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Let’s move on to Gamma, to see how that variable works in relation to the price of our entire portfolio, and individual positions. Gamma is the measure of the change of an option’s Delta, with respect to a 1 point move in the underlying stock – or ETF, or Future.
In other words, Gamma itself is not a variable directly on the price of the option. Rather, it is the measure of the change on the Delta. It has more of an effect on the Delta than it does directly on the price of the option itself.
When buying an option, Gamma is positive. When selling an option, Gamma is negative, regardless of whether it’s a call or a put. This often confuses people, because you have to keep in mind, the Gamma is the measurement of the rate of change of the Delta, not of the option.
In practical terms, a positive Gamma is something that you want, if you believe that the market is going to be making a large move. If you are positive Gamma, it will affect the Delta in a way that will increase the price of the option, if a large move is coming in the market.
Long puts and calls are long Gamma. You make more money when the market moves. If you’re short calls and puts, on the other hand, you’re short Gamma. That means that you do not want the market to move too much.
In our case, almost all of our positions are short Gamma. We don’t mind if our positions move, but not by too much. Normally, when you’re short Gamma, that means that you’re selling calls, and you’re selling puts. When you have a short Gamma overall position, you are also going to be long Theta.
Theta is where most of the money is made. Let’s move on to Theta. The types of positions that we put on are all positive Theta positions. Theta is the measure of how much an option loses value on a daily basis, as time approaches expiration.
Theta increases in size, as it nears expiration. What this means is that the closer to expiration an option is, the quicker it loses its value. That’s why I mention, in other videos, that Theta will increase as we get closer to expiration.
In our case, we are positive Theta on our Diamond position, of 6.06. That means, it should collect $6.15, every single day that we hold this position until expiration, as long as price remains within a certain range.
On our EEM position, we are positive Theta, or long Theta, 9.47. That means on average, we should collect $9.47 every single day that the EEM remains within a certain price range.
On the IWM position, we are long 9.96, or close to 10 in Theta. We are positive Theta by 10, on a daily basis. In other words, if price remains constant and doesn’t dramatically change, or go outside of the parameters that we want it to go out of, we will collect an average of $10 on that position alone, per day.
Our SPY position is also positive Theta, of about 10.40. As long as the price remains within a given range, we will collect an average of $10.28, per day, for every day that we hold this position.
These variables, of course, change constantly.