:41] And an out-of-the-money option, if the applied ball goes up, the Delta goes up.
[23:45] So we're saying why? Exactly.
[23:51] So we're saying why, exactly yes, the bright, simple, the proto.
[23:54] Yes, the bright, simple, the proto likelihood of a big move is greater, so.
[23:55] The likelihood of a big move is greater, so the probability of it being in the money is greater.
[23:58] The probability of it being in the money is greater, well done, you did learn.
[24:04] You might date a supermodel, okay, what happens to a uh if a plied ball goes up?
[24:06] What happens to a uh if a plied ball goes up? What happens? We had a band and at the money delta.
[24:09] What happens? We had a band and at the money delta, so if you think it goes up, say up.
[24:10] If you think it goes up, say up. If you think it goes down, stay down.
[24:13] It's correct, stays the same.
[24:19] It stays the same, well done, no change, right? Because it's not the money.
[24:25] Because it's not the money, it still doesn't, just because of all Tony goes up, the chance of going up or down is still the same.
[24:30] The chance of going up or down is still the same, it's still 50/50.
[24:32] It's still 50/50, you write to write the magnitude.
[24:35] If we're going up or down, might be different, but the coin flip is still up or down.
[24:37] It's still up or down, it's still 50/50, no change in.
[24:41] 50/50, you write to write the magnitude.
[24:42] If we're going up or down, might be different, but the coin flip is still up.
[24:46] But the coin flip is still up or down, it's still 50/50, no change in.
[24:52] Or down, it's still 50/50, no change in Delta. This one you should get now.
[24:55] Delta, this one you should get now. Implied volatility goes down. What?
[24:57] Implied volatility goes down. What happens to out-of-the-money Delta?
[25:00] What happens to out-of-the-money Delta? Who thinks it goes up? Say up.
[25:04] Who thinks down? Oh my god, you guys are actually learning something. It goes down.
[25:11] Actually learning something. It goes down or sometimes it doesn't move. It doesn't move.
[25:12] It doesn't move for very far out-of-the-money options, but generally it does go down.
[25:15] Options, but generally it does go down. Obviously, if it's zero, you can't go below zero.
[25:17] Obviously, if it's zero, you can't go below zero. Very, really, really far out-of-the-money like one Delta options don't go down to zero.
[25:22] Go down to zero. So you guys are getting there.
[25:26] There. All right, I have an at-the-money Delta and at-the-money option Delta implies.
[25:30] Law goes down. You should know this. What do you think?
[25:32] Do you think no change?
[25:36] See, see how much do you guys learned? Gradual ations.
[25:39] Gradual ations. All right, did you get? You're doing good so far, but now it gets harder.
[25:43] It gets harder. Let's talk about Gamma. What happens with volatility?
[25:47] What happens with volatility? Volatility changes affecting Gamma. So what happens to an out of the money?
[25:53] Gamma, so what happens to an out-of-the-money option gamma when it's bought?
[25:55] Money option gamma when it's bought, implied ball goes up, what happens to it?
[25:57] Implied ball goes up, what happens to it? Out-of-the-money option gamma, does it go?
[25:59] Out-of-the-money option gamma, does it go up or down?
[25:59] Who thinks up? Who thinks down?
[26:14] Wrong.
[26:17] The out-of-the-money option gamma goes.
[26:19] The out-of-the-money option gamma goes higher. Why is that?
[26:19] It's the same reason Delta goes up for now and out of the.
[26:27] Delta goes up for now and out of the money option, right?
[26:29] Again, the gamma goes up because the Delta goes up as well. How?
[26:33] Up because the Delta goes up as well. How about this one?
[26:33] About this one. And at-the-money option gamma, implied.
[26:36] And at-the-money option gamma, implied Bob goes up. Who thinks gamma goes up? Say up.
[26:42] Up. Who thinks down? Stay down. One person said down.
[26:48] Down is right. No change. Why?
[26:52] What, why is that? You said you said down.
[26:57] What? Why is that? You said, you said down. What do you think down? What's that? No.
[27:05] What do you think down? What's that? No, not really. It's because don't get if you...
[27:09] Not really. It's because don't get if you would don't worry, you got it right, but...
[27:11] Would don't worry, you got it right, but no one else did. So don't worry, whoever...
[27:12] No one else did. So don't worry, whoever got it wrong, please don't worry cuz...
[27:14] Got it wrong, please don't worry cuz you're not supposed to get this right.
[27:15] You're not supposed to get this right. The reason is the gamma is greatest when...
[27:17] The reason is the gamma is greatest when it's at the money, right? So when there's...
[27:20] It's at the money, right? So when there's a greater chance for a bigger move of...
