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The Greeks represent the consensus of the marketplace as to how the option will react to changes in certain variables associated with the trading in fx option gamma strategies product of an option contract.

There is no guarantee that these forecasts will be correct. And as Plato would certainly tell you, in the real world things tend not to work quite as perfectly as in an ideal one.

The option costs much less than the stock. Why should you be able to reap even more benefit than if you owned the stock? Calls have positive delta, between 0 and 1. That means if the stock price goes up and no other pricing variables change, the price for the call will go up. If trading in fx option gamma strategies product call has a delta of.

Puts have a negative delta, between 0 and That means if the stock goes up and no other pricing variables change, the price of the option will go down. For example, if a put has a delta of. As a general rule, in-the-money options will move more than out-of-the-money optionsand short-term options will react more than longer-term options to the same price change in the stock.

As expiration nears, the delta for in-the-money calls will approach 1, reflecting a one-to-one reaction to price changes in the stock. As expiration approaches, the delta for in-the-money puts will approach -1 and delta for out-of-the-money puts will approach 0.

Technically, this is not a valid definition because the actual math behind delta is not an advanced probability calculation. However, delta is frequently used synonymously with probability in trading in fx option gamma strategies product options world. Usually, an at-the-money call option will have a delta of about.

As an option gets further in-the-money, the probability it will be in-the-money at expiration increases as well. As an option gets further out-of-the-money, the probability trading in fx option gamma strategies product will be in-the-money at expiration decreases. There is now a higher probability that the option will end up in-the-money at expiration. So what will happen to delta?

So delta has increased from. So delta in this case would have gone down to. This decrease in delta reflects the lower probability the option will end up in-the-money at expiration. Like stock price, time until expiration will affect the probability that options will finish in- or out-of-the-money.

Because probabilities are changing as expiration approaches, delta will react differently to changes in the stock price. If calls are in-the-money just prior to expiration, the delta will approach 1 and the option will move penny-for-penny with the stock. In-the-money puts will approach -1 as expiration nears. If options are out-of-the-money, they will approach 0 more rapidly than they would further out in time and stop reacting altogether to movement in the stock.

Again, the delta should be about. Of course it is. So delta will increase accordingly, making a dramatic move from. So as expiration approaches, changes in the stock value will cause more dramatic changes in delta, due to increased or decreased probability of finishing in-the-money.

But looking at delta as the probability an option will finish in-the-money is a pretty nifty way to think about it. As you can see, the price of at-the-money options will change more significantly than the price of in- or out-of-the-money options with the same expiration. Also, the price of near-term at-the-money options will change more significantly than the price of longer-term at-the-money options.

So what this talk about gamma boils down to is that the price of near-term at-the-money options will exhibit the most explosive response to price changes in the stock. But if your forecast is wrong, it can come back to bite you by rapidly lowering your delta.

But if your forecast is correct, high gamma is your friend since the value of the option you sold will lose value more rapidly. Time decay, or theta, is enemy number one for the option buyer. Theta is the amount the price of calls and puts will decrease at least in theory for trading in fx option gamma strategies product one-day change in trading in fx option gamma strategies product time to expiration. Notice how time value melts away at an accelerated rate as expiration approaches.

In the options market, the passage of time is similar to the effect of the hot summer sun on a block of ice. Check out figure 2. At-the-money options will experience more significant dollar losses over time than in- or out-of-the-money options with the same underlying stock and expiration date. And the bigger the chunk of time value built into the price, the more there is to lose.

Keep in mind that for out-of-the-money options, theta will be lower than it is for at-the-money options. However, the loss may be greater percentage-wise for out-of-the-money options because of the smaller time value.

Obviously, as we go further out in time, there will be more time value built into the option contract. Since implied volatility only affects time value, longer-term options will have a higher vega than shorter-term options. Vega is the amount call and put prices will change, in theory, for a corresponding one-point change in implied volatility. Typically, as implied volatility increases, the value of options will increase.

Vega for this option might be. Now, if you look at a day at-the-money XYZ option, vega might be trading in fx option gamma strategies product high as. Those of you who really get serious about options will eventually get to know this character better. Options involve risk and are not suitable for all investors. For more information, please review the Characteristics and Risks of Standardized Options brochure before you begin trading options.

