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47/ Aaaand we’re back, talking about second-order greeks.
Honestly, I don’t really get why so many people care. I was an options market-maker for a long time, and I almost never thought about second-order greeks.
Like a few times a month, tops.
Honestly, I don’t really get why so many people care. I was an options market-maker for a long time, and I almost never thought about second-order greeks.
Like a few times a month, tops.
48/ If you’re an exotics trader then fine. But I doubt there are more than a dozen of you reading this.
And if you’re exo trader or options MM, you should have better sources of info than some rando Twitter handle. :)
And if you’re exo trader or options MM, you should have better sources of info than some rando Twitter handle. :)
49/ So why does #fintwit care? Some of it is curiosity, learning for the sake of learning. That’s great.
But I bet some of it is trying to feel and sound smart. However, feeling and sounding smart doesn’t pay the bills. So be careful.
Ok, no more soapbox. Let’s go.
But I bet some of it is trying to feel and sound smart. However, feeling and sounding smart doesn’t pay the bills. So be careful.
Ok, no more soapbox. Let’s go.
50/ SPEED: d gamma / d spot.
Ok, I’m cheating already since this is a *third* order greek. Booo! But it’s the most important “weird one” for a market maker IMO.
Ok, I’m cheating already since this is a *third* order greek. Booo! But it’s the most important “weird one” for a market maker IMO.
51/ Gamma is basically “How much am I going to need to hedge to stay delta neutral?”
The delta of low-gamma positions stays pretty constant, high-gamma positions have deltas that move around a lot.
Why should I care?
The delta of low-gamma positions stays pretty constant, high-gamma positions have deltas that move around a lot.
Why should I care?
52/ Expiration, usually. Say I have a pos with high gamma. I’m probably trading a lot (more than I’d like) trying to stay flat.
If I have a high speed on top of it, then I’m exposed to the risk that if stock moves, I’ll have so much gamma I won’t be able to hedge well anymore.
If I have a high speed on top of it, then I’m exposed to the risk that if stock moves, I’ll have so much gamma I won’t be able to hedge well anymore.
53/ Near expiration, I could easily get stuck with a large delta I can’t hedge.
No market maker likes to sweat a big delta over the weekend. That’s not what you’re paid to do.
No market maker likes to sweat a big delta over the weekend. That’s not what you’re paid to do.
54/ CHARM: d delta / d time.
Another one that matters mostly near expiration, for much the same reasons as above. Near expiration, the mere passage of time can change your delta a lot.
ITM options get ITMier, OTM options get OTMier.
Another one that matters mostly near expiration, for much the same reasons as above. Near expiration, the mere passage of time can change your delta a lot.
ITM options get ITMier, OTM options get OTMier.
55/ Of course, ATM options kind of stay around 50 delta as long as spot doesn’t move.
So the charmiest options are the ones on the shoulders of the Gaussian. The 25/75 delta options, basically.
So the charmiest options are the ones on the shoulders of the Gaussian. The 25/75 delta options, basically.
56/ VOMMA: d vega / d vol.
I didn’t worry much about this one, because I didn’t really trade long-dated options and this is a thing that matters more as t_exp gets bigger.
Usually, the way you think about this is “If vol explodes, does my book get bigger or smaller?”
I didn’t worry much about this one, because I didn’t really trade long-dated options and this is a thing that matters more as t_exp gets bigger.
Usually, the way you think about this is “If vol explodes, does my book get bigger or smaller?”
57/ Since we’re good boys and girls and we’re delta hedging, options trading is about trading vol. And vega is the size of your vol bet.
58/ And since IV only really moves fast in one direction (up), vomma tells you the answer to the question “If the world goes crazy, do I now have a massive book on my hands?”
Which is something worth knowing, for sure.
Which is something worth knowing, for sure.
59/ D VEGA / D SPOT:
I don’t know what this one’s called. But it’s another specific case of d vega / d whatever.
And as before, what we care about is “How big/small does my book get if X happens?”
I don’t know what this one’s called. But it’s another specific case of d vega / d whatever.
And as before, what we care about is “How big/small does my book get if X happens?”
60/ In fact, as you can tell, this is how I think about all of these 2nd order greeks.
I’ve never put on a trade thinking “Ooh, I see a vomma mispricing”.
I’m sure that’s someone’s job but it never was mine. Thinking about this stuff was always about risk management for me.
I’ve never put on a trade thinking “Ooh, I see a vomma mispricing”.
I’m sure that’s someone’s job but it never was mine. Thinking about this stuff was always about risk management for me.
61/ But again, usually if you take care of the first-order stuff, you don’t really need to think about the second-order stuff except in weird situations.
I think that’s it for second order greeks. Yes I skipped a big one. That’s cuz I have nothing interesting to say about it.
I think that’s it for second order greeks. Yes I skipped a big one. That’s cuz I have nothing interesting to say about it.
62/ Please don’t think of this as definitive on the subject. It’s just one person’s perspective, given the experiences I’ve had.
I’m sure @bennpeifert @ksidiii and others have different (and possibly more informed) views. That’s ok too.
I’m sure @bennpeifert @ksidiii and others have different (and possibly more informed) views. That’s ok too.
