Greeks of a Call:
Delta: Long
Gamma: Long
Vega: Long
90% of the time if a stock goes higher Calls will lose money because the implied volatility will move lower. This is not always the case but it occurs the majority of the time. I use a strategy from the trading floor where I buy both Puts and ‘extra stock.’
For example, I bought 100 LVS May 48 Puts for $2.60 and purchased stock for $49.89. The delta of the Puts was 35 so I would need to purchase 3500 shares of stock to be delta neutral. Let’s also examine what would happen if I purchased even more stock, for this example let’s say I were to purchase 5000 shares of stock:
Long 100 May 48 Puts, Long 5000 Shares of Stock:
Long 5000 Shares of Stock can translate to Long 50 May 48 Calls and
Short 50 May 48 Puts since this is a Combo.
Lets net out this position:
Long 100 May 48 Puts minus Short 50 May 48 Puts= Long 50 May 48 Puts/Long 50 May 48 Calls
So, I am long the May 48 Straddle. Why did I choose this position instead of just buying the Puts outright. Well, I have downside and upside as well. If the stock sells off $10 on Monday, I will make money on this trade because I am long 50 of the May 48 Puts. Since the stock is $50.75 and the Long May 48 Calls have a larger delta than the Puts, I will get longer as the stock goes higher as well, similar to the Calls. The primary reason I chose this trade was because I will make money if the stock continues to go higher. Let’s look at how the trade breaks down:
Long 50 May 48 Calls, Long 50 May 48 Puts
OR
Long 100 May 48 Puts and Long 5000 Shares of Stock:
Delta: Positive: around 1500
Gamma: Positive: around 500
Vega: Positive: around 900
As stated earlier, stock moves higher the implied volatility will move lower. An out of the money Put has higher implied volatility than a Call. The further a put is out of the money the higher the implied volatility will be, this is known as the Volatility Skew. Therefore, as stock moves higher I should actually make money on the Vega as the Puts will become further out of the money and their implied volatility will rise. The position will get crushed if the stock goes to 48, but I consider the likelihood of this happening to be low.
For those interested in learning more about this, I offer private 1 on 1 mentoring and boot camps. In a boot camp I will fly to your location and personally educate you on Options 9 hours/day for 1 week. 1 on 1 mentoring is peformed remotely.
—
Andrew Keene
President/Founder
Andrew@KeeneOnTheMarket.com