This is going
to be a brief and concise post, on the matter of managing option delta or
gamma. Over the years I have seen many newbie traders make similar mistakes I
myself had experienced starting out; and like most fields, becoming an expert
requires critical thinking, at least on a level deeper than those you’re taking
your money from.
The core
mistakes
Applying
textbook theories alone would not likely result in profitable trading, and hedging
Greeks blindly to software-default-vols is usually a bad idea. Yet, this is
what I’ve noticed a lot of newbies do, despite the subsequent “unexpected”
P&L volatility, and no alpha over time for those who don’t engage in market
making.
The better
process
As you
watch the implieds and the underlying change over time, you need to constantly
question the motivations behind the transactions. E.g. when you notice big
orders lifting the offers/implieds on a number of call options, instead of
assuming this is a good spot to fade and “sell expensive vol”, you need to ask
yourself “why is a relatively large order willing to buy at increasingly
expensive options?, and are they really just giving money away?”
Apply your
experience to find the most probable answer, and eventually you’ll realize
whether to fade/ride with the changes in direction/vol. This explains why
experience in trading offers so much value, and so many newbie quants fail.
