Sure, they probably know, or can easily learn, the basics: puts and calls; in-the-money and out-of-the money; HV (historic volatility) and IV (implied volatility); the naked and the spread.
But what about Vomma……
If the term vomma is Greek to you, that is because it literally is. Options traders use various Greek letters and terms to describe the sensitivity of an option’s price to various factors, such as volatility in the underlying security. The most basic terms—delta, gamma, theta, vega, and rho—are referred to as “major Greeks.
” Vomma, on the other hand, is known as a minor Greek because it provides insight into vega.
Delta is a ratio that mea-sures how much an option’s price is expected to change for every $1 shift in the price of the underlying security. Deltas on puts (which give the owner the right to sell a security at a certain price) can range from 0 to negative 1; on calls (which give the owner the right to buy a security at a certain price) they are 0 to positive 1. If a call has a delta of 0.50 and the price of the underlying stock rises $1, the price of the call will go up, theoreti-cally, about 50 cents, as long as every thing else remains constant.
Delta can offer a rough gauge on the odds an option will wind up in the money at expiration. (A call option is in the money if the market price is above the strike price; a put option is in the money if the market price is below the strike price.) For example, a trader buying a far out-of-the-money put with a negative 0.05 delta has a 5% chance of the option expiring in the money. Not a good bet.
Delta neutral is a common phrase. It means a combina-tion of option deltas add up to zero, and the combined options will move, for a time, 100% in lockstep with the underlying stock. It’s very useful for hedging a stock’s movement.
Gamma This one is tougher; it measures the rate of change in the delta of an option for every one-point move in the price of the underlying security. What does this mean? An oft-used analogy is that delta is an option’s speed, and gamma reflects acceleration, a nuance that may be more important to professional traders hedg-ing large portfolios.
Gamma is small when an option is deep in or out of the money. It is at its largest when the option is near or at the money.
Retail traders may often hear advanced traders mention gamma scalping, which is, very broadly speaking, adjusting an options position frequently with a primary goal of not losing money due to theta (see below).
Theta measures the rate of change in an option’s value due to time, and is usually expressed as a negative. For example, if an option’s theta is minus 0.20, an investor can expect its premium to decline, or decay, 20 cents a day, if everything else remains constant. The rate of decay tends to accelerate as the option nears expira-tion.
Option writers, or sellers, collect theta when they open a trade, by receiving a small cash payment, a premium, for the risk they are taking on the trade, not unlike how insurance firms collect premiums.
Vega, which isn’t a Greek letter but one of the Greeks, nonetheless, measures an option’s price sensitivity—how much it could change—in response to implied volatility changes in the underlying security. Vega is a higher number for long-dated options than for those expiring soon; long posi-tions will be positive, however, and short posi-tions will be negative.Vega is useful for hedging against implied-volatility changes; changes in vega are mea-sured by the aforemen-tioned vomma, a minor Greek, (a Pyrrho not a Plato, you might say).
Perhaps more useful is this trader’s tip: If the vega is smaller than the option’s bid-ask spread, then the spread isn’t competitive.
RHO This comes in last, and for good reason. It measures the expected change in an option’s price for every one-percentage-point change in interest rates. Considering interest rates have pretty much disappeared, no one tracks it these days. [tilanne on alkanut muuttua 2/2022].
