The Greek System

Being an options trader can sometimes feel like belonging to a fraternity; some gravitate toward the academic minded, some are athletically oriented, and some of us just go all-out Animal House.

Of course, we at ThinkorSwim like to believe we represent the finest brokerage house on the industry’s campus. But wherever you decided to pledge, almost everyone gets introduced to the reigning “Greeks” early in the process.

These mighty Greeks -- delta, theta, gamma, vega, and rho (well rho isn’t so mighty right now with interest rates near zero) -- will be your guides and provide the code for being a lifelong member of good standing in the fraternal order of options.

But before we meet each of these individually -- and learn about their powers, and yes, the tragic flaws they each have -- let’s use another quintessential part of the hazing process: the road trip, which will draw an analogy of how the Greeks can provide a general map of where one’s position is located at a specific time, but can't predict the bumps or detours on the way and can't accurately predict the condition in which you’ll arrive.

Road Trip!

So you pack into your father’s mint Cadillac convertible and are blasting across the desert highway toward Vegas. With a full tank of gas, there’s nothing but 300 miles between you and a big payday.

Time to step on the accelerator, set the cruise control at 95 miles per hour, lean back, and count the minutes, approximately 32, before you pull up to the clearing house, I mean casino, and start grabbing at the piles of money.

Those who joined the call options buying in tech names during the pre-2000 Internet bubble must have had similar feelings. They were in the driver’s seat and there was little need to pay attention to know if you’d arrive safely at a profitable destination. Hey, you’re with your Greek brothers who have it all mapped out. You trust them, what could go wrong?

Well, if you’re also an option trader, especially one that has used TOS education and tools, you’d know that the driving conditions could change drastically.

It’s now dark and raining, the gas meter has slipped below “H”, and that classic Caddy-feel is starting to feel like an old, gas-guzzling clunker. This is essentially what happened to the financial markets starting in September 2008.

Suddenly, the gauges on your dashboard take on a different, more important meaning and need to be monitored more closely. The slick road and darkness increases risk, akin to an increase in implied volatility or your vega risk.

A bridge was washed away and the detour goes to a curvy, mountainous road. The 300 miles, or your expiration date, suddenly seem much further away, making theta a more important consideration.