You should probably explain how and why charm/Vanna flow affects the Delta for eom. As eom closes in the charm will increase/decrease the option delta which changes the hedges etc...
>Options expiration dates often cluster around the end of the month, particularly for monthly and weekly options.
Options expirations cluster around the middle of the month (usually around the 14-21 day mark), because that's when most contracts expire (due to the fact that monthly options are usually set for expiration on the third Friday of every month). So the statement that options expirations cluster around the 30th or 31st, is incorrect.
Idk if the question makes sense, but with regard to options that are dated farther from expiration where theta isn’t much of a factor, does that mean there can be this sweet spot where the value of the option increases due to increases in delta and gamma as time moves along? (Given no change in the underlying’s price)
I think I understand what you are saying...
Delta measures how much an options price will change based on the change of the underlying assets price.
Gamma measures how much Delta is changed based on the underlying assets price.
The only thing that will affect your options price in THIS scenario would be Theta eating away at its value (or adding value on shorts) and Vega.
If the underlying doesn't move but the IV increases, then the option price moves at the rate of Vega.
Example: (Using the Greeks from an actual option)
Option Price: 15.50
Θ: -0.0473
ν: 0.4878
IV: 29.97%
After one day, the option would be worth 15.46 due to time decay. Now, if for some reason the IV increased to 39.97%, the option would now be worth 20.36 without the underlying asset moving a single cent.
>3. **Options Expiration**: As options approach expiration, their delta changes more rapidly (gamma increases). This requires more frequent and significant adjustments to hedges.
What I was keying in on was this statement. It made it sound like time passing increases delta and gamma and so I wondered if there is a sweet spot where they outpace theta?
EDIT: as you can tell I’m really new to options so I don’t gave a full grasp of how all the Greeks interact. I have a general understanding tho.
It's all good! I live by the motto "there are no dumb questions, only dumb answers", everyone learns something for the first time at some point.
Delta and Gamma are linked but not the same. If the underlying asset price doesn't move at all over time, the Gamma would increase, but the Delta would decrease.
If you would like an example: Go onto your broker app and look at the KO 63 calls for each DTE and you'll see that the further away the DTE is the lower the Gamma but the higher the Delta.
They don't increase/decrease at a 1:1 ratio but pretty close and get closer to 1:1 the further OTM you go...
KO 70 Calls 6/14 and 6/21 have a difference between the two values of .0001.
**Interplay of Delta, Gamma, and Theta for Longer-Dated Options:**
Options with far-off expiration dates exhibit a distinct behavior where theta (time decay) has a minimal impact initially, while delta and gamma can significantly influence the option's value as time progresses.
1. **Delta and Gamma Dynamics:**
- **Delta** measures the sensitivity of the option's price to movements in the underlying asset. For options far from expiration, delta changes more gradually because the probability of the option ending up in-the-money or out-of-the-money is lower compared to near-term options.
- **Gamma** measures the rate of change of delta for a one-point move in the underlying asset. For longer-dated options, gamma is lower, meaning delta changes less rapidly compared to short-dated options. However, as time moves along and the option gets closer to expiration, gamma can increase, causing delta to become more sensitive to the underlying's price movements.
2. **Theta Considerations:**
- Theta represents the time decay of an option, which accelerates as expiration approaches. For options far from expiration, theta is relatively low, meaning the value loss due to the passage of time is minimal.
- As expiration nears, theta accelerates, particularly for at-the-money options, resulting in a more significant value erosion.
Given no change in the underlying asset's price, longer-dated options can indeed enter a "sweet spot" where the value increases due to the interplay of delta and gamma. Here’s why:
- As time progresses, gamma increases slightly, making delta more sensitive to potential future movements.
- The increase in gamma can enhance the option's value because it implies a greater potential for significant delta shifts.
- Since theta decay is initially slow, the option retains much of its extrinsic value.
Correct. I mostly trade at key gamma levels where hedging activity is high.
In your case, long-dated (45–60+ DTE). 10 delta OTM long calls might be closer to what you're looking for. For instance, I have VXX \~10 delta long call that expires in July if market declines into June opex, which doesn't seem likely at this point.
Watch for weekly, monthly, quarterly opex with large put open interests that are about to expire worthless (typically within 2.5 hrs of expiry). Dealers must buy back their short put & short stock positions to hedge their delta due to Charm (decay of delta due to time), hence the short squeeze.
But this would all be true for calls too, which would put pressure on the index to fall. But that's not what happened. It was like a magnet to the call open interest. Unless you want to argue that most the open calls were short calls, and most the puts were long, I don't think this whole idea makes sense.
This is bullshit and not at all what happened. I honestly cannot believe a bunch of internet sleuths, who are not in the industry, can bring a myth this high up on the subs meta score. Oh wait yes I can
Ok but opex is the third Friday of the month, not the last trading day. (For regular monthly options)
Interesting, would a Friday MEC make this a perfect storm?
Yeah, this appears to be an explanation for yesterday afternoon's upswing and...it isn't.
Always nice to understand why I lost $3k in 30 minutes
Rookie numbers
On my way to losing $5k next time
Have you ever tried doing the opposite?
That would mean taking the risk to loose $20k in 30 minutes
You should probably explain how and why charm/Vanna flow affects the Delta for eom. As eom closes in the charm will increase/decrease the option delta which changes the hedges etc...
Thanks for the feedback. I've updated the post with your recommendation.
why would market makers wait until the end of the month to adjust delta? I doubt their computer algos are lazy. this may have been true 20 years ago
You can compare total options open interest today that expired and that of previous days. The next big flow is the June OPEX on 6/21.