[27:21] A greater chance for a bigger move of the implied lagos up. So that all the at...
[27:23] The implied lagos up. So that all the at the Delta, the out of the money option...
[27:25] The Delta, the out of the money option Delta's the reason this makes gamma is...
[27:28] Delta's the reason this makes gamma is greatest was that the money, right? So...
[27:32] Greatest was that the money, right? So when a pod Bob goes up, all the deltas of...
[27:36] When a pod Bob goes up, all the deltas of the out of the money options are also...
[27:37] The out of the money options are also higher. So the Delta has actually changed...
[27:39] Higher. So the Delta has actually changed less like the option price to change...
[27:42] Less like the option price to change less. But basically like remember we...
[27:44] Less. But basically like remember we talked about how you wanted like the...
[27:45] Talked about how you wanted like the greatest change in the acceleration...
[27:48] Greatest change in the acceleration factor with with with lower vol there's...
[27:50] Factor with with with lower vol there's more gamma because it moves matter much...
[27:53] More gamma because it moves matter much more. So basically as like as when vols...
[27:57] More. So basically as like as when vols almost zero and he have a big move it's...
[27:59] Almost zero and he has a big move, it's worth much more.
[28:01] So that's why when the fly ball goes up, the at the money option goes down.
[28:10] And likewise the other way, everybody confused yet?
[28:13] It's because when the ball goes up that the moves matter.
[28:16] That the moves have actually matter less.
[28:18] So that's why when likewise when implied balls go down, the gamma goes higher for an at the money option.
[28:25] Because again, it's back to that acceleration factor.
[28:28] It when when Vagos up the delta out of the money options goes up.
[28:33] So therefore the gamma goes down.
[28:36] Alright, so here's a question that most people in the room will get wrong.
[28:40] Including most of the mentors, as volatility approaches infinity, what happens to the game of options gamma?
[28:48] Gamma goes up.
[28:54] Who says up? What's that that?
[29:00] Goes up, who says up? What's that? That, that, that might be true, the model.
[29:03] That, that, that might be true, the model does break, but what happens to the game of options?
[29:06] It approaches zero, actually.
[29:13] You're right, so therefore you're right.
[29:15] The model does break because it actually approaches zero.
[29:17] Because basically what happens is when polity it becomes infinite.
[29:19] The option prices just don't change, just because they can literally trade anywhere.
[29:24] Remember when I said before how like you option traders like to impress people with how Alice smart they are?
[29:34] This is exact what I'm doing right now.
[29:36] So here's the question that nobody in this room will get right, including all the mentors and Anton.
[29:40] So what happens as volatile as volatility approached infinity?
[29:46] What happens the Delp of options?
[29:47] What's that? It goes up to infinity.
[29:49] No, that's not.
[30:03] It goes up to infinity.
[30:03] No, that's not correct.
[30:04] Correct, that's a good guess though, at least she.
[30:06] That's a good guess though, at least she guessed.
[30:06] No, they all have a 50 Delta was.
[30:19] Guessed? No, they all have a 50 Delta was that right?
[30:19] No one got it right, does.
[30:22] That right? No one got it right, does everyone know why?
[30:25] Exactly, you're right, it could go.
[30:27] Exactly, you're right, it could go anywhere.
[30:27] So what what right? They don't.
[30:30] Anywhere, so what what right? They don't really.
[30:31] Really? Yeah, they don't really change it.
[30:31] What happens is the markets.
[30:34] Change it, what happens is the markets all volatile.
[30:34] The everything base has a.
[30:36] All volatile, the everything base has a 50/50 chance of finishing in the money.
[30:37] 50/50 chance of finishing in the money, so remember that Delta probability rule.
[30:40] So remember that Delta probability rule, they basically just the model does break.
[30:42] They basically just the model does break, but basically all options have a 50.
[30:44] But basically all options have a 50 Delta at that point because they just.
[30:46] Delta at that point because they just don't change like that.
[30:46] The price has.
[30:48] Don't change like that, the price has changed, but it's kind of it's kind of a weird question.
[30:51] Changed, but it's kind of it's kind of a weird question, but basically when when.
[30:54] Weird question, but basically when when when there's infinite volatility, the.
[30:57] When there's infinite volatility, the other line can trade at any price.
[30:57] So.
[30:59] Other line can trade at any price, so literally anything can happen.
[30:59] So they.
[31:01] Literally anything can happen, so they all had 50 deltas, which is a very.
[31:04] All had 50 deltas, which is a very complicated question.
[31:07] So basically, like, when volatility becomes infinite.
[31:09] When volatility becomes infinite, it's like if you drop a heroin addict in Bangkok with six months to live.
