When trading options you will need to consider price, time, and volatility at the same time. That means understanding the interplay of a few options greeks and how they play off one another.
Here’s what we know. Options aren’t stocks. And you can’t just track profit and loss (P&L) in a vacuum based on what the underlying stock is doing—making it tough to figure out your exit strategy. For that, you’ve got to consider stock price, time, and volatility (vol), which are measured individually by the options “greeks”—delta, theta, and vega. Knowing how each greek works alone is one thing. You should also know how they play off one another during the life of your trade. Master this, and you’re well on your way to mastering the art of the exit.
Let’s examine the greeks with a holistic approach. We’ll consider two different trades—a long call and a long call spread—from the time each trade is placed, to three days later, and then at the end of one week. We’ll also look at what can theoretically happen to those trades if the stock moves up or down $5, or if the price is unchanged.
On the day of the trade, suppose the underlying stock is at $125, and both trades expire in 30 days. Out of the gate, the trades have the following greeks:
Three Days Later
To view your trade profile and the impact of greeks, go to the Analyze tab on thinkorswim from TD Ameritrade, add a symbol, and select Risk Profile to get started.
Seven Days Later
For illustrative purposes only.
Bear in mind, there can be multiple forces to consider when calculating or predicting the P&L of an option. Visualizing the greeks working together helps.
While options trading involves unique risks and is definitely not suitable for everyone, if you believe options trading fits with your risk tolerance and overall investing strategy, TD Ameritrade can help you pursue your options trading strategies with powerful trading platforms, idea generation resources, and the support you need.
Learn more about the potential benefits and risks of trading options.
Kevin Lund is not a representative of TD Ameritrade, Inc. The material, views, and opinions expressed in this article are solely those of the author and may not be reflective of those held by TD Ameritrade, Inc.
for thinkMoney ®
Financial Communications Society 2016
for Ticker Tape
Content Marketing Awards 2016
Content intended for educational/informational purposes only. Not investment advice, or a recommendation of any security, strategy, or account type.
Be sure to understand all risks involved with each strategy, including commission costs, before attempting to place any trade. Clients must consider all relevant risk factors, including their own personal financial situations, before trading.
Market volatility, volume, and system availability may delay account access and trade executions.
Past performance of a security or strategy does not guarantee future results or success.
Options are not suitable for all investors as the special risks inherent to options trading may expose investors to potentially rapid and substantial losses. Options trading subject to TD Ameritrade review and approval. Please read Characteristics and Risks of Standardized Options before investing in options.
Supporting documentation for any claims, comparisons, statistics, or other technical data will be supplied upon request.
This is not an offer or solicitation in any jurisdiction where we are not authorized to do business or where such offer or solicitation would be contrary to the local laws and regulations of that jurisdiction, including, but not limited to persons residing in Australia, Canada, Hong Kong, Japan, Saudi Arabia, Singapore, UK, and the countries of the European Union.
TD Ameritrade, Inc., member FINRA/SIPC, a subsidiary of The Charles Schwab Corporation. TD Ameritrade is a trademark jointly owned by TD Ameritrade IP Company, Inc. and The Toronto-Dominion Bank. © 2022 Charles Schwab & Co. Inc. All rights reserved.