Every Options Greek (and how to use them) | Options for Beginners

In this video, we're going to go through the eight most important Greeks in order of importance for retail traders. That way, when your strangle flips from bullish to bearish, you'll understand the Delta impact. When your position's Theta flips from positive to negative, you'll understand why that happened; or when the IV on what was a deep out-of-the-money strike rapidly rises, you'll be okay because you were prepared for the vega impact. [Music] So, welcome to the Greeks crash course! My name is Jim Schultz, and I'm going to be leading you through this 10-episode series where what

we want to do is look at the Greeks that we, as Tasty, use most of the time—those we use to put our positions and our portfolios in the best possible spot. Now, of course, this is going to include the first-order Greeks that we're all pretty familiar with, but we're also going to dabble into some of the second- or third-order Greeks that we find to be very, very important. Now, in each episode, we're going to follow the same sequence. We're going to cover four different things: first, what is the Greek? Second, how do we primarily use

that Greek? Third, how do we improve our returns with that Greek? And fourth, how do we decrease our risk with that Greek? So, without further ado, let's dive into episode number one: Delta. Okay, so starting off, what is Delta? Well, what we're going to do is attack this thing from two different angles. We're going to talk about the mathematical angle, the mathematical side of things, and we're also going to talk about the intuitive side of things. So, let's start with the mathematical explanation. Well, Delta is very simply how an option price will move given a

$1 move in the underlying stock price. Now, as options rarely move one-for-one with a stock, what Delta does is allow us to approximate how the option price will change given the stock price change. So, for example, if an option has a Delta of 30, that means that the option price is expected to move by 30 cents for every $1 move in the stock. If a Delta is 50, then the option price is going to move 50 cents for every $1 move in the stock. So, mathematically, it really is that simple. If you want to reach

a bit further down the learning curve and take a look at some deeper-level mathematics related to Delta, you can look at the Black-Scholes option pricing model because Delta is the first derivative of the Black-Scholes option pricing model with respect to price change. So, it quite literally shows how an option price is going to change when the underlying stock price changes. Okay, but what about the intuitive side of things? Well, given these quantitative foundations, the intuitive side of things is actually quite easy. It just gives us a sense of how our options—how our positions in our

options portfolio—are going to move around as stock prices move around. We usually keep it that simple, that clear, and that fundamental at Tasty. Here is where things get pretty interesting: this is actually not how we primarily use Delta. We actually use Delta in a couple of other ways, which brings me to my next point. So, how do we primarily use Delta? Well, in addition to that textbook definition, there are two other interpretations of Delta. Number one, Delta can be used as an approximate probability gauge, and number two, Delta can also be used as a share

equivalent to measure your directional bias or your directional exposure. Now, interestingly, at Tastytrade, we actually probably use Delta's textbook definition—the standard, you know, default setting of Delta—we probably use that the least. Instead, we use Delta as a probability gauge and Delta as a directional bias measurement at different points in time. At trade entry, when we're putting on a brand new position, that's when we lean on the probability aspect of Delta. When we make adjustments to that position, that's when we might use both the probability gauge and the directional bias that Delta provides us. But at

the portfolio level, like when we look bird's-eye view, 10,000-foot gaze, that's usually when we lean on Delta's ability to give us a measurement of directional bias exclusively. So, for example, let's say that I was considering a short put strategy—a quick shout-out to my second crash course where we talked about strategy management and went over short puts, so make sure you guys give that a look—but let's say I'm considering a short put strategy that has a Delta of 30. I know that the approximate probability from that Delta is 30% that that option will expire in the

money. Now, I'm a premium seller; I don't want the option to expire in the money; I want the option to expire out of the money. So, I have the inverse of that, or a 70% approximate probability of success. This is very, very useful for me at trade entry. Now, let's say I have a position on and the Delta is 40. Well, understanding the directional bias—the share equivalent—helps me process the fact that this position is going to feel like owning 40 shares of stock, even though the contract is for 100 shares. Conversely, let's say that the

