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.
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