December 5, 2024 • 21 mins
Have you ever had trouble understanding the concept of option Greeks because of the math involved? If so, join host Mark Benzaquen and fellow OIC instructor Mat Cashman as they make their way through Delta, Gamma, and Theta using metaphor rather than math in this insightful and unique look at the Greeks.
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(00:00):
You're listening to the Options Insider Radio Network, the home of the Options Podcast.
For more quality options programs, visit theoptionsinsider.com or search for Options Insider Radio Network
in your podcast provider of choice.
Listeners can also access all of our programming through our mobile app available on the iTunes
(00:22):
and Google Play stores.
Most programs are also available via livestream at mixler.com/options-insider.
That's mixlr.com/options-insider.
Don't forget to follow along with your favorite programs and submit your own questions for
the host set twitter.com/options, stocktwits.com/options, facebook.com/theoptionsinsider, or via questions
(00:52):
at theoptionsinsider.com.
This is the Options Industry Council's Wide World of Options.
Before we start today's show, listeners should know that options involve risk and are not
suitable for all investors.
(01:14):
Individuals should not enter into an options transaction until they have read and understood
the disclosure document, characteristics, and risks of standardized options.
Also by visiting theocc.com or by contacting your broker, any exchange on which options
are traded, or the Options Clearing Corporation at 125 South Franklin Street, No. 1200, Chicago,
(01:34):
Illinois 60606.
The Options Industry Council is an industry resource provided by the Options Clearing
Corporation, collectively OCC.
Any strategies discussed are strictly for illustrative and educational purposes only
and are not to be construed as an endorsement or solicitation to buy or sell securities.
Commissions, fees, margins, interest, and taxes have not been included in any of the examples
(01:58):
used in this show.
These costs impact the outcome of all stock and options transactions.
Consult your tax advisor about any potential consequences.
OIC was created in 1992 to educate investors and their financial advisors about the benefits
and risks of exchange traded equity options, and the Wide World of Options radio show is
(02:18):
one of several resources investors can utilize to learn more about options.
Other resources OIC offers include webinars, articles, and self-guided options related
coursework.
For more information, check out www.optionseducation.org.
Now here's your host, Mark Benzoquin.
Hello everyone and welcome to OIC's Wide World of Options.
(02:47):
I'm your host, Mark Benzoquin.
As 2024 comes to a close, OIC will be featuring a rebroadcast of two live presentations we
did at the recent Money Show Traders Expo in Orlando, Florida.
For the first session of the event, I provided a high-level overview of credit spreads including
call and put verticals as well as iron condors and butterflies.
(03:11):
And then for our second session, we really had this terrific presentation by my friend
and colleague Matt Cashman, a fellow OIC instructor here, where Matt explored the concept of understanding
the Greeks through metaphor rather than math.
And as I thought it was so interesting and as I thought that our listeners can really
(03:33):
get some terrific benefit from these insights that Matt has, I thought it would be a good
idea to welcome back to the show.
So Matt, welcome back.
Thanks for joining us today.
Thanks for having me, Mark.
It's always a pleasure to be on the OIC podcast to talk about Greeks.
So Matt, let me ask you this.
Greeks, theoretical pricing concepts that investors use to kind of gauge where they
(03:58):
predict option prices might go based on certain inputs in the market, et cetera, et cetera.
All of that obviously is heavily math-centric.
So where do we go from math-centric learning to learning through metaphor?
Where did that concept come up and how do we apply it to this particular topic?
(04:20):
Excellent, excellent question, Mark.
I think it's great to start at the very beginning with some set the table as it were.
The concept itself came from a conversation that I had with Ed Modlow, who's the executive
director of investor education here at OIC.
And his question to me was, do you think we could teach the Greeks without using math?
(04:43):
And I thought about it for a moment and I thought, I think I can probably do that.
Let's see if we can climb that hill together.
So that's where the actual presentation and the concept came from.