Delta was 80; now I know this is going to feel like 80 shares of stock on a 100-share contract. So, it's going to feel a whole lot more like the full contract size and the full contract weight. I can glean, I can gather all of this… From the Delta alone, now lastly, let's look at this from an overall portfolio standpoint. Let's say that my portfolio Deltas were 200, and those Deltas were beta-weighted to the SPY. That's going to tell me, that's going to communicate to me that I effectively have what's going to feel like 200

shares of SPY in my overall portfolio. So that gives me kind of a broad market view of the directional exposure that I have with all of my positions in the aggregate. Understanding Delta in these different ways—man, this can really help me make the right decision at the right time. Okay, so let's take a look at the return side of things in the world of options. Somebody once said, "For every gimme, there's a gotcha," and Delta's relationship with returns—man, this might represent the most classic gimme-gotcha exchange that exists in the marketplace. Now, of course, what we're

going to cover for the next 30 to 60 seconds—this is not the only way to generate returns as a premium seller. This is not the only way to generate returns from using options. But when we look at Delta's relationship with returns and credits and premiums, this is going to get us off to a good start. Ceteris paribus, all other things being equal, if you want to generate more returns from Delta, one way that you could do that would be to sell bigger Delta options. So you would choose 45 over 35; you would choose 40 over

30. The reason why this will generate higher returns is those 45 Delta options—they're going to have higher premiums than the 35 Delta options. Those 40 Delta options—they're going to have higher premiums than the 30 Delta options. Now, this relationship holds true regardless of whether you are on the call side or the put side. To push this idea even a little bit further, the reason why this is the case—the reason why we see this relationship—is don't forget, Deltas represent probabilities. Deltas represent the probability of expiring in the money. So if I sell a 45 Delta option,

then I only have a probability of profit (POP) of 55%. Whereas if I sell a 35 Delta option, I'm going to have a POP of 65%. So if I sell that bigger Delta, yes, I'm going to bring in higher credits, more profit potential—the gimme—but I'm also going to have to absorb a lower probability of profit—the gotcha. Okay, so lastly, let's take a look at the risk side of things. Let's start by stating the obvious: the stock market is random. The stock market is unpredictable. Nobody knows where prices are going; nobody knows which way the market

wants to move in a given day, or week, or month, or quarter, or year. Understanding this, as option traders, as option sellers, it yields a number of advantages to us—two of which don't have anything to do with Delta, two of which don't have anything to do with direction. They are Theta and they are Vega, and we'll take a look at those in those episodes. But getting back to the Delta side of things, getting back to Delta's focus on reducing our risk, here is the most important thing that you need to pull away: control your size.

Whether it's at the individual position level or the overall portfolio level, the best thing that you can do to control your risk as it relates to Delta is to make sure that you are small enough. Make sure that your Delta is manageable and make sure that you understand what directional exposure you are exposed to, which, having gone through, you know, the last five or seven or nine minutes, you are starting to become equipped to do just that. Yes, of course, we all want to have a bias; we all want to play a hunch; we all

want to be long or we want to be short, you know, the overall market or a given stock for a certain time period. That's perfectly fine. But you need to understand the market is random; the market is unpredictable. It might not do what you want it to do. So how do you control your risk in a world like that? You do it by staying small. How do you stay small? You stay small by understanding Delta in all the reasons that we've talked about today. So thank you guys very much for tuning in today. I am

so humbled and I am so appreciative of your time and your attention. If you want to share this with one of your trader buddies, that would be absolutely amazing. Also, please consider saving this episode for future reference when you're trying to, you know, better understand directional bias, probabilities, etc., etc. And when you guys are ready, I will see you in the next episode inside of this Greeks crash course on Theta. This guy is going to be all about Theta. Now, next to Delta, what we covered in episode number one, this is probably the Greek that

we use the most often at the position level and the portfolio level. So this guy is critically, critically important to your success as a premium-selling option trader. Now we're going to follow the same structure that we did in episode one. We're going to cover four things: what the Greek is, how we can use this Greek to improve our returns, and how we can use this Greek to decrease our risk. So without further ado, let's dive right into episode number two—Theta. Okay, so what is Theta? Let's break this thing down in the same way that we

did in episode number one with Delta. Let's talk about the mathematical side of things, and then let's talk about the intuitive side of things. Mathematically, Theta is actually pretty simple. Simply measures how an option price will change with each passing day. So what you're effectively doing is putting a value on the calendar. See, options are very different from stock in a lot of ways, but one of which is this: options have a fixed end point. Options have an expiration date. As you get closer and closer to that expiration date, the extrinsic value of the option,

