Secondary Greeks
Options can get complex, there is no doubt about it. In “Introduction to Options” I discuss the primary Greeks. The primary Greeks are important, yes, but they are mathematical calculations. The primary Greeks can help with your trading, but should not be seen as absolutes by any means. Greeks are also fluid, meaning they constantly are changing based on external factors.
For example, theta measures the Options’ sensitivity to time. Time is always passing and thus from theta alone the value of a contract is slowly (and constantly) losing its value. This is especially true for 0 DTE contracts. The Secondary Greeks should help further paint a picture of what can cause an Options contract’s values to change. More importantly, what other parties may be using to add to their trading thesis.
Before going into a rabbit hole over Secondary Greeks, you need to ask yourself if these concepts can better your edge and help your trading in any way. This is true for any piece of the market. It is easy to want to learn more about any and every piece of the Stock Market because “knowledge is power”, but I have learned the “inch deep mile wide” approach is not the best when it comes to achieving edge in the Stock Market.
In “How To Day Trade Options for Beginners”, I mentioned it is best to start with one strategy and dig deep on the ins and outs of that one strategy. Why? Because this is the work it takes to make it in this field. You have to work hard to understand your edge. Expected versus unexpected function. Another reason why I am a firm believer is putting in the work yourself rather than paying for a strategy.
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You might ask why in the world Theme Options Trading offers paid content. Fair point. There is a fine line between paying for a strategy and following it blindly, and utilizing educational material to point you in the right direction alongside paving a path to profitability. This is similar to a college career. Coming from an engineering background, while I did gain incredible knowledge while in university, this knowledge was only a fraction of what was required for my first job. The older I got the more I realized college gave me an analytical mindset to look at problems with a unique technical view. I would not have gained this mindset (or would have any idea how to achieve this mindset) had I not attended college nor developed the necessary educational framework required to be an engineer. Now, back to Options.
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This is one of the many reasons why I have a strong view against system (mathematical) trading. It is very common for someone to join a system trading chat room, and follow the “buy” here and “sell” here signal, putting your money solely at the risk of someone else’s “hard” work. This is extremely detrimental to a trading career.
With that said, as with most things I want to understand who is on the other side of the trade to add to my Game Theory thesis. A simple example, if a stock is above VWAP I know a lot of people believe that the stock is bullish. This is the same for Options trading, but it gets a little more challenging. Keeping things simple, for 0 DTE contracts I know that people think they are really risky and that if something has a low percentage of expiring with value, the seller views this contract as “easy money”. When I trade these contracts – what the seller is blatantly missing is the strong market cycle, the breakout theme, and the confirmed breakout entry signal. These are all elements of the Stock Market that cannot be calculated and represented by a number.
Charm
Charm is an Options delta’s sensitivity to smaller changes in time. It answers the question – how will delta change tomorrow? It is also referred to as delta bleed, which makes sense, because theta does affect the Options value. In other words, as time passes delta decreases for certain Options contracts (primarily OTM).
Charm is greatest for ATM contracts. What other Greek has the greatest impact on ATM contracts? Theta. We can slowly see how the larger picture is starting to relate to one another, and how the Greeks interact.
Omega
Omega is the third derivative of the Options price. Remember, delta is the first derivative, and gamma is the second derivative. Omega answers the question – how will a 1% change in the underlying affect Options pricing? It is primarily used to help determine leverage on larger portfolios, and in my opinion overkill for intraday trading.
When intraday trading, we know delta, which should help with risk, profit targets, and an idea of how quickly the contract’s value will change in the near future. We know gamma, which shows us how we can expect delta to change in the future. I do not see value from an intraday discretionary trading standpoint on how a percentage change in the underlying will better my edge.
An example of Omega: Omega = 2% and NVDA increases from 500 to 525 (5%). How would this change your Options premium? The premium would increase by 10% (2*5 =10) from $5 to $5.50.
Rho
Rho is the sensitivity of the Options price to changes in interest rates. It answers the question – how will a 1% change in interest rates affect Options pricing? Personally, I don’t see much value in Rho for the way I trade.
First, Rho is most relevant for contracts that have more time until expiration. I trade short-dated contracts. Second, I don’t trade around major economic events. There is a lot of volatility, and thus market response, after major announcements and if you position yourself in the wrong way you can really screw up your account due to slippage. For example, you might have a hard market stop set, but demand/supply could be so great post interest rate announcement that slippage may be 25% or more, not for me.
An example of Rho: Rho = $0.25 and CPI comes out indicating a 1% increase in interest rates. How would this change your Options premium? The premium would increase from $5 to $5.25 (or $0.25).
Vanna and Vomma
Vanna and Vomma both consider Implied Volatility. Vanna gets a little complicated and does not have much value in my opinion. Similar to Vega, its focus is on Implied Volatility, but instead is focused on delta. Vanna answers the question – how will a 1% change in Implied Volatility affect Options delta? Keep in mind that an increase in Implied Volatility causes all deltas to converge to 0.50 (assuming all else equal). Vomma answers the question – how will a 1% change in Implied Volatility affect Vega? Vomma is highest for OTM contracts. Remember the higher the Implied Volatility the more likely people believe a stock will have larger moves, and thus believe an OTM contract will have a better chance of expiring with value.
Published on February 14, 2024