24 lines
1.6 KiB
Plaintext
24 lines
1.6 KiB
Plaintext
Greeks and Income Generation
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With volatility-selling strategies (sometimes called income-generating
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strategies), greeks are often overlooked. Traders simply dismiss greeks as
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unimportant to this kind of trade. There is some logic behind this reasoning.
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Time decay provides the profit opportunity. In order to let all of time
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premium erode, the position must be held until expiration. Interim changes
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in implied volatility are irrelevant if the position is held to term. The
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gamma-theta loses some significance if the position is held until expiration,
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too. The position has either passed the break-even point on the at-expiration
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diagram, or it has not. Incremental daily time decay–related gains are not
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the ultimate goal. The trader is looking for all the time premium, not
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portions of it.
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So why do greeks matter to volatility sellers? Greeks allow traders to be
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flexible. Consider short-term-momentum stock traders. The traders buy a
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stock because they believe it will rise over the next month. After one week,
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if unexpected bearish news is announced causing the stock to break through
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its support lines, the traders have a decision to make. Short-term speculative
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traders very often choose to cut their losses and exit the position early rather
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than risk a larger loss hoping for a recovery.
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Volatility-selling option traders are often faced with the same dilemma. If
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the underlying stays in line with the traders’ forecast, there is little to worry
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about. But if the environment changes, the traders have to react. Knowing
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the greeks for a position can help traders make better decisions if they plan
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to close the position before expiration. |