ceteris paribus, has to go lower and lower and lower. That's what Theta is measuring; that's what Theta is capturing: this process—this whole idea of extrinsic value going lower as you get closer and closer to expiration—that is more commonly referred to as time decay. Now, for those of you that might want to dig even deeper into the mathematics, it might be helpful to know a couple of things. Number one: Theta is a first derivative of the Black-Scholes model with respect to time. Number two: Theta is not a linear function; it is dynamic. It changes from one

day to the next based on a myriad of factors, two of which are these: number one, how much time you have left in the cycle is very important to determining the actual value, the actual increments of Theta, and how they change from one day to the next. But then number two: the moneyness of the option—out of the money options, in the money options, at the money options—all of these decay differently, and they possess different amounts of Theta. All right, so now that we have the mathematical foundation in place, let's turn to the intuitive side of

things. The intuitive explanation of Theta is actually pretty straightforward. Here are a couple of things that you want to understand. Number one: Theta is represented in actual dollars. So, for example, if you had a Theta of 0.03, that would mean that that option is going to decay by 3 cents per share with each passing day. Now remember, every contract is 100 shares, so you could talk about this on a per share basis—three cents—or you could talk about this on a per contract basis of $3. Typically, when we communicate with one another as traders, we opt

for the latter, referring to a Theta of 0.03 as actually $3 or using kind of the whole per contract value of Theta in our communication with one another. But then number two, and this might be one of the most important things to understand when it comes to Theta: the Theta for short options is positive, and the Theta for long options is negative. Put very simply, this means that the passage of time helps short options; the passage of time hurts long options. All right, so how do we use Theta? Well, the biggest benefit of Theta, guys,

is in its being a nondirectional metric in the marketplace. Right? As we talked about back in episode number one, when we laid down the basic foundation of Delta, this is an unpredictable market, right? Things happen pretty randomly, so it can be pretty difficult to predict direction. It can be pretty difficult, i.e., impossible, to predict where a stock might be going next. But we can all be pretty sure that tomorrow is Tuesday, or next week is the last week of the month, or whatever the case may be. So this gives us a ton more control in

an otherwise unpredictable marketplace. Also, our research has shown, through the various management techniques that we apply to all of our positions, that we apply to our entire portfolio—that is way beyond the scope of this episode or even this entire crash course—that we can expect to keep approximately 25% of our daily Theta. So now, with that number in my back pocket, I've got something I can work with, right? I've got something that I can use to build out return projections, to build out risk tolerance. You know, go back to the first crash course. Hey, quick shout

out to that little ditty that we dropped last September where we talked about portfolio Thetas of 0.1%, portfolio Thetas of 0.3%, or whatever the case may be. I can use all this to now begin to build a portfolio that's going to make sense to me and my return projections, my return expectations, my risk tolerance, and all of those things. All right, so now what everybody really wants to know: how do I improve my returns with little old Theta? Well, what we're going to see here is very similar to what we saw in episode one with

Delta. In fact, you could even make the case this is even simpler than what we saw in episode one with Delta. If you want to improve your returns with Theta, once you understand that Theta effectively represents the value of each passing day, all you have to do is increase the value of each passing day. All you have to do is increase your overall portfolio Theta as a premium seller. So now the passage of time becomes more and more valuable to you. That sounds pretty good, right? But you might be asking, "Jim, are there any risks

associated with this?" Well, I'm really glad you brought that up. All right, so now how do we decrease our risk with Theta? Well, the old adage rings true again: there is no gimme without a corresponding gotcha. And when it comes to Theta, things can actually get a little bit slippery. And that's because, before we talk about decreasing risk with Theta, let's begin by talking about increasing risk with Theta. To do so, I want to start with this important disclaimer: more Theta means more risk. Maybe not directly, but indirectly for sure. And here's how. The way

that you are going to build up Theta in your portfolio is through undefined risk strategies like strangles, short puts, ratio spreads, straddles, etc.; vertical spreads, iron condors, and butterflies. These are terrific strategies, but they're not going to build up appreciable amounts of Theta. Undefined risk positions are going to do that. Okay, if you have more undefined risk positions on, then you are exposed to bigger and bigger swings in P&L. Now, naturally, you can mitigate this by being delta neutral, by keeping your directional bias in check, etc., but it's important to understand that by having more