The concept itself, however, is really just a way for people to understand some of these
more complicated mathematical parts of options without having to necessarily dig into the
(05:06):
math itself.
Because there's lots of different ways you can understand the Greeks.
Some people have a very base-level understanding of the math behind it.
It comes to them naturally.
But the thing that I think about is that what if people don't necessarily understand the
math naturally?
What if it doesn't come to them naturally?
There are other parts of our daily lives that we can connect with the Greeks that will give
(05:31):
them a better understanding of how these things work, why they work the way that they do,
and how to think about them when they're thinking about the actual risk that they have on with
their options position.
So that's where it came from.
Right.
I like that.
Thank you.
And I also like that when you talk about Greeks, you talk about it as a dashboard
(05:53):
for your vehicle, again, through a metaphor.
Yeah.
That when you're driving your car, you can see everything, all the components of your
vehicle, your speed, your acceleration, how much gas you've got in the car, et cetera,
et cetera.
And you kind of use that as the metaphor to better understand Greek.
So knowing that, let's get started with the Greek that I think is most familiar with people,
(06:19):
and that's going to be delta.
So without using math, how do we better understand delta through metaphor?
Yeah, absolutely.
I really like the metaphor most generally of the dashboard to your car.
I think it's something that everyone can really understand because, like you said, it gives
(06:39):
you all of the information you really need to know about the car without having to like
open up the hood.
You don't have to open the hood to figure out whether or not the thing's running.
You don't have to stick your head out to figure out how fast you're going because your speedometer
does that for you.
One of the ways that people conceive of delta, and one of the ways that I started to think
(06:59):
about delta when I thought about it in terms of this presentation, is that delta is like
the speedometer of your car.
I talk about delta as the speedometer of your options position.
Just like your speedometer tells you how fast you're going in your car, delta can tell you
how much an options price is expected to change for every one point move in the stock price.
(07:21):
So a higher delta option, kind of like a higher speed in a car, means your option is going
to be more sensitive to underlying movements of the stock.
So if you're going 100 miles an hour, turning your wheel to the left very quickly is going
to yield a very bad result.
It's not going to be a great experience for you.
(07:44):
But if you're going 10 miles an hour, turning your wheel to the left very quickly might just
be you pulling to the side of the road or pulling into a parking spot.
It's a completely different situation, much like an option that has something like 100
delta is going to react much differently to underlying movement in the stock than an option
that has a 10 delta.
(08:05):
So in that way, we like to kind of think about delta as like the speedometer of your car.
It tells you kind of how fast that option should theoretically move.
Right.
And just to kind of back up to something you had mentioned that if you're traveling 100
miles an hour and likening that to 100 deltas, if you suddenly turn your wheel, bad things
(08:25):
are going to happen.
We're obviously not making a recommendation for investors not to trade high delta options.
We're simply giving them the understanding that the more correlated an option is with
the stock, the more potential for sudden movement in that options price is going to be.
(08:48):
Yeah, of course.
More potential movement that that option would have relative to the underlying movement of
the stock.
Right.
And that's the important part.
The important part is for you to understand how much risk does this option have.
And that's one of the very first things that people start to understand when they talk
about options is the delta of that option gives you a really good idea of how much underlying
(09:12):
risk, how much risk to the underlying movement that option might have as far as how much it's
going to move.
Right.
Understood.
Thank you for that.
So if we've got a delta as the speed of the car and we know that the next major Greek
is a derivative of delta that's gamma.
So if delta is the speed of the car, how do we describe gamma?
(09:36):
Well, gamma is actually and I talk about this when I when I talk about in the presentation,
delta really measures how much you can think about the price of the option moving.
So we're talking about price in that situation.
Gamma is what is theoretically referred to as a second derivative Greek, but it shows
(09:57):
up on everyone's kind of primary risk landscape because it's usually right next to delta.
Gamma is a Greek that measures another Greek.
So it's really a second derivative Greek because gamma is actually how much your delta is going
to move for that same one dollar move in the underlying.
