Watch your greeks

I learned an important lesson today: Always watch your greeks.

What are greeks?
An options' price is derived from various greek letters that stand for various different things:

• Delta: option price's sensitivity to movement in the underlying stock's price. If delta is positive, the option price goes up as stock price goes up.


• Gamma: Options price's sensitivity to movement in the delta (or how fast the delta moves with the stock price). If gamma is positive, delta increases as price goes up, and vice versa.


• Theta: Effect of time on the option. If theta is positive, time is in your favor and vice versa.


• Vega: The effect of implied volatility. The higher the vega, the more you want volatility to be. The higher the volatility, the higher the option price.


• Rho: Effect of the risk free rate

Many strategies out there focus on keeping delta near 0, or theta always positive, or vega high/low in times of rising/falling volatility. I have been focusing mainly on theta and volatility, but I learned today that you should be mindful of all the greeks.

As the SPY fell today, many of my holdings fell along with the SPY. Although my theta and my vega are still positive and the increase in the VIX (overall implied volatility) helped my position, I failed to look at my deltas.

Unfortunately, I had deltas as high as 300 (for every one dollar move up in the underlying, my position would go up $300). Unfortunately, the inverse works as well, and for every dollar move down, I lose $300. And that is what happened. I could have easily hedged my self by purchasing securities with negative deltas or liquidating some securities with very high deltas.

I have taken steps to reduce my deltas and in the future i vow to be more mindful of such things.