Options investors may lose the entire amount of their investment in a relatively short period of time. Multiple leg trading in fx option gamma strategies product strategies involve additional risksand may result in complex tax treatments. Please consult a tax professional prior to implementing these strategies.

Implied volatility represents the consensus of the marketplace as to the future level of stock price volatility or the probability of reaching a specific price point. There is no guarantee that the forecasts of implied volatility or the Greeks will be correct. Ally Invest provides trading in fx option gamma strategies product investors with discount brokerage services, and does not make recommendations or offer investment, financial, legal or tax advice.

System response and access times may vary due to market conditions, system performance, and other factors. Content, research, tools, and stock or option symbols are for educational and illustrative purposes only and do not imply a recommendation or solicitation to buy or sell a particular security or to engage in any particular investment strategy.

The projections or other information regarding the likelihood of various investment outcomes are hypothetical in nature, are not guaranteed for accuracy or completeness, do not reflect actual investment results and are not guarantees of future results. All investments involve risk, losses may exceed the principal invested, and the past performance of a trading in fx option gamma strategies product, industry, sector, market, or financial product does not guarantee future results or returns.

The Options Playbook Featuring 40 options strategies for bulls, bears, rookies, all-stars and everyone in between. Vega for the at-the-money options based on Stock XYZ Obviously, as we go further out in time, there will be more time value built into the option contract.

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Ocassionally windfalls [applicable to overhedges] also contribute to the PnL. The trading strategies of the desks to a large extent center around the gamma and the volatility exposures based on the market view they have. In this article we shall try to understand the gamma risks. While being long gamma requires funding costs i. So by being long gamma you would realize negative PnL on theta whereas positive PnL on theta by being short gamma [well almost always - one exception being long deep ITM puts are long theta].

One common practise is to be long gamma in trending markets and short gamma for ranged bound or sluggish markets. In the discussion that follows we assume that the portfolio is delta hedged at discrete intervals. Of course if we keep the portfolfolio continuously delta hedged, we would not realized any PnL [the argument assumes that the other risk factors do not change] i.

It will be worth noticing in the discussion that follows how the perspectives of the risk managers and traders sometimes may be often differ. Lets take the first scenario, the market is rallying stocks moving up. The traders would like to have long gamma exposures in such a market. With a long gamma exposure, as the markets rally the portfolio picks up more delta between rehedgings.

To keep the portfolio delta hedged as the market moves up and the portfolio picks up positive delta, the trader will sell the stocks [or forwards]. With markets going up the trader is selling at a high [sell at a high while have bought at a low] thus making profits.

When the trader expects that the market will continue to rally, he would delta hedge less often to be able to accumulate more deltas [and hence more profits]. In another situation we suppose that the markets were crashing , the trader would again like a long gamma exposure. The portfolio would be picking up negative delta which the trader would cover by buying stocks [buying low] in a falling market.

The trader is making a profit in this situation by accumulating negative deltas on the way down. It would start to appear that being long gamma always gives you a profit. Remember that we told that positive gamma is an expensive strategy because of the time decay. To be able to earn profits overall, the stock movements should be able to compensate for the loss in time decay. So when the trader believes that the market is going to be sluggish [small moves], he would keep a short gamma position and be happy to earn PnL due to theta.

But, being short gamma is a risky strategy. The trader will start loosing money in trending markets. The analysis is similar to the discussion above, when the market crashes the portfolio picks up positive delta and the trader will find himself in a situation where he is selling when the market is crashing [selling low].

Similarly when the market rallies, the portfolio would pick up negative delta and the trader would find himself in a situation where he's buying in the peaking market to delta hedge. In a collapsing market the traders sometimes might like to hedge less often in the hope that the market would rebound [after all you dont realize profit or loose unless you book it].

But then the risk manager should know that this strategy runs the risk of realizing even more losses in future by not booking small ones today. Hence short gammas can get the risk managers worried. A physicist thinks reality is an approximation to his equations.

A mathematician doesn't care. Gamma exposure and risk management 3. I have my own problems to solve. I'm never likely to go there. I am just short the profit at the moment.