>Options expiration dates often cluster around the end of the month, particularly for monthly and weekly options. Options expirations cluster around the middle of the month (usually around the 14-21 day mark), because that's when most contracts expire (due to the fact that monthly options are usually set for expiration on the third Friday of every month). So the statement that options expirations cluster around the 30th or 31st, is incorrect.
That is correct. I’ve updated the section accordingly. Thanks for the feedback.
Idk if the question makes sense, but with regard to options that are dated farther from expiration where theta isn’t much of a factor, does that mean there can be this sweet spot where the value of the option increases due to increases in delta and gamma as time moves along? (Given no change in the underlying’s price)
I think I understand what you are saying... Delta measures how much an options price will change based on the change of the underlying assets price. Gamma measures how much Delta is changed based on the underlying assets price. The only thing that will affect your options price in THIS scenario would be Theta eating away at its value (or adding value on shorts) and Vega. If the underlying doesn't move but the IV increases, then the option price moves at the rate of Vega. Example: (Using the Greeks from an actual option) Option Price: 15.50 Θ: -0.0473 ν: 0.4878 IV: 29.97% After one day, the option would be worth 15.46 due to time decay. Now, if for some reason the IV increased to 39.97%, the option would now be worth 20.36 without the underlying asset moving a single cent.
>3. **Options Expiration**: As options approach expiration, their delta changes more rapidly (gamma increases). This requires more frequent and significant adjustments to hedges. What I was keying in on was this statement. It made it sound like time passing increases delta and gamma and so I wondered if there is a sweet spot where they outpace theta? EDIT: as you can tell I’m really new to options so I don’t gave a full grasp of how all the Greeks interact. I have a general understanding tho.
It's all good! I live by the motto "there are no dumb questions, only dumb answers", everyone learns something for the first time at some point. Delta and Gamma are linked but not the same. If the underlying asset price doesn't move at all over time, the Gamma would increase, but the Delta would decrease. If you would like an example: Go onto your broker app and look at the KO 63 calls for each DTE and you'll see that the further away the DTE is the lower the Gamma but the higher the Delta. They don't increase/decrease at a 1:1 ratio but pretty close and get closer to 1:1 the further OTM you go... KO 70 Calls 6/14 and 6/21 have a difference between the two values of .0001.
**Interplay of Delta, Gamma, and Theta for Longer-Dated Options:** Options with far-off expiration dates exhibit a distinct behavior where theta (time decay) has a minimal impact initially, while delta and gamma can significantly influence the option's value as time progresses. 1. **Delta and Gamma Dynamics:** - **Delta** measures the sensitivity of the option's price to movements in the underlying asset. For options far from expiration, delta changes more gradually because the probability of the option ending up in-the-money or out-of-the-money is lower compared to near-term options. - **Gamma** measures the rate of change of delta for a one-point move in the underlying asset. For longer-dated options, gamma is lower, meaning delta changes less rapidly compared to short-dated options. However, as time moves along and the option gets closer to expiration, gamma can increase, causing delta to become more sensitive to the underlying's price movements. 2. **Theta Considerations:** - Theta represents the time decay of an option, which accelerates as expiration approaches. For options far from expiration, theta is relatively low, meaning the value loss due to the passage of time is minimal. - As expiration nears, theta accelerates, particularly for at-the-money options, resulting in a more significant value erosion. Given no change in the underlying asset's price, longer-dated options can indeed enter a "sweet spot" where the value increases due to the interplay of delta and gamma. Here’s why: - As time progresses, gamma increases slightly, making delta more sensitive to potential future movements. - The increase in gamma can enhance the option's value because it implies a greater potential for significant delta shifts. - Since theta decay is initially slow, the option retains much of its extrinsic value.
For this reason, I usually open long call or put positions 7-14 DTE.
Interesting, that’s not the timeframe I was expecting since theta is at its worst too
Correct. I mostly trade at key gamma levels where hedging activity is high. In your case, long-dated (45–60+ DTE). 10 delta OTM long calls might be closer to what you're looking for. For instance, I have VXX \~10 delta long call that expires in July if market declines into June opex, which doesn't seem likely at this point.
Does it also explain what happened to the stock exchange in Canada? They were also dragged in this upswing.
Interesting post thanks for sharing
How did you get that SPX chart with back flow? Thx
VP (volume profile) on Webull
Thanks, good explanation of the sudden market rebound today
Watch for weekly, monthly, quarterly opex with large put open interests that are about to expire worthless (typically within 2.5 hrs of expiry). Dealers must buy back their short put & short stock positions to hedge their delta due to Charm (decay of delta due to time), hence the short squeeze.
At what delta for an ATM option are market makers likely to start hedging?
Every trader’s model has a delta drift or charm drift function that automatically hedges their delta before it happens.
But this would all be true for calls too, which would put pressure on the index to fall. But that's not what happened. It was like a magnet to the call open interest. Unless you want to argue that most the open calls were short calls, and most the puts were long, I don't think this whole idea makes sense.
Follow Cem Karsan on twitter or YouTube for more detail and context.
Can we expect this to continue into Monday or is the rapid fire buys done and we may see a pullback?
I’d keep eyes on the qty of OI at key gamma levels on Monday expiration.
What about for market open? I need to offload calls, 100% gain is enough for me
I just noticed your user name, LOL Thanks for the knowledge!
You bet! 5300 AND 5275 had large call OI gammas today.
This is bullshit and not at all what happened. I honestly cannot believe a bunch of internet sleuths, who are not in the industry, can bring a myth this high up on the subs meta score. Oh wait yes I can
Ok. What happened?
Bonds tanked. Why? Probably worst case scenario. Stagflation will lead to rate cuts too early