undefined risk positions on, you are exposed to wilder swings. If you are exposed to wilder swings, then you are exposed to more risk. If you are exposed to more risk with Theta, there's your gotcha. So, naturally then, if you want to decrease your risk with Theta, what you need to do is target lower Theta amounts at the overall portfolio level. Like we talked about in that first crash course, you know, rather than going for 0.3% or 0.4%, you might want to target 0.1% of total net leg or 0.2% of total net leg. There is no

right or wrong answer. This isn't about being right or wrong; this isn't about being better or worse. It truly is about gimmies and gotchas. It truly is about figuring out what makes the most sense for you and understanding that if you want more return, you have to be willing to accept more risk, and if you want to take your risk down with Theta, you have to be willing to accept lower return targets. All right, guys, so we made it! We have reached the end of episode two on Theta inside of the Greeks crash course. If

you wanted to share this episode with one of your trader friends, that would be amazing. Be sure and save this episode for future reference, and when you are ready, I will see you inside of episode number three of the Greeks crash course, where we are going to cover Vega. This is episode number three, where we are going to cover Vega. Now, we've got to be open, we’ve got to be honest, and we've got to be transparent here at the outset when it comes to the Delta, Theta, Vega discussion. Vega is definitely the third wheel of

those guys, but it's still an important metric, so it's worthwhile for us to invest a few minutes to better understand how to utilize this guy. What we're going to do is follow the same framework that we have followed for the first two episodes and that we're going to follow for all the episodes inside of this Greeks crash course. So, without further ado, let's dive headfirst into episode number three: Vega. All right, so what is Vega? Well, what I want to do here is break down Vega the same way that we broke down Delta and we

broke down Theta. Let's explain this guy from a mathematical angle and then an intuitive angle. So mathematically, Vega is a first derivative of the Black-Scholes option pricing model. It is the first derivative with respect to volatility; in other words, it's going to show us exactly how a change in volatility will impact the resulting option price. That's it—pretty simple and straightforward. From a mathematical standpoint regarding the math, that's pretty much all we need to know to move right into the intuition. Okay, so intuitively, the conversation regarding Vega is actually going to be very similar to the

one that we had regarding Theta. But before we get into the specifics, let's first understand that volatility has a special relationship with option prices that we have to be aware of. When volatility rises, ceteris paribus, option prices will also rise. When volatility falls, option prices will also fall. So now let's take that idea and translate that into long options versus short options. If I'm long an option, I'm going to be positive Vega. What that means intuitively is I want volatility to rise; I want volatility to expand. I want this to happen because that expansion will

lift the price of the option that I bought. This is a positive outcome for me. Conversely, if I'm short options, I'm going to be negative Vega, so I'm actually going to want volatility to fall; I'm actually going to want volatility to contract. I want volatility to contract because that will lower the option price of the option that I have sold and eventually have to buy back. Intuitively, this is basically the extent of how we use Vega and its relationship to individual options. But it's also important to recognize two additional things that are noteworthy: 1. Vega

is higher for at-the-money options relative to in-the-money options or out-of-the-money options. 2. Vega is also higher for longer-term options relative to shorter-term options. All right, so how do we use Vega? Well, to begin this discussion, it's really helpful to remember that how we process things at the portfolio level is different from how we process things at the position level. We kind of saw this take shape in episode one with Delta and episode two with Theta. What's different about the discussion here with Vega is that Delta and Theta are both used on both of the different

levels; we used Delta and Theta at the portfolio level and at the position level. When it comes to Vega, we really only look at Vega at the portfolio level if we look at it at all. Here’s what I mean by that: in the early days of Tasty, we paid a lot more attention to portfolio Vega; we tried to optimize our Vega. We try to keep it within certain ratios and certain limits relative to other Greeks like Delta or Theta. But as we've grown and learned and adapted based on our own experiences, our own understanding of

the markets, our own research, and our empirical results, what we've come to realize is this: We don't need to actively monitor portfolio Vega anymore. If our portfolio Delta and our portfolio Theta are in line and on target with what we're trying to achieve, then portfolio Vega just naturally takes care of itself. To bring this whole point full circle in terms of how we use portfolio Vega at Tasty, it plays much more of a support role than it does a lead role. All right, so how do we use Vega to increase our returns? Well, rather than

