#151 - How Closely Should You Monitor Option Greeks When Trading?
Hey everyone, Kirk here again and welcome back to the daily call. Today, we are going to answer the question, “How closely should you monitor your option Greeks when trading?” I think this is a tough one to answer because I think there’s two parts to it. The first part of monitoring Greeks comes into play with single positions. If you’re looking at a single position, maybe a single iron butterfly or iron condor that you have in an ETF or a stock, then you might look at the Greeks a little bit different because you're looking at it in the context of that single position. We’ve talked about before on the weekly podcast and on videos how you can use Greeks and in particular, Deltas as triggers for adjustments. If you sell the 15 Delta strangle for example and one of the Deltas on one side of your trade gets to 30, then you make an adjustment. That could be one of your triggers. There’s one way of looking at it which is monitoring Greeks on a position type level. Now, the other way of looking at it, I think probably the more important context of looking at it is looking at it with a whole portfolio, so looking at a Beta weighted look at your Deltas. Are your overall positions when Beta weighted to a market index, are you bearish or bullish? Because an individual position could be off for example. Maybe it’s suggesting that you make an adjustment, but adjusting that individual position could cause the rest of the portfolio to become even more bearish or bullish than it already needs to be. And so, I think if you look at the portfolio first and use that top-down approach and then start digging into individual positions, that's where I think you get a lot of value in monitoring the Greeks. I think you should closely watch them. I think on the portfolio side, that will give you the first warning shots if anything is starting to get unbalanced or unskewed and from there, you can start digging in and finding out which positions are really causing it, which positions maybe have their Deltas going up dramatically, experienced a big move in volatility, some of those things. I think it’s also important to note that in some cases, if you have let’s say large rises in Delta on short premium trades, it may not be the best move to adjust that position. What we had in the recent weeks in the markets is huge spikes in volatility. Although some positions stayed the same, just market volatility went up. It looks like the Deltas are going up because there’s a possibility of a big move, but that doesn’t mean that the stock hasn't experience it yet. It's still sitting there or it’s still generally range bound. It’s where it needs to be. You have a good position on. You just might have to carry a little bit more margin for the time being. That’s something that we monitor as well too. Don’t just look at one of the Greeks. Look at the whole position, the whole portfolio. Continue to ask yourself, “Look. What can I do? Can I be more patient? Can I sit here and wait for volatility to come back in or for time decay to work in my favor?” I think there’s a little bit more to it than just looking at the Greeks on an individual basis. As always, hopefully this helps out. If you guys have any questions or comments, let me know. Until next time, happy trading!
