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Minyan Mailbag: Options Terminology

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..."partials" help us describe how our position will change.

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Prof. Succo,

Question - I understand the definitions of delta, gamma, vega. But in trading, can you explain when one says: "I'm short 8,000 gamma, long 200,000 vega, etc., etc.

Are these dollar terms? Shares?

Best,

Minyan David

MD,

If I have an option position, one that throws off convexity (my stock exposure changes as the price of the stock changes) these terms we call "partials" help us describe how our position will change. Let's denominate those terms in dollars (not share amounts) to make everything equal.

If my delta is -$200,000; that means that I am short (right now) $200,000 worth of stock (divide $200,000 by the stock price to convert this to shares).

If my gamma is $20,000 (positive meaning that I am long options or long convexity), it means that if the stock price increases by 1%, my delta will now be $-180,000. If the stock drops by 1% my delta will now be $-220,000. If my gamma is $-20,000 (negative meaning I am short options or short convexity), it means that if the stock increases by 1% my delta will now be -$220,000; if the stock drops by 1% my delta will now be -$180,000.

If my position has a vega of $50,000 (positive vega meaning I am long options and want the prices of options to get more expensive) and the implied volatility of my options go from 20% to 21%, I will see a $50,000 profit. If the vega of my position is -$50,000 (negative vega meaning I am short options and want the prices of the options to get cheaper) and the implied volatility goes from 20% to 21%, I will see a net loss in the position of -$50,000.

-Succo
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