focus on how Vega increases our returns, I'm actually going to focus on how Vega impacts our returns. Now, I recognize that that might be a little bit misleading, but hey guys, we are already committed to this subtitle series inside of this crash course on increasing returns, and there's just no turning back. When it comes to option profitability, it's very important that we all recognize that there are only three ways to make money when you buy or sell options: Delta, Theta, or Vega. Okay, now of those three, Delta, Theta, and Vega, Vega is by far the

most hidden of those three. It's never as clear as Delta; it's never as obvious as Theta, but it is always there, and it's always kind of working behind the scenes. Now that we understand that, let's move one step forward. The market, just as a whole, is usually in a state of contraction—volatility contraction—80 to 85% of the time. The volatility in the marketplace is indeed contracting. Okay, we are option sellers at the core; we are option sellers most of the time. Remember, when I sell an option, I'm negative Vega. What does that mean? If I'm negative

Vega, it means that I want volatility to go down; I want volatility to contract. So, this is definitely going to help my returns in the long run. However, as we're all well aware of now, being three episodes into this crash course, every gimme has a gotcha, and that whole volatility contraction business—that's a pretty decent-sized gimme. So, you might be wondering, Jim, is there an equally sized gotcha just lurking in the shadows? Yes, there is. The market is normally contracting; the market does usually contract, which helps us a lot—there's your gimme. But it doesn't always contract;

it's not always just perpetually in this state of volatility decrease. Volatility can increase too; volatility can expand as well. And sometimes this expansion happens quickly. Sometimes this expansion happens quickly and forcefully, and that situation can put us, premium sellers, short Vega holders, in a bit of a bind—the gotcha. So that brings me to our next section. All right, so how do we reduce our risk exposure with Vega? Well, this one, guys, is going to be the easiest segment that we've had thus far inside of the Greeks crash course, and this is why: you've already done

it. You are already in the process of mitigating your risk exposure by way of Vega. Specifically, what I mean is this: if you've been following along with what we've been doing, as I've already mentioned just a few minutes ago, if your Delta is in check, as we've talked about in this crash course and previous crash courses, then you are on the right track. If your Theta numbers at the portfolio level are in check and on target, like we've talked about in this crash course and previous crash courses, then you are on the right track. If

both of these things are already taken care of, you don't have to actively monitor your portfolio Vega numbers at all. They are going to take care of themselves; they are going to naturally mitigate your risk levels by way of Delta and Theta at the portfolio level. And just like that, guys, we are done with episode number three inside of the Greeks crash course, all about Vega. Be sure to share this episode with one of your trader friends; be sure to save it for yourself for future reference. And then whenever you are ready, I will see

you inside of episode number four of the Greeks crash course: gamma. This is where things start to get a little slippery, like we've moved beyond the first-order Greeks—your Deltas, your Thetas, your Vegas—into those second and third order Greeks, kicking things off here with gamma. All right, so what is gamma? Well, let's break down the "what it is" segment into the same two parts that we've been using all throughout the crash course to this point: let's talk about the mathematical side of things and let's talk about the intuitive side of things. So mathematically, gamma is fairly

straightforward; it is the second derivative of the Black-Scholes option pricing model. It is the second derivative of the Black-Scholes option pricing model, first with respect to price and then second with respect to price again. So, effectively, what it tries to measure is the change of a change, just in a general sense. In a more specific sense, it measures how Delta changes because, remember guys, Delta is the first derivative of the Black-Scholes option pricing model with respect to price. So, gamma is the change of Delta. Okay, so now that we have a mathematical basis, what about

the intuitive side of gamma? Well, this one is going to kind of be a lot to digest, so try to stay with me here for the next couple of... Minutes, but in just a general sense, if we were to think of a car that's already moving, that movement of the car is basically measured by two different things: the speed of the car and the acceleration of the car. Well, if we take that idea and we translate it back into an options context, to a Greek's context, the delta would be the speed of the car; the

gamma would be the acceleration of the car. So, it's measuring how the speed changes; it's measuring how the delta changes. All right, so now that we have at least a loose grasp on the intuitive understanding of gamma, here's the next, very important element that you want to add to your foundation: the magnitude of gamma is not nearly as important as understanding the sign of gamma and all that that entails. Now, I'm going to unpack a lot more behind why this is the case in the next few minutes, but let's begin by building our foundation by

