How do you manage your option portfolio aggregate greeks?

[Oscard]

I am running an index options book with risk reversal (SPX, rolling 3 months) with long puts and short calls both with 10% OTM. I delta hedge this by futures.

My market view is negative because of apparent macro economic circumstances and basically making money from selling calls and as imp increase with declining market my puts increase in value.

I run my option book by looking at the greeks on portfolio level and drill down on position level to trade to get the aggregate portfolios greeks to look as i want.

Present portfilio greeks excluding delta futures hedge
Greeks($)
Delta -2500
Gamma 0 ish
Theta 450
Vega -1100

My BIG question is... when you are running a portfolio by looking at aggregate portfolio greeks is there any "rule of thumb" ratios between the greeks (of course depending on the your market view) that i should keep mind. E.g. is my Vega/Theta ratio maybe to big?

It feels like the right approach to get Gamma close to zero and then in re -balance my Delta hedge but am i am really struggling finding any logic for the levels Vegas and Thetas. Of course there are no golden rule but i just looking for some kind of logic to anchor up my trades on in terms of ratios between the greeks

Please enlighten me!

Cheerio

 

[luckyd1976]

Please enlighten me!

Cheerio

Hell Man, Enlighten me!

Has this been working for ya???

 

[Oscard]

Hell Man, Enlighten me!

Has this been working for ya???

running your option book by your greeks is how its is done...

 

[luckyd1976]

running your option book by your greeks is how its is done...

Just a heads up, (U know more about OptionGreeks than I)

Has your Gamma Neutral trading strategies been working in these volatile times???

 

[Oscard]

Well... it is not really that i try to aim for gamma neutral strategy - it just fell good to have the portfolio with a smaller gamma - kind of feels good that market moves doesn't change my delta to much as it already is pretty high in absolute terms

 

[Oscard]

thanks for your comment GammaJammer - do you know any books, papers, and guides that discuss how to manage an option book?

 

[gooseman]

i think the index moves are large enough to warrant being long gamma. which would you rather be? i'd prefer to pay out theta in these conditions.....

 

[Oscard]

Not big on book learning to be honest. Think it usually does more harm than good. Natenburg is the seminal work on options but it won't tell you jack about sitting on a trading desk managing real risk.

Sorry

GJ

true- i have natenberg, i have cox/Rubinstein, hull,taleb etc but it doesn't really discuss this at all. I assume investment bank research could could be one source but tricky to get hold of. Hence i have to learn the hard way through my portfolio PnL

 

[Oscard]

i think the index moves are large enough to warrant being long gamma. which would you rather be? i'd prefer to pay out theta in these conditions.....

Please clarify these condition so i can understand your reason for your portfolio to be long gamma? and what kind of option strategies would you use and how do you want your other aggregate portfolio greeks to look like? Many questions

My view is that the market is still going south until there is no doubt the bottom is reached. I try to run a kind of market neutral portfolio, call it a poor attempt of volatility arbitrage, where i use risk reversals (very direction option strategy) with delta hedged futures. I.e i make money from selling calls and long puts that increase in value. That is why i try get my gamma close to zero so no sudden movement change the delta exposure to much... still struggling to find logic for appropriate levels and ratios of the portfolio greeks - something that comes with expensive and painful experience i guess

cheerio!

 

[TWI]

With vols this high not sure long vol books are the way forward as theta component is too high to cover by trading the positive gamma on the other hand managing negative gamma is also not an easy option right now unless you have strong directional conviction.
The best times are when you have a directional view so you also have a natural gamma hedge as well as running short gamma book. In my experience the majority of time I make being short vol when implieds are a godo premium to historics rather than long vol trying to buy implied cheap. if you cannot take the vega reval then need to know your outs but remember the vega will coome back through the theta eventually so it is more about not spunking it in the neg gamma hedging.

 

[Oscard]

With vols this high not sure long vol books are the way forward as theta component is too high to cover by trading the positive gamma on the other hand managing negative gamma is also not an easy option right now unless you have strong directional conviction.
The best times are when you have a directional view so you also have a natural gamma hedge as well as running short gamma book. In my experience the majority of time I make being short vol when implieds are a godo premium to historics rather than long vol trying to buy implied cheap. if you cannot take the vega reval then need to know your outs but remember the vega will coome back through the theta eventually so it is more about not spunking it in the neg gamma hedging.

Thanks for your reply , i follow, but what do you mean with " vega will come back through the theta eventually" in this case

 

[TWI]

Vega is just a revaluation of your option book. If for example you sold 50% vol and then it jumps up to 65% your option will be revalued against you but ultimately at expiration the vol value is 0 so the revaluation comes back to you through the daily theta. This is important to understand if you are trading delta neutral as then the intrinsic delta value of the option is covered by your hedge book and so you just have to worry about managing the gamma. The real issue is that as actual volatility gets close to an exceeds the implied you sold the gamma hedging starts to take more money off you that the theta cannot cover.
Ideal is selling implied as far above real as possible and then sucking in theta every day and not having to manage too much negative gamma. As i said before the ideal is also to have an underlying view and position that allows you to effectivly prehedge the gamma and take you slowly out of your position while paying you theta.