14
Mar 18

## Intro to option greeks: delta and its determinants

I started trading stocks in 2010. I didn't expect to make big profits and wasn't actively trading. That's until 2015, when I met a guy who turned $10,000 into$140,000 in four years. And then I thought: why am I fooling around when it's possible to make good money? Experienced traders say: trading is a journey. That's how my journey started. Stocks move too slowly, to my taste, so I had to look for other avenues.

Two things were clear to me. I didn't want to be glued to the monitor the whole day and didn't want to study a lot of theory. Therefore I decided to concentrate on the futures market. To trade futures, you don't even need to know the definition of a futures contract. The price moves very quickly, and if you know what you are doing, you can make a couple of hundreds in a matter of minutes. It turned out that the futures markets are the best approximation to the efficient market hypothesis. Trend is your friend (until the end), as they say. In the futures markets, trends are rare and short-lived. Trading futures is like driving a race car. The psychological stress is enormous and it may excite your worst instincts. After trying for almost two years and losing $8,000 I gave up. Don't trade futures unless you can predict a big move. Many people start their trading careers in the forex market because the volumes there are large and transaction fees are low. I never traded forex and think that it is as risky as the futures market. If you want to try it, I would suggest to trade not the exchange rates themselves but indexes or ETF's (exchange traded funds) that trace them. Again, look for large movements. One more market I don't want to trade is bonds. Actions of central banks and macroeconomic events are among strong movers of this market. Otherwise, it's the same as futures. Futures, forex and bonds have one feature in common. In all of them institutional (large) traders dominate. My impression is that in absence of market-moving events they select a range within which to trade. Having deep pockets, they can buy at the top of the range and sell at the bottom without worrying about the associated loss. Trading in a range like that will kill a retail (small) investor. Changes in fundamentals force the big guys to shift the range, and that's when small investors have a chance to profit. I tried to avoid options because they require learning some theory. After a prolonged resistance, I started trading options and immediately fell in love with them. I think that anybody with$25,000 in savings can and should be trading options.

## Efficient market hypothesis

This hypothesis is a standard assumption in Economics. It states that market prices reflect "all relevant" information. The exact definition of the "relevant" information depends on how strong economists want the hypothesis to be. The main practical implication is that it's impossible to make profits in financial markets. I fail to logically connect the statement "market prices reflect all information" with the statement that "it's impossible to make profits". But my main point is not this.

The main point is that economists themselves indicate reasons why the efficient market hypothesis may not hold. One is the cost of obtaining information. The option chain for Apple for each expiration date contains dozens of strikes, and each strike means a separate market, although there is a high correlation between these markets. Multiply that number of markets by the number of expiration dates (weekly options give about 50 expiration dates and monthly options give another 12, that's for one year), and you will see that Apple alone generates hundreds, if not thousands, of markets.

Another reason why the hypothesis may not hold is transaction costs. The bid-ask spread (which is the difference ask-bid)  in the lower part of the above option chain is $7 and in the upper part is$50. In the options markets, the transaction costs and the cost of obtaining information will prevent any big player from attempting to capture all profits.

Dare, and you will be rewarded!