(10:18):
And so I like to think about gamma as long as we're kind of in the same we're staying
in the same metaphor family here.
We're keeping it to cars.
I compare gamma to different types of vehicles.
So think about a sports car that can change direction very quickly relative to like a
giant truck that has a lot of moving parts that have to move around in order for it to
(10:43):
change direction.
Gamma is like the vehicle's potential to change direction or speed.
High gamma options are kind of like sports cars.
They have the ability to accelerate or decelerate or change direction very quickly relative
to price changes.
Low gamma options conversely are more like those big giant trucks.
(11:07):
They're steady and they take a lot of underlying movement to actually move in the same way
that a high gamma option would for that same one dollar move in the underlying.
So they're going to be a little bit less sensitive to underlying movement.
But there's no real I don't want to give the idea that one is more risky than the other
(11:32):
because they're just risk metrics here that we're talking about as far as how the option
moves relative to underlying.
It's just a good way for you to be able to conceive of what those movements might be
when the stock moves.
And talking about gamma as a sports car or a big truck is one of those ways for you to
(11:53):
understand how that option might move.
Okay, so sticking with that analogy, if I'm driving a sports car, if I've got an option
which has high gamma, I'm going to experience quick shifts in delta as that stock price
moves.
But conversely, if I'm, as you said, driving that truck or holding an option with low gamma,
(12:14):
those changes in delta are going to come more slowly.
Is that right?
Yes, that's exactly it.
High gamma options respond more dramatically generally to changes in underlying stock price.
Low gamma options, on the other hand, are a little bit slower to respond to the movement
of the delta relative to the underlying same, the same amount of movement in the under.
(12:35):
Understood.
Okay, thank you.
Another Greek theta, which for me, I think is probably the easiest to understand.
You know, I'm certainly, and I'm sure everybody's familiar with the concept, time is money.
Theta also known as time decay, I'm sure you've got some terrific metaphor for this as well,
(12:55):
right?
Am I going to be disappointed?
No, I don't think you're going to be disappointed, Mark, but I will say theta is one of those
things that is hard to describe perfectly with metaphor because it has a couple of different
components to it.
One of the things that I most broadly try to transmit as an idea when I'm talking about
(13:17):
theta is I want people to think about it like decay, generally, because that's really what
it is.
Theta is the amount that your actual option price is going to change in a 24 hour time
period.
And so if we were to start with an option that's $3 and fast forward 24 hours to this
point tomorrow and it has, let's say, eight cents of theta, your option model is telling
(13:42):
you that that option theoretically, if nothing else moves, is going to be worth $2.92 tomorrow.
That's $3 minus the eight cents of theta.
So in this way, I'd like to really get people focused on the idea that theta is a measure
of decay, that it's like a countdown for the option.
And once I started thinking about that, I thought, okay, well, this is a little bit
(14:04):
like an hourglass where the actual option premium, if you think about an hourglass,
it has two sections.
You've got that section up top where all the sand is and then the section down at the bottom,
which is empty at the beginning.
When you turn it over, what actually happens is the sand from the top starts to filter
through that tiny little hole into the bottom.
You can think about theta in that way as well.
(14:26):
The top of it can in that way be like the premium of the option in the top of the hourglass.
And as time passes, a little bit of it at a time comes down to the second half, the
bottom half of the hourglass.
That is the force of theta.
That is the force of time taking that value from the option itself and moving it down
(14:48):
into another area, which is what time is taking away from that option.
Now, the hard part about this is that that's a really general way to talk about it.
But that doesn't give you the idea of the more complex part of theta, which is that
theta time decay becomes exponential as you get closer to expiration.
(15:12):
So the secondary part of this is the part that's a little bit harder to understand.
Well, and I'm glad you brought that last part up because when I was listening to you talking
about the metaphor, I'm thinking of follow-up questions.
And the one thing that I had in my head was, but the sand through the hourglass, what's
the phrase, so are the days of our lives.
(15:33):
The sand through the hourglass falls at a steady rate.