[31:15] Anything could happen.
[31:18] Not speaking from experience, what happens to theta?
[31:25] What happens to out-of-the-money options when implied Bob goes up?
[31:29] Just to go up or down.
[31:31] Who thinks down? Who thinks up? It's up.
[31:39] Why is it up? Because the options are worth more, but the timing maturity is the same.
[31:44] So therefore, theta just has to go up.
[31:46] Because at the time, the amount of days are still the same, but the option price is worth more.
[31:51] So it did take the premium divided by the time.
[31:53] And it just, so it's always more.
[31:56] How about it would apply if all goes up?
[31:59] What?
[32:03] And it just, so it's always more.
[32:04] About it would apply if all goes up. What happens at the money option theta does?
[32:06] What happens at the money option theta does it go up or down?
[32:07] It go up or down. Who thinks down? Who thinks up? No, it goes.
[32:17] Who thinks down? Who thinks up? No, it goes up again. The same thing. That is a very.
[32:21] Up again. The same thing. That is a very linear relationship. The yeah, if the.
[32:23] Linear relationship. The yeah, if the options worth more and the same amount.
[32:25] Options worth more and the same amount of that days to maturity, it has to has.
[32:28] To have more theta. It's like monopoly.
[32:31] Goes from $1 to $2 and they're both in. They, if there's 3 days to maturity, the.
[32:36] Theta is just more because it's the.
[32:39] Options worth more and has to decay more. It's like a, it's like there's a $10,000.
[32:42] It's like a, it's like there's a $10,000 car or $100,000 car. Which one is which.
[32:50] One decays more? Which one, which one.
[32:52] Loses more value when it's driven off a lot in dollars. Every automobile when it.
[32:54] Lose like 20% of its value when it's driven off a lot. A brand new car. So.
[32:58] Obviously in real dollars, a $10,000 car.
[33:01] Driven off a lot. A brand new car. So obviously in real dollars, a $10,000 car.
[33:04] Which one is which. One decays more. Which one, which one loses more value when it's driven off a lot.
[33:07] Obviously, in real dollars, a $10,000 car loses two thousand and a hundred.
[33:09] Loses two thousand and a hundred thousand dollars, called car lose a thousand dollars, called car lose a twenty thousand.
[33:13] So it's just simply a twenty thousand, so it's just simply a linear relationship.
[33:15] When Bob goes up, all options at more theta and it's also greatest when you get close to maturity.
[33:19] Greatest when you get close to maturity.
[33:22] Now that we've discussed all the Greeks, when is it useful to know the Greeks?
[33:26] When is it useful to know the Greeks besides when you're trying to get free gyros?
[33:28] So Greeks are a very very important for market makers.
[33:34] In fact, that's the most important thing for market makers because they have a different strategy than directional traders.
[33:37] Guys like me sitting at a desk managing a portfolio of options need to know Greeks backwards and forwards.
[33:48] If you want to understand how market makers trade, I did a mine one in New York was about how how to think in price options like a market maker.
[33:54] But some takeaways are when a market maker trades an option, he immediately needs to trade stock to cover his Delta risk.
[34:04] So when you wouldn't like what we talked about before, when he if you if he sells a call.
[34:08] Before, when he, if you, if he sells a call, he, and he immediately needs to buy stock.
[34:09] He, and he immediately needs to buy stock to hedge his Delta because he's betting on volatility, not direction.
[34:14] He's not taking the other side of your bet and hoping that stock goes down.
[34:16] He's betting on realized volatility.
[34:18] Market makers that usually have a portfolio of options in different stocks or indices.
[34:23] And they have a basket of different names.
[34:27] So he's constantly looking at his overall Delta, Gamma, Vega, Theta portfolio risk.
[34:35] Just like you're managing a portfolio of stocks.
[34:36] He's managing a portfolio of Greeks.
[34:38] So therefore they're always shocking in their portfolio.
[34:43] This is thing that they always do with with their portfolio.
[34:47] And literally every day, if not more than once a day.
[34:49] So basically when you shock your portfolio, the market maker will look at what happens if the stock moves down 20, 30% or more.
[34:57] And then make guesses of what's gonna happen to Vol and what's gonna happen to their Gamma and their Vega.
[35:05] And therefore come up with their worse, their best in worst.
[35:10] Up with their worse, their best in worst-case scenario for piano.
[35:12] And that's a case scenario for piano, and that's obviously very important to all market makers.
[35:15] Obviously very important to all market makers and also like what what their book is gonna look like when it does move.
[35:17] Book is gonna look like when it does move, that how is their, how what's their new Delta?