understanding that the sign of gamma is what really matters. Now, similar to Vega, long options have positive gamma and short options have negative gamma—a pretty simple concept to understand. It sounds easy enough, but the positive and negative gammas and what they actually mean, what they actually represent, are anything but easy. If you have a long option with positive gamma, what that means, or what that begins to mean, is that your delta is going to change in the same direction as the stock price movement. If you have a short option or negative gamma, that means that

your delta is going to change in the opposite direction of the stock price movement. Okay, now that probably doesn't make a ton of sense yet, so let's work through a couple of examples. First off, let's say you had a long call—a very simple, bullish strategy. This is going to be positive gamma. Here is what that means: if the stock were to rally (what you want to have happen), your deltas will actually increase. If the stock were to go down (what you don't want to have happen), your deltas will actually decrease. In other words, if the

strategy works right—a bullish strategy—the stock goes higher; your deltas will strengthen. But if the strategy doesn't work right—a bullish strategy—the stock goes lower; your deltas will actually weaken. Now, conversely, let's say you had a short call. This is going to be a negative gamma position. Here is what that means: if you have a short call on, this is a bearish strategy. Well, what happens if the stock rallies? If the stock rallies, your deltas are actually going to go down, but since this is a bearish strategy with a short call, those deltas are negative, so they're

going to become more negative, which is going to make you even more bearish. But what if the stock actually goes down on your short call? This is what you want to have happen, where your deltas are actually going to increase, or in this case, since it's a negative number, they're going to become less negative, which means you are less bearish. Okay, now those two simple examples, believe it or not—a long call and a short call—they can be extrapolated out to any long option strategy and any short option strategy. So that's the good news, right? The

principles that we learned with long calls and short calls in relation to positive gamma and negative gamma are going to be the same for any long option strategy and any short option strategy. Whenever you buy premium, you're going to be positive gamma; whenever you sell premium, you're going to be negative gamma. Now, as tasty traders focus primarily on selling premium, we are almost always going to be negative gamma. So that means that our directional biases can strengthen, they can weaken, they can flip over from one side to the other, where we were bullish, but now

maybe we're bearish in a strategy like a strangle because of negative gamma. Now the last piece to this is—remember all the protocols, all the mechanics, all the adjustments, all the defending losers, and managing winners that we put in place in the Strategy Management Crash Course that we released a couple of months ago? That all starts, that all centers around this idea, this awareness of negative gamma and the consequences and implications of what that means. All right, so what about increasing returns? Well, gamma is a very interesting Greek because there are many traders in the marketplace

that actually do try to use gamma to increase their returns through a process that is oftentimes referred to as gamma scalping. Now, the idea behind gamma scalping usually relates to long options, so positive gamma, and it's a situation where a trader tries to capitalize on the times when they are right directionally, and they let that positive gamma continue to build up and work in their favor. At Tasty, however, we actually believe wholeheartedly in a market that is random, in a market that is unpredictable, so that's not typically a strategy that we like to employ. We

actually prefer to take the other side of that trade in a process that some might call reverse gamma scalping. So, rather than try to be right directionally, rather than try to pile on, you know, in those times when we happen to nail a directional move, we actually prefer to lessen the impact of direction and place a greater emphasis on Vega and Theta—these non-directional metrics, these non-directional elements. This is what reverse gamma scalping actually looks like. Without getting into all the details—because that is way beyond the scope of what we're trying to do here—but the most

important thing about this section inside of this episode is this: we don't really focus. On gamma, too much in regards to improving our returns. We focus on gamma in regards to controlling our risk, which brings us to our next point. Okay, so what about decreasing risk with gamma? Well, this is where our approach to gamma, our approach to this Greek, and our proprietary management techniques really begin to shine. First off, let's make sure that we all understand that undefined risk strategies are the best way forward to consistency—consistency with results, consistency with profitability, consistency in a

number of different ways. It's that pure, unfiltered exposure to the Greeks that's going to allow you to achieve those consistent results, so that would be a gimme, as some might say. Well, you might naturally be wondering, "Jim, where's the gotcha?" Well, it's right here. When you have undefined risk strategies on, you are naturally exposed to unlimited potential losses: unlimited potential losses in the way of directional moves, unlimited potential losses in the way of implied volatility changes. So, a pretty sizable gotcha. Now, to mitigate this, we want to start by understanding and recognizing gamma's natural drift.