And we know that theta isn't that case, that it accelerates as we approach expiration.
So I certainly appreciate you addressing that.
Thank you so much.
Let me ask you this.
So we've got delta gamma theta, the dashboard on our car.
(15:56):
How do all of these Greeks interact with each other?
Or do they interact with each other?
Are any of them dependent upon each other?
Should an investor, and I shouldn't say should, but might an investor be more concerned with
one than another, or do they all play a relatively equal role?
Well, I think it's a good question.
(16:18):
I think the idea behind this was to give people an idea of how to think about these things
on their own, in their own kind of bubble.
Think about delta this way, think about theta this way, think about gamma this way, or
you can think about these things in that way.
They are obviously, because they are mathematical functions, and they have the same, let's say,
(16:43):
the same mathematical model is driving all of these things, relatively speaking.
They are interdependent in some ways.
Now, the way that they are interdependent is much more complicated than the actual functions
themselves.
I want people to really dive into thinking about how these things interact on their own
(17:05):
at first, and then we can really dig into how does theta and gamma, how are they related
to each other?
Because those two things are related to each other, but you need to really understand how
each one functions independently before you can really start to dig into how does each
(17:25):
one interact with the other one.
Right.
So it's the walk before you run, understand what they are first, and then we'll get into
some more of the intermediate or advanced concepts.
Yeah, absolutely.
Yeah, and Matt, really, thanks for these fantastic metaphors.
It's really terrific, and I really find it super interesting to be talking about Greeks
(17:49):
without feeling that our listeners need a calculator in their hands, so thank you for
that.
Before we wrap up, any final thoughts or tips for our listeners that are new to options?
Well, I just think that the concept of the dashboard is really central to this idea.
I want people to really think about the Greeks as the dashboard of your car and think about
(18:12):
it in that way.
You can have a very complicated options position that can have an aggregate Greek headline
risk number across the board that can tell you an awful lot about how your options position
is going to change or theoretically going to change over time or because of movement,
just like the dashboard of your car tells you an awful lot about how your car is doing
(18:37):
on a second by second basis by just looking at it initially, right?
It transmits an awful lot of information very quickly, very efficiently.
The Greeks do the exact same thing for your options position.
Pay attention to them because it's going to help you understand your option risk more
easily and more quickly.
(18:57):
Without sticking your head out of the window of your car.
Without sticking your head out of the window of a moving car.
Indeed.
I love that line.
Matt, excellent information.
I really appreciate you joining us and sharing your insight with us today.
Thanks so much.
Absolutely.
It was a pleasure.
You can call me anytime and I'll be back, Mark.
And considering that we sit next to each other, I can just lean over and ask you.
(19:21):
But again, thanks for that.
Ladies and gentlemen, that's going to do it for today's final episode of 2024.
Special thanks to my friend and colleague, Matt Cashman, for helping us better understand
the Greeks in a very interesting and new way and for taking the time to join us today.
We'll be back next time with a whole new show featuring more industry names, market concepts,
(19:44):
and of course, trusted options education.
In the meantime, be sure to visit the events section of our optionseducation.org website
to register for our upcoming webinar events and feel free to explore the rest of what
OIC has to offer.
Thanks again to all of our listeners and supporters out there.
And as always, please be sure to send us your questions to options@theocc.com as we always
(20:11):
love to talk options with our listeners.
Take care everyone, and we'll be talking with you again very soon.
You've been listening to the Options Industry Council's Wide World of Options.
If you have questions about anything you've heard on today's show, email options@theocc.com
or visit www.optionseducation.org and chat with OIC's investor education team.
(20:36):
Interested in connecting with OIC on social media?
Subscribe to the OIC YouTube channel.
Like them on Facebook.
Follow them on Twitter at options.edu and follow their page on LinkedIn.
Thanks for listening and be sure to tune in to the next episode of Wide World of Options.
You're listening to the Options Insider Radio Network, the home of the Options Podcast.
