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The Skinny On Options Modeling

Can Greeks Be Optimized?

The Skinny On Options Modeling

Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options before deciding to invest in options.

We like to sell premium because Theta (time decay) is on our side. However, there are other important Greeks to consider. This includes Delta and Vega. Can the Greeks be optimized in a portfolio?

There is a relationship between Theta, Delta, and Vega of OTM options, and how far OTM those options are. They increase as implied volatility (IV) increases, and the further OTM the option is, the lower they become. Delta and Vega also have a direct relationship to time. The more time the option has to expiration, the higher they will be while Theta has an inverse relationship and the less time the option has the greater the impact of Theta. The formula for this was displayed and explained.

TP showed a series of three related tables and explained their importance. The first table was of the 1 standard deviation put with 45 days to expiration (DTE). The table included the volatility level, put price, theta, vega and theta/vega ratio at volatility levels of 30%, 25%, 20% and 15%. This showed how the ratio moves linearly and how a trader is rewarded for accepting more risk.

TP explained what the tables tell us about the relationship between Theta, Vega and Delta, and if there is an optimization level we can achieve. The linearity of the relationship means that although we can optimize for Theta by selling premium with approximately 45 DTE, there is no way to optimize for the other two Greeks.

Watch this segment of “The Skinny on Options Modeling” with Tom Sosnoff, Tony Battista and TP for a better understanding of the relationship between Theta, Vega and Delta.

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