Gamma moves higher the closer to expiration you get. It doesn't matter what the stock is; it doesn't matter what the strategy is; it doesn't even matter what the specific moneyness of the option is, you know, at the money, out of the money, in the money—this is how gamma just naturally wants to move. So we combat this, we mitigate this risk by managing all of our undefined risk positions at 21 days to go. Doing this puts a natural cap, it puts a natural ceiling on just how high gamma can really go. And what this does for

us is it allows us to better control our directional risk without having to monitor the exact magnitude of gamma. As we referenced earlier, not to mention our research has actually shown a very interesting finding: most of the big outlier moves, most of the big outlier losses that have occurred in the marketplace in the last 15 years—most of these guys have occurred in the second half of the expiration cycle. That means inside of 21 days to go. Now, you might see that and at first glance think, "Oh, that's just a coincidence," but if you stop and

think about it a little bit, it makes mathematical sense. Because at the end of an option's life, as you get closer and closer to expiration, this is when everything gets heightened. This is when all the Greeks begin to grow in magnitude, including gamma. So, seeing a situation where most of the big losses occur in the second half of the cycle actually makes mathematical sense, and we can avoid some of those—at least—by simply managing at 21 days to go. Wow, guys, believe it or not, but we are now at the end of episode 4. Gamma—this guy

is over. This guy is done. This guy's in the rearview mirror. So, if you want to do us a favor and share this video with one of your trader friends, that would really help us out. And make sure that you save this episode for future reference. Then, when you guys are ready, I will see you in episode number five, where we are going to talk about the Greek that gets no love—rho. The Greek that gets no love, the Greek that gets no respect. Rho—when you got your deltas, you got your thetas, you got your vegas,

you got your gammas, and then you've got lonely little rho that nobody pays attention to. Well, there's actually a reason for that, and that is why this episode, by far, is going to be the shortest one inside of the crash course. But still, we have to pay it its due. Let's cover it across four different dimensions: what the Greek is, how we primarily use it, how we can use it to increase our returns, and how we can use it to reduce our risk. So, without further ado, let's dive headfirst into episode number five of the

Greeks crash course: rho. Alright, so what is rho? Well, let's hit this guy from the same two angles that we've been hitting all these Greeks from. Let's cover this guy from the mathematical side, and then let's cover this guy from the intuitive side. So, mathematically, rho is the first derivative of the Black-Scholes model with respect to interest rates. So, what it is going to show us is when the risk-free rate in the marketplace changes, how is that going to impact option prices? That's it. Alright, so what about the intuitive side of rho? Well, believe it

or not, there’s really nothing there. Like, believe it or not, there really is no intuition that we can readily utilize when it comes to rho. The reason why is this: you go back to delta, you've got directional bias, you've got probability. You go to theta, you've got the value of each passing day. You go to vega, even, and you have this natural relationship between market volatility and option prices. But then you get to rho, and none of that is there. Then you get to rho, and all that just kind of disappears. Like, sure, we could

whip up some textbook scenario just for giggles, but that's not going to have any connection to real situations, real trades, and real probabilities. And the reason why brings me into our next section. Alright, so how do we use rho? Well, here's the reason why there is no intuition behind rho: because we don't use rho at Taste at all. In five and a half years as a trader and a show host on the network, I have not once logged into my platform thinking, "Man..." I really hope my row is in check; like, man, I’ve got to

see if I need to hedge off some of this row risk. Like, no, that is not something that ever happens, so it’s not something that we have to worry about in the least. Next to Delta, next to Theta, next to Vega, next to Gamma, row should command exactly 0% of your attention. Okay, so how do we use row to improve our returns? Well, guys, to stick with the theme today, we're not going to worry about using row to increase our returns because we're not going to worry about row at all. Now, naturally, you might be

thinking, "Jim, that's not enough, man! I need a little bit more from you. I came to the video today hoping to be enlightened about row and this Greek and how I could use this guy to make me a better trader." So, you’ve got to give me a little bit more than that. All right, we are general practitioner retail traders, right? We are trading a myriad of products across all different markets. We're using strategies here; we're using strategies there. If we were focused exclusively—like 100%—on a fixed income portfolio, you know, only trading your TLTs, only trading

your ZBs, only trading your ZN, then maybe we should focus on row a little bit more. But for us, as these overarching, kind of jack-of-all-trades traders, it just doesn’t make a lot of sense. So, what about row and decreasing risk? Well, if you’ve made it this far in the video, if you haven’t clicked off yet, then you already know what I’m going to say: for us, this is a non-event. But to push a little bit further—to go beyond your TLTs, your ZBs, and your ZN and your fixed income portfolios—the reason why this doesn’t matter to