(21:02):
For more quality options programs, visit theoptionsinsider.com or search for Options Insider Radio Network
in your podcast provider of choice.
Listeners can also access all of our programming through our mobile app available on the iTunes
and Google Play stores.
Select programs are also available via livestream at mixler.com/options-insider.
(21:25):
That's mixlr.com/options-insider.
Don't forget to follow along with your favorite programs and submit your own questions for
the hosts at twitter.com/options, stocktwits.com/options, facebook.com/theoptionsinsider or via questions
(21:49):
at theoptionsinsider.com.
You're listening to the Options Insider Radio Network, the home of the Options Podcast.
For more quality options programs, visit theoptionsinsider.com or search for Options Insider Radio Network
in your podcast provider of choice.
Listeners can also access all of our programming through our mobile app available on the iTunes
(00:22):
and Google Play stores.
Most programs are also available via livestream at mixler.com/options-insider.
That's mixlr.com/options-insider.
Don't forget to follow along with your favorite programs and submit your own questions for
the host set twitter.com/options, stocktwits.com/options, facebook.com/theoptionsinsider, or via questions
(00:52):
at theoptionsinsider.com.
This is the Options Industry Council's Wide World of Options.
Before we start today's show, listeners should know that options involve risk and are not
suitable for all investors.
(01:14):
Individuals should not enter into an options transaction until they have read and understood
the disclosure document, characteristics, and risks of standardized options.
Also by visiting theocc.com or by contacting your broker, any exchange on which options
are traded, or the Options Clearing Corporation at 125 South Franklin Street, No. 1200, Chicago,
(01:34):
Illinois 60606.
The Options Industry Council is an industry resource provided by the Options Clearing
Corporation, collectively OCC.
Any strategies discussed are strictly for illustrative and educational purposes only
and are not to be construed as an endorsement or solicitation to buy or sell securities.
Commissions, fees, margins, interest, and taxes have not been included in any of the examples
(01:58):
used in this show.
These costs impact the outcome of all stock and options transactions.
Consult your tax advisor about any potential consequences.
OIC was created in 1992 to educate investors and their financial advisors about the benefits
and risks of exchange traded equity options, and the Wide World of Options radio show is
(02:18):
one of several resources investors can utilize to learn more about options.
Other resources OIC offers include webinars, articles, and self-guided options related
coursework.
For more information, check out www.optionseducation.org.
Now here's your host, Mark Benzoquin.
Hello everyone and welcome to OIC's Wide World of Options.
(02:47):
I'm your host, Mark Benzoquin.
As 2024 comes to a close, OIC will be featuring a rebroadcast of two live presentations we
did at the recent Money Show Traders Expo in Orlando, Florida.
For the first session of the event, I provided a high-level overview of credit spreads including
call and put verticals as well as iron condors and butterflies.
(03:11):
And then for our second session, we really had this terrific presentation by my friend
and colleague Matt Cashman, a fellow OIC instructor here, where Matt explored the concept of understanding
the Greeks through metaphor rather than math.
And as I thought it was so interesting and as I thought that our listeners can really
(03:33):
get some terrific benefit from these insights that Matt has, I thought it would be a good
idea to welcome back to the show.
So Matt, welcome back.
Thanks for joining us today.
Thanks for having me, Mark.
It's always a pleasure to be on the OIC podcast to talk about Greeks.
So Matt, let me ask you this.
Greeks, theoretical pricing concepts that investors use to kind of gauge where they
(03:58):
predict option prices might go based on certain inputs in the market, et cetera, et cetera.
All of that obviously is heavily math-centric.
So where do we go from math-centric learning to learning through metaphor?
Where did that concept come up and how do we apply it to this particular topic?
(04:20):
Excellent, excellent question, Mark.
I think it's great to start at the very beginning with some set the table as it were.
The concept itself came from a conversation that I had with Ed Modlow, who's the executive
director of investor education here at OIC.
And his question to me was, do you think we could teach the Greeks without using math?
