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A positive 53 Vega is considered relatively neutral. Anything over 100 on our position, we may have to take a look at an adjustment on our position, in order to get it back to a level that would be considered neutral.
Vega and Delta are the two most important components of the variables of the option trades that we’re putting on, as far as profitability goes. With the types of positions that we’re putting on, normally, these stay within relatively neutral prices.
Theta, of course, must always remain positive. Given all of the other variables in the price of an option, we want Theta to be positive, because that’s how we make money, every single day. We collect $36.50, as long as we hold this position, if the price remains relatively constant.
The final Greek that we’re going to discuss today, and one in which is not displayed on this position statement, is Roe. Roe is actually how much an option changes in value, to the respect of a 1 point change in interest rates. The reason that interest is used in the price of an option, is because when you buy an option, you are spending money that could otherwise be sitting in an account, collecting interest.
All of the Greeks, actually variables of the option, are interesting, because they give you more information and help you adjust your positions, if necessary. They also are an indicator that something is wrong with your position.
That’s where the real power of these Greeks come in. They tell you if something is wrong. If any of these positions are dramatically out of line, if they aren’t fairly neutral… For example, Delta. We would love to have a zero and neutral Delta, here, but that’s never going to happen. The thing that we can do is monitor our overall position, according to Delta, Gamma, Theta, and Vega, in order to determine whether or not an adjustment is necessary in our overall portfolio.
The reason that we watch them is simply to make adjustments when necessary. If the market should move against us, we want to make sure that we’re in a position not to get hurt. All things being equal, we want Delta and Vega to be relatively neutral, and Theta to be positive. If you keep those points in mind, you’re never going to get hurt.
I suggest you read additional material on the Greeks, in order to strengthen your education on the Greeks. As we go through the type of positions that we will be building in our portfolio, you will also become aware of how important a signpost the Delta, the Vega, and the Theta are.
The types of positions we put on normally involve the sale of a call and put, as well as the purchase of a call and put. That’s why our positions and Delta and Vega are relatively neutral. Our Theta is positive, because we sell our options at a higher price than we are buying them. Normally, these are considered credit spreads. That’s how we make our money.
It’s not important that you know every single detail about Delta, Gamma, Theta, and Vega, in order to really profit from these types of trades. You should only be aware of their general power in affecting the price of an option position, and your overall portfolio.
As we go through the building of our portfolio, and we go through each one of the videos that you’ll see, in this program, you’ll see how important it is, not only to monitor these positions using the Greeks, but also to take a look at our profit picture. Our profit picture is really a good visual tool in order to determine the exact position our portfolio has.
This is what our current position looks like. Some people are very visual. It would be a lot easier for them to take a look at this picture. You can instantly tell that as long as the current price is within the center of our profit picture, then you know you’re okay. You’re going to be in good shape.
That’s it for today, guys. Trade with confidence.