There are many ways to scan for free: Irshad, Regarding a good source for understanding and applying the Greeks, but more importantly, all about options and how to trade them, I recommend Optionetics. Pete From: OptionClub@yahoogro Irshad,
http://crimsonmind.
http://www.cboe.
http://www.ivolatil
Ed
============
On 7/8/2010 4:46 PM, PLA wrote:
Sent: Thursday, July 08, 2010 12:38 PM
To: OptionClub@yahoogro
Subject: [TheOptionClub.
You have to be careful about assumption like those you are proposing. Always keep in mind that the greeks are outputs from an options pricing formula, but that option prices are not determined by option pricing formulas. Option prices are dictated by the laws of supply and demand and the option pricing formulas simply try to explain why the prices are what they are. That explanation always comes down to a measure of implied volatility.
In general, we do expect to see implied volatility ease when the market moves higher but this is not always the case. Maintaining delta neutrality addresses the directional risk present in your portfolio, but often it seems that traders lose sight of the real goal. In my book, the goal is not to reduce my delta to near zero. Rather, my goal is to manage risk. Those greeks help me assess where the risks lie and provide me with some guidance as to what I might do to address unacceptable risks.
The danger I find is that as traders begin learning about the greeks they lose sight of the bigger picture. Option prices are going to respond to the demand present in the market. That demand is a reflection of the relative expectation of the marketplace for future price movement. When the market grows concerned that equity prices are susceptible to significant price movements of 3SD or more you will see option prices rise. This is reflected in an inflated implied volatility. As the concern of the market eases the demand for options subsides, which is in turn reflected by a lower implied volatility.
Implied volatility only effects the extrinsic or "time value" of an option. So, if the implied volatility rises the option's time value has increased. The expiration date of that option remains unchanged, however. With the knowledge that options lose all of their time value as of their expiration date we know that the relative "time decay" has to increase for the option's time value to be reduced to zero by that fixed date of expiration. Of course, this is all mathematical theory and imperfect at that because even with a large theta an option's implied volatility can continue to rise and inflate the value of an option's time value even as expiration approaches.
So, the answer to your first question is that your assumption is not necessarily correct. It is true that when you see market prices trending higher you will often see implied volatility subside. With that lower implied volatility you will necessarily see less time value in your option and, therefore, a smaller decay rate. Your option's vega is a measure of it's sensitivity to changes in the implied volatility. While potential price collapse is often a cause for increased implied volatility other factors can inject uncertainty and concern into the market. Earnings or FDA announcements are prime examples. Such events can inject concern into the minds of investors who in turn seek to protect their equity positions even if prices have been trending higher. This increase in demand for options will result in a rise in the option's pricing and, consequently, a rise in the implied volatility figures returned by an option pricing model.
In other words, even though there is often a correlation between price movement of the underlying and implied volatility, there is no direct link. Assuming that there is a direct link is an incorrect assumption. Where you will find a direct linkage is between implied volatility and the price of the option. In fact, many who really know this stuff will tell you that implied volatility IS the price of the option.
I don't have any one book or on-line resource to suggest. In my experience, learning this stuff requires a bit of struggle. You'll just need to keep working at it until your mind wraps around it and grasps it. There are many resources on-line, but quite frankly I think this message board is as good as any of them. I might also shamelessly plug the Trading Room , but the real deciding factor in achieving a good understanding is persistence.
Christopher Smith
TheOptionClub.
--- In OptionClub@yahoogro
>
> Hello Option Gurus,
>
> Need your help in understanding and setting up build block for delta nuetral position. Based on the three standalone option theories
>
> 1) When underlying (price) goes up, Volatility goes down
> 2) When Volatility goes down, Gamma (net, long or short) goes up
> 3) When Volatility goes up, Positive Theta goes up
>
> Question #1, Is it correct to assume that, if price go up, then vega (net) & theta (positive) goes down and gamma (net) goes up and vice versa, when prices go down?
> Question #2, Is there any recommended book or online resource that can help in understanding & maintaining delta neutral position either on a periodic basis or on occurance of an event like x% movement in underlying or change in volatility?
>
>
> Appreciate your response in advance, Happy trading!!
>
> Best
> - Irshad
>
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