(04:43):
And I thought about it for a moment and I thought, I think I can probably do that.
Let's see if we can climb that hill together.
So that's where the actual presentation and the concept came from.
The concept itself, however, is really just a way for people to understand some of these
more complicated mathematical parts of options without having to necessarily dig into the
(05:06):
math itself.
Because there's lots of different ways you can understand the Greeks.
Some people have a very base-level understanding of the math behind it.
It comes to them naturally.
But the thing that I think about is that what if people don't necessarily understand the
math naturally?
What if it doesn't come to them naturally?
There are other parts of our daily lives that we can connect with the Greeks that will give
(05:31):
them a better understanding of how these things work, why they work the way that they do,
and how to think about them when they're thinking about the actual risk that they have on with
their options position.
So that's where it came from.
Right.
I like that.
Thank you.
And I also like that when you talk about Greeks, you talk about it as a dashboard
(05:53):
for your vehicle, again, through a metaphor.
Yeah.
That when you're driving your car, you can see everything, all the components of your
vehicle, your speed, your acceleration, how much gas you've got in the car, et cetera,
et cetera.
And you kind of use that as the metaphor to better understand Greek.
So knowing that, let's get started with the Greek that I think is most familiar with people,
(06:19):
and that's going to be delta.
So without using math, how do we better understand delta through metaphor?
Yeah, absolutely.
I really like the metaphor most generally of the dashboard to your car.
I think it's something that everyone can really understand because, like you said, it gives
(06:39):
you all of the information you really need to know about the car without having to like
open up the hood.
You don't have to open the hood to figure out whether or not the thing's running.
You don't have to stick your head out to figure out how fast you're going because your speedometer
does that for you.
One of the ways that people conceive of delta, and one of the ways that I started to think
(06:59):
about delta when I thought about it in terms of this presentation, is that delta is like
the speedometer of your car.
I talk about delta as the speedometer of your options position.
Just like your speedometer tells you how fast you're going in your car, delta can tell you
how much an options price is expected to change for every one point move in the stock price.
(07:21):
So a higher delta option, kind of like a higher speed in a car, means your option is going
to be more sensitive to underlying movements of the stock.
So if you're going 100 miles an hour, turning your wheel to the left very quickly is going
to yield a very bad result.
It's not going to be a great experience for you.
(07:44):
But if you're going 10 miles an hour, turning your wheel to the left very quickly might just
be you pulling to the side of the road or pulling into a parking spot.
It's a completely different situation, much like an option that has something like 100
delta is going to react much differently to underlying movement in the stock than an option
that has a 10 delta.
(08:05):
So in that way, we like to kind of think about delta as like the speedometer of your car.
It tells you kind of how fast that option should theoretically move.
Right.
And just to kind of back up to something you had mentioned that if you're traveling 100
miles an hour and likening that to 100 deltas, if you suddenly turn your wheel, bad things
(08:25):
are going to happen.
We're obviously not making a recommendation for investors not to trade high delta options.
We're simply giving them the understanding that the more correlated an option is with
the stock, the more potential for sudden movement in that options price is going to be.
(08:48):
Yeah, of course.
More potential movement that that option would have relative to the underlying movement of
the stock.
Right.
And that's the important part.
The important part is for you to understand how much risk does this option have.
And that's one of the very first things that people start to understand when they talk
about options is the delta of that option gives you a really good idea of how much underlying
(09:12):
risk, how much risk to the underlying movement that option might have as far as how much it's
going to move.
Right.
Understood.
Thank you for that.
So if we've got a delta as the speed of the car and we know that the next major Greek
is a derivative of delta that's gamma.
So if delta is the speed of the car, how do we describe gamma?
(09:36):
Well, gamma is actually and I talk about this when I when I talk about in the presentation,
delta really measures how much you can think about the price of the option moving.
So we're talking about price in that situation.
Gamma is what is theoretically referred to as a second derivative Greek, but it shows
(09:57):
up on everyone's kind of primary risk landscape because it's usually right next to delta.
