Caveats with Regard to Online
Greeks
Often, online greeks are one click away, requiring little effort on the part of
the trader. Having greeks calculated automatically online is a quick and
convenient way to eyeball greeks for an option. But there is one major
problem with online greeks: reliability.
For active option traders, greeks are essential. There is no point in using
these figures if their accuracy cannot be assured. Experienced traders can
often spot these inaccuracies a proverbial mile away.
When looking at greeks from an online source that does not require you
to enter parameters into a model (as would be the case with professional
option-trading platforms), special attention needs to be paid to the
relationship of the option’s theoretical values to the bid and offer. One must
be cautious if the theoretical value of the option lies outside the bid-ask
spread. This scenario can exist for brief periods of time, but arbitrageurs
tend to prevent this from occurring routinely. If several options in a chain
all have theoretical values below the bid or above the offer, there is
probably a problem with one or more of the inputs used in the model.
Remember, an option-pricing model is just that: a model. It reflects what is
occurring in the market. It doesn’t tell where an option should be trading.
The complex changes that occur intraday in the market—taking the day
or weekend out, changes in stock price, volatility, and the interest rate—are
not always kept current. The user of the model must keep close watch. It’s
not reasonable to expect the computer to do the thinking for you.
Automatically calculated greeks can be used as a starting point. But before
using these figures in the decision-making process, the trader may have to
override the parameters that were used in the online calculation to make the
theos line up with market prices. Professional traders will ignore online
greeks altogether. They will use the greeks that are products of the inputs
they entered in their trading software. It comes down to this: if you want
something done right, do it yourself.