I like to say there are three difficult phases when learning how to trade options. The first, and second most difficult in my opinion, is learning about options including trading strategies and the greeks. The second is the easiest of the three, but by no means is it easy: Learning when and what strategies to use based on charts, time, volatility and other factors. The third and hardest is learning how to manage the trade.

Option Complexity

What makes trading options potentially difficult and often at the same time intriguing is their complexity. With stock you can only do two things: buy and sell. That is true of options but there are so many different strategies based on so many different outlooks. Buying and selling stocks can only be structured for an expected move higher or lower.

Add in the Greeks

In addition, there are the option greeks: delta, gamma, theta and vega. The option greeks can tell you how your position will change due to a movement in the underlying, time passing and changes in implied volatility.

Maybe you will never become an option greeks expert, but knowing one thing can help you immensely and that is to spread it out. Here is what I mean. If you are concerned about one or more of the option greeks, consider a spread trade. An option spread that involves buying and selling either all calls or puts will always have positive and negative greeks.

A Quick Example

Let’s imagine you are a bullish on a stock. A long call is a bullish option strategy. Long options have negative theta. Time passing lowers the premium. If you are worried about time decay eroding your option premium, you could consider a spread instead. You could sell a higher strike call option with the same expiration, which would add some positive theta to the mix.

Short options (as in this case a short call) have positive theta. Time passing helps the position because it lowers the premium based on time. Now a trader will have less exposure to time and possibly positive theta because of the spread.

Finally

As I often tell my students, “when in doubt, spread it out.” If you are concerned about a particular option greek affecting your position adversely, do the opposite to create a position that is closer to being option greek neutral than just a long or short position alone. It is worth a look at the very least.

John Kmiecik, Market Taker Mentoring