Gamma is a Greek that measures another Greek.
So it's really a second derivative Greek because gamma is actually how much your delta is going
to move for that same one dollar move in the underlying.
(10:18):
And so I like to think about gamma as long as we're kind of in the same we're staying
in the same metaphor family here.
We're keeping it to cars.
I compare gamma to different types of vehicles.
So think about a sports car that can change direction very quickly relative to like a
giant truck that has a lot of moving parts that have to move around in order for it to
(10:43):
change direction.
Gamma is like the vehicle's potential to change direction or speed.
High gamma options are kind of like sports cars.
They have the ability to accelerate or decelerate or change direction very quickly relative
to price changes.
Low gamma options conversely are more like those big giant trucks.
(11:07):
They're steady and they take a lot of underlying movement to actually move in the same way
that a high gamma option would for that same one dollar move in the underlying.
So they're going to be a little bit less sensitive to underlying movement.
But there's no real I don't want to give the idea that one is more risky than the other
(11:32):
because they're just risk metrics here that we're talking about as far as how the option
moves relative to underlying.
It's just a good way for you to be able to conceive of what those movements might be
when the stock moves.
And talking about gamma as a sports car or a big truck is one of those ways for you to
(11:53):
understand how that option might move.
Okay, so sticking with that analogy, if I'm driving a sports car, if I've got an option
which has high gamma, I'm going to experience quick shifts in delta as that stock price
moves.
But conversely, if I'm, as you said, driving that truck or holding an option with low gamma,
(12:14):
those changes in delta are going to come more slowly.
Is that right?
Yes, that's exactly it.
High gamma options respond more dramatically generally to changes in underlying stock price.
Low gamma options, on the other hand, are a little bit slower to respond to the movement
of the delta relative to the underlying same, the same amount of movement in the under.
(12:35):
Understood.
Okay, thank you.
Another Greek theta, which for me, I think is probably the easiest to understand.
You know, I'm certainly, and I'm sure everybody's familiar with the concept, time is money.
Theta also known as time decay, I'm sure you've got some terrific metaphor for this as well,
(12:55):
right?
Am I going to be disappointed?
No, I don't think you're going to be disappointed, Mark, but I will say theta is one of those
things that is hard to describe perfectly with metaphor because it has a couple of different
components to it.
One of the things that I most broadly try to transmit as an idea when I'm talking about
(13:17):
theta is I want people to think about it like decay, generally, because that's really what
it is.
Theta is the amount that your actual option price is going to change in a 24 hour time
period.
And so if we were to start with an option that's $3 and fast forward 24 hours to this
point tomorrow and it has, let's say, eight cents of theta, your option model is telling
(13:42):
you that that option theoretically, if nothing else moves, is going to be worth $2.92 tomorrow.
That's $3 minus the eight cents of theta.
So in this way, I'd like to really get people focused on the idea that theta is a measure
of decay, that it's like a countdown for the option.
And once I started thinking about that, I thought, okay, well, this is a little bit
(14:04):
like an hourglass where the actual option premium, if you think about an hourglass,
it has two sections.
You've got that section up top where all the sand is and then the section down at the bottom,
which is empty at the beginning.
When you turn it over, what actually happens is the sand from the top starts to filter
through that tiny little hole into the bottom.
You can think about theta in that way as well.
(14:26):
The top of it can in that way be like the premium of the option in the top of the hourglass.
And as time passes, a little bit of it at a time comes down to the second half, the
bottom half of the hourglass.
That is the force of theta.
That is the force of time taking that value from the option itself and moving it down
(14:48):
into another area, which is what time is taking away from that option.
Now, the hard part about this is that that's a really general way to talk about it.
But that doesn't give you the idea of the more complex part of theta, which is that
theta time decay becomes exponential as you get closer to expiration.
(15:12):
So the secondary part of this is the part that's a little bit harder to understand.
Well, and I'm glad you brought that last part up because when I was listening to you talking
about the metaphor, I'm thinking of follow-up questions.
