29 lines
2.0 KiB
Plaintext
29 lines
2.0 KiB
Plaintext
Managing Trades
|
||
Once the trade is on, the greeks come in handy for trade management. The
|
||
most important rule of trading is Know Thy Risk . Knowing your risk means
|
||
knowing the influences that expose your position to profit or peril in both
|
||
absolute and incremental terms. At-expiration diagrams reveal, in no
|
||
uncertain terms, what the bottom-line risk points are when the option
|
||
expires. These tools are especially helpful with simple short-option
|
||
strategies and some long-option strategies. Then traders need the greeks.
|
||
After all, that’s what greeks are: measurements of option risk. The greeks
|
||
give insight into a trade’s exposure to the other pricing factors. Traders must
|
||
know the greeks of every trade they make. And they must always know the
|
||
net-portfolio greeks at all times. These pricing factors ultimately determine
|
||
the success or failure of each trade, each portfolio, and eventually each
|
||
trader.
|
||
Furthermore, always—and I do mean always—traders must know their up
|
||
and down risk, that is, the directional risk of the market moving up or down
|
||
certain benchmark intervals. By definition, moves of three standard
|
||
deviations or more are very infrequent. But they happen. In this business
|
||
anything can happen. Take the “flash crash of 2010 in which the Dow Jones
|
||
Industrial Average plunged more than 1,000 points in “a flash.” In my
|
||
trading career, I’ve seen some surprises. Traders have to plan for the worst.
|
||
It’s not too hard to tell your significant other, “Sorry I’m late, but I hit
|
||
unexpected traffic. I just couldn’t plan for it.” But to say, “Sorry, I lost our
|
||
life savings, and the kids’ college fund, and our house because the market
|
||
made an unexpected move. I couldn’t plan for it,” won’t go over so well.
|
||
The fact is, you can plan for it. And as an option trader, you have to. The
|
||
bottom line is, expect the unexpected because the unexpected will
|
||
sometimes happen. Traders must use the greeks and up and down risk,
|
||
instead of relying on other common indicators, such as the HAPI. |