[35:21] What's a new gamma exposure? What's a new Vega exposure you're gonna look like?
[35:24] So like I said, understand the Greeks is the most important thing for a market maker.
[35:27] Greeks is the most important thing for a market maker, but why is it useful for you guys to understand Greeks?
[35:32] Because you guys to understand Greeks because you're not gonna do that to your portfolio.
[35:34] You're not gonna have a basket of 10 of 17 options in eight different names.
[35:38] Well, it can be very useful to you because you can, it can help you punish them.
[35:45] See, understand that Greeks can help you make a more informed decision of whether or not you might be better than trading stock.
[35:52] Often there you'll see strikes with a lot of open interest.
[35:57] And if you know there's a lot of open interest and know how market makers are positioned, there's a lot of stock that they may need to buy or sell.
[36:05] Move through strikes, and you can use that to your advantage as a retail.
[36:11] That to your advantage as a retail trader knowing like what a lot of times you'll hear the term price action.
[36:17] It's like what's the price action doing? Is it, is it sometimes it's not real money buying?
[36:21] Sometimes it's option market makers just trying to rehash or portfolios knowing like because the stock goes through a strike, they need to buy.
[36:28] And below a strike, they need to sell if they're negative if they're short gamma.
[36:32] So it's a very important thing to understand of the way they market makers need to reposition themselves.
[36:40] And you can use that to your advantage should you have a good fundamental view.
[36:43] And you can profit off that sometimes it can help you determine whether it's more selling your stock.
[36:51] Just sometimes it has like a rally through a strike and weight and whether that's a real move or maybe you want to sell half your position or hedge it or take profits.
[37:00] But just knowing what the market makers are doing there, it can add to your bottom line.
[37:04] P know, so you still need to drive your ideas with fundamentals and you can use options to express your ideas, but you.
[37:12] Options to express your ideas, but you only after assessing the marginal.
[37:14] Only after assessing the marginal benefits of options trading, which is the.
[37:17] Benefits of options trading, which is the topic I covered in last year's London.
[37:19] Topic I covered in last year's London seminar and furthermore, when you're.
[37:24] Seminar and furthermore, when you're cognizant of the Greeks, you can make.
[37:25] Cognizant of the Greeks, you can make informed decisions at big open in two.
[37:27] Informed decisions at big open in two strikes and deciding what to do with.
[37:28] Strikes and deciding what to do with your positions and obviously.
[37:31] Your positions and obviously understanding the Greeks can make you.
[37:33] Understand price action and equal more profits, so this the kind of stuff I.
[37:35] Profits, so this the kind of stuff I cover in mentoring, here are some other.
[37:37] Cover in mentoring, here are some other things we cover, how to behave around.
[37:38] Things we cover, how to behave around earnings and other catalyst driven.
[37:41] earnings and other catalyst driven events, when is the optimal time to buy.
[37:42] Events, when is the optimal time to buy around these events, how do you estimate.
[37:45] Around these events, how do you estimate the new Delta and gamma when when the.
[37:49] Stock has a big move using average gamma.
[37:50] Stock has a big move using average gamma, other tricks to estimate P and L and an.
[37:54] Other tricks to estimate P and L and an options trade, I said before out gamma.
[37:56] Options trade, I said before out gamma was very hard to predict, but there are.
[37:58] Was very hard to predict, but there are ways to guess with a with a with pretty.
[37:59] Ways to guess with a with a with pretty good certainty, you have what your Pino.
[38:04] Good certainty, you have what your Pino and is gonna be due to gamma and other.
[38:05] And is gonna be due to gamma and other other tricks, if you look up up up and.
[38:09] Other tricks, if you look up up up and down the option chain and one things.
[38:11] Down the option chain and one things.
[38:14] Down the option chain, and one thing that's really come around lately is how to play these options around turnaround stories, especially with volatile balls at these levels.
[38:20] There are some ways that have been really working very well.
[38:28] So let's summarize what we learned today.
[38:32] Options are not sophisticated, risky, and hard to understand.
[38:35] You guys passed most my questions, so there you go.
[38:37] The benefits of options can be huge when understood and traded correctly.
[38:42] Knowing the Greeks is not more important than coming up with good fundamental ideas.
[38:50] However, calculating Greeks won't make you money on a standalone basis.
[38:55] However, they can be very, very useful.
[38:57] Understanding them can help you predict what will happen to the price of an option as the market changes.
[39:03] And if you understand the Greeks, a retail trader can make more informed decisions about which options to trade and when to trade them and how to profit off them.
[39:11] Help you guys profit off them going forward.
[39:14] Thank you guys.
[39:17] Going forward, thank you guys.