Getting By Without Greeks in Options Trading
Can You Do Without Using Greeks in Options?
If you are new to the options trading world, you may not have heard about the Greeks. No, it’s not an invading army that is coming to steal your trading account. The Greeks are a series of indicators that help options traders assess their positions (or possible positions). It is a trader’s radar screen, if you will. But, they can be a bit complicated, especially for newer traders. Is it possible to survive without using these indicators?
It depends on your goals with options trading and those goals have much to do with time frames. When you trade options for shorter periods, like day trades, etc., the Greeks will be essential to your success. If you are looking at longer periods as given by LEAPS, then using Greeks is probably a waste of time.
If you need to roll up your sleeves and “crack the books” to learn the Greeks, you’ll want to have a general understanding of calculus. It’s mostly about derivatives or more specifically, partial derivatives. That is about all the calculus you’ll need to worry about for most options trading scenarios.
When considering the Greeks, the one indicator that will benefit all traders of options, irrespective of time frame, is the delta. It is the rate of change of the option price given a one-unit change of the underlying. The underlying can be a stock, but it can be other instruments like commodities or currencies. The underlying could even be another option.
The delta is the most useful because it gives you an indication as to whether your option is moving in the right direction. Remember, time is against buyers of options. The closer an option gets to expiration, the faster the rate of decay of the option. Since this is a discussion about the Greeks, time decay is measured by theta! If you see your delta going against you, and there’s reason to believe the market has changed its trend, it could be time to take a defensive stance and either close out your position or hedge.
Active trading tools will often include the Greeks within their platforms ThinkOrSwim.com is one that includes them. You can set up your environment to include whichever Greek you want to view.
Can Delta Be Used to Determine Probability?
Some people are under the impression that delta can be used as the probability of an option expiring in-the-money. While it may be close in certain situations, you should be careful as it can be deceiving when used for this purpose. I would treat it as more of a rough estimator of the probability. The good news is your trading platform will likely include probability indicator. If they do, use this indicator instead.
If you are going to use the Greeks for your trading, make sure you understand them completely before relying on them. You can well imagine what will happen when you read them wrong. Your trading will suffer immeasurably, although you may even get lucky on occasion, which would provide you with a false sense of success. Options trading is complicated enough. Using indicators wrong will discourage you.
To answer the question of this article, i.e., can you get by without the Greeks in options, my personal feeling is that you can. I have traded many an option without using any Greeks. On occasion, I will check the deltas in midstream just to see how my positions are doing.
Dangers of Over Trading
Be aware that I don’t day trade options, however. I know seasoned option traders are screaming at me that I am leaving money on the table by not using the Greeks. Maybe, but I like a simplified life. I don’t want to be glued to a computer screen to etch out another two points or so. My trading is calmer than that and I am perfectly fine with it. Besides, if the trend is up on the underlying stock, but the Greeks are telling you to get out of your option position, you are more likely to over trade. You’ll get hit with more commissions when this happens. Those extra points that you got from analyzing the Greeks will be burned up from those commissions and capital gains taxes.
I am not knocking traders who use the Greeks and I acknowledge that these indicators are useful. I am conceding that people can use them to make money. However, my position is that people should not feel as though it’s required to use the Greeks in order to succeed with options investing. The Greeks have their own set of challenges along with a steeper-than-average learning curve. To each his-or-her own!