When I started trading options few months ago, no one emphasized the importance of understanding Greeks and Implied Volatility. Perhaps these old timers I followed have an understanding and probably thought it as an obvious thing that new option traders should learn. It definitely was not too obvious when I am making money. The only time I started paying attention was when I started losing money though the stock price is moving up – could have been because of the decrease in Implied volatility post earnings, time decay/theta burn etc.
The single most important resource has been my personal options trading experience so far, observing that Greeks change with events, earnings, speculation, market (sometimes) and lot of other elements I don’t probably have understanding at this point.
The best resource I found to help me understand these greeks is a series of articles on Investor Business Daily’s options column. For your convenience I am providing the direct links here so you don’t have to go to the IBD and spend time navigating.
1) The “Greeks” – What Options Traders Need to Know Part 1 – Delta
2) The “Greeks” – What Options Traders Need to Know Part 2 – Gamma
3) The “Greeks” – What Options Traders Need to Know Part 3 – Vega
4) The “Greeks” – What Options Traders Need to Know Part 4 – Theta
5) The “Greeks” – What Options Traders Need to Know Part 5 – Rho
6) The “Greeks” – What Options Traders Need to Know Part 6 – The Greeks of a Straddle
I am not saying that you have to master the greeks to trade options but personally I feel by understanding them, I have better chances of taking calculated risks and could eventually become a better trader. It’s all about the time you spend understanding, investigating and learning through experimentation.
What I am currently doing as an experiment is observing the changes in greeks every single day for PCLN October 1000.00 Call Options. I created an excel spreadsheet to record the greeks every single day after the market closes. I will post my findings in few months.
Quote of The Day: “Look within to gauge your worth rather than depending on institutions or the opinions of others, for institutions rise and fall, and fashions come and go, but a good sense of your own value will see you through life’s ups and downs.” - Dr. Norman Rosenthal