Sunday, October 7, 2012

What are proper Greeks for delta neutral portfolios?

Unlike those portfolios seeking alpha (price performance), the smooth portfolio seeks theta. Even though the concept of option portfolio management by Greeks is known, but what are the suitable Greeks values for different portfolios?

It should be easier to derive the Greeks according to the amount of portfolio profits and risks, and a fixed set of trading instruments. Converting percentage numbers on my last profit and loss projection post, the smooth monthly income option portfolio may profit in the ranges of $600 each month when trading two contracts for SPX & RUT. If the portfolio faces risks of over 60% of the profit target ($360 to $400), then it may be time for adjustments. So if my high probability option portfolio has Greeks exceeding the following values, I should consider adjustments, considering SPX moves $10 frequently.
  • Delta      > 36 to 40
  • Gamma  > 2  (If G=2, delta would change 20 when SPX moves 10)
  • Theta     < 20 ($600 over 30 days)
  • Vega     > 400 or < -400 (Assume VIX changes 0.5 on average, causing $200 changes)
I will update these values in the future to reflect my real and fine-tuned Greek adjustments in trading.

If the high probability option trade portfolio uses different stocks each month, the Greeks for such portfolios would vary since the P & L are impacted by the stock prices, as explained in my previous post on this subject. For such portfolios, the usage of an indicator such as ATR should be helpful to determine the short term potential P & L if prices moves in ATR range.

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