And the one thing that I had in my head was, but the sand through the hourglass, what's
the phrase, so are the days of our lives.
(15:33):
The sand through the hourglass falls at a steady rate.
And we know that theta isn't that case, that it accelerates as we approach expiration.
So I certainly appreciate you addressing that.
Thank you so much.
Let me ask you this.
So we've got delta gamma theta, the dashboard on our car.
(15:56):
How do all of these Greeks interact with each other?
Or do they interact with each other?
Are any of them dependent upon each other?
Should an investor, and I shouldn't say should, but might an investor be more concerned with
one than another, or do they all play a relatively equal role?
Well, I think it's a good question.
(16:18):
I think the idea behind this was to give people an idea of how to think about these things
on their own, in their own kind of bubble.
Think about delta this way, think about theta this way, think about gamma this way, or
you can think about these things in that way.
They are obviously, because they are mathematical functions, and they have the same, let's say,
(16:43):
the same mathematical model is driving all of these things, relatively speaking.
They are interdependent in some ways.
Now, the way that they are interdependent is much more complicated than the actual functions
themselves.
I want people to really dive into thinking about how these things interact on their own
(17:05):
at first, and then we can really dig into how does theta and gamma, how are they related
to each other?
Because those two things are related to each other, but you need to really understand how
each one functions independently before you can really start to dig into how does each
(17:25):
one interact with the other one.
Right.
So it's the walk before you run, understand what they are first, and then we'll get into
some more of the intermediate or advanced concepts.
Yeah, absolutely.
Yeah, and Matt, really, thanks for these fantastic metaphors.
It's really terrific, and I really find it super interesting to be talking about Greeks
(17:49):
without feeling that our listeners need a calculator in their hands, so thank you for
that.
Before we wrap up, any final thoughts or tips for our listeners that are new to options?
Well, I just think that the concept of the dashboard is really central to this idea.
I want people to really think about the Greeks as the dashboard of your car and think about
(18:12):
it in that way.
You can have a very complicated options position that can have an aggregate Greek headline
risk number across the board that can tell you an awful lot about how your options position
is going to change or theoretically going to change over time or because of movement,
just like the dashboard of your car tells you an awful lot about how your car is doing
(18:37):
on a second by second basis by just looking at it initially, right?
It transmits an awful lot of information very quickly, very efficiently.
The Greeks do the exact same thing for your options position.
Pay attention to them because it's going to help you understand your option risk more
easily and more quickly.
(18:57):
Without sticking your head out of the window of your car.
Without sticking your head out of the window of a moving car.
Indeed.
I love that line.
Matt, excellent information.
I really appreciate you joining us and sharing your insight with us today.
Thanks so much.
Absolutely.
It was a pleasure.
You can call me anytime and I'll be back, Mark.
And considering that we sit next to each other, I can just lean over and ask you.
(19:21):
But again, thanks for that.
Ladies and gentlemen, that's going to do it for today's final episode of 2024.
Special thanks to my friend and colleague, Matt Cashman, for helping us better understand
the Greeks in a very interesting and new way and for taking the time to join us today.
We'll be back next time with a whole new show featuring more industry names, market concepts,
(19:44):
and of course, trusted options education.
In the meantime, be sure to visit the events section of our optionseducation.org website
to register for our upcoming webinar events and feel free to explore the rest of what
OIC has to offer.
Thanks again to all of our listeners and supporters out there.
And as always, please be sure to send us your questions to options@theocc.com as we always
(20:11):
love to talk options with our listeners.
Take care everyone, and we'll be talking with you again very soon.
You've been listening to the Options Industry Council's Wide World of Options.
If you have questions about anything you've heard on today's show, email options@theocc.com
or visit www.optionseducation.org and chat with OIC's investor education team.
(20:36):
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Thanks for listening and be sure to tune in to the next episode of Wide World of Options.
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(21:02):
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(21:25):
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(21:49):
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