us is because any changes to interest rates or any anticipated changes to interest rates are going to be so small, they’re going to be so tiny, that they are effectively inconsequential. Now, if this were the 70s, right? Back when Tom was in his early 30s and mortgage rates were, you know, 12% or 15% or whatever they were, then that’s a totally different environment. And if we ever get back to that state, then I will come back, and I will update this video forthwith. But for right now, in the world that we live in—this low interest

rate environment that we’ve been in for quite some time, that we are in right now, and that we will likely be in indefinitely moving out into the future—it just doesn’t make any sense to pay a ton of attention to row. Now, some of you—maybe all of you—are likely wondering, "Jim, why would you even bother to make this video about row when you basically just deflected for five straight minutes? Like, why even go through the process of putting this in the crash course?" I'll give you one word: completeness. As you learn about the world of options—if

you’re brand new to the world of options, man, my heart goes out to you guys that are just starting out. You are diving headfirst into the deep end of the pool, and you may not even realize it. You are going to be inundated with information. You are going to be bombarded and blasted with ideas, concepts, strategies, and this and that. Sooner or later, this little guy, row, is going to show up on your doorstep. Sooner or later, you’re going to learn about, read about, or hear about this guy, row, and you’re going to wonder, "Hey,

do I need to focus on this? Do I need to spend any attention learning about this? Do I need to invest in figuring out all the things there are to figure out in regards to, like, is this going to make me a better trader?" And the answer is no. These five minutes—even if they’ve been the first five minutes that you’ve spent on this Greek—they need to be the last five minutes that you spend on this Greek until further notice. All right, so you guys made it through episode five of the Greeks crash course, even given

the non-event that it was. When you guys are ready, I will see you in episode number six, where things are going to get a little crazy because we’re going to talk about charm. I'm going to try not to sensationalize this guy too much; I kind of want to lead you guys astray with hyperbole. But these next eight minutes, they might completely change the way that you view trading, specifically your strike selection. Charm really is a total game changer. Now, all right, let's unpack charm in the same way that we've unpacked all the Greeks to this

point. Let’s do this guy across four different dimensions: what the Greek is, how we primarily use the Greek, how it impacts returns, and how it impacts risks. Now, all right, without further ado, let’s dive right in to episode number six of the Greek crash course: charm. All right, so what is charm? Well, let's answer that question in the same way that we've already answered that question with the previous five Greeks. Let's do it mathematically, and then let's do it intuitively. So, mathematically, charm is another second derivative of the Black-Scholes option pricing model. It's the same

as gamma in that regard; gamma was also a second derivative of the Black-Scholes option pricing model. Now, with gamma, we differentiated the model with respect to price and then again with respect to price. What charm does is it shares delta as that first layer, if you will, but then... It differentiates the model with respect to time, so the first differentiation is with respect to price and the second differentiation is with respect to time. So what charm effectively measures is how Delta itself changes over time. Okay, so that's the mathematical side of charm, but what about

the intuitive side of charm? Well, this is where the magical properties of this Greek really begin to shine. All right, so charm measures how Delta changes over time, but if we push that a little bit further, if we explore that a little bit more deeply, here is what we're going to find: out-of-the-money options and in-the-money options typically have stronger charms, whereas at-the-money options have weaker charms. Now, here's what that means: if I have an out-of-the-money strategy, then those Deltas are going to decay more quickly; those Deltas are going to move towards zero more quickly. Whereas

if I have an in-the-money strategy, those Deltas are going to strengthen more quickly; those Deltas are going to move towards 100 more quickly because they have stronger charms. On the out-of-the-money side and on the in-the-money side, at-the-money options typically have weaker charms; they cling on to their Deltas for a longer period of time. Those Deltas don't decay like they might if they were out of the money or strengthen like they might if they were in the money. Okay, if I'm a premium seller, those out-of-the-money Deltas decay. Now, I'm really interested because lower Delta options typically

carry lower extrinsic values. So as the Deltas move down because of charm, the extrinsic values are going to move down because of charm, and now as a premium seller, I've got something that I can work with. So how do we use charm? Well, to be honest, charm, even with all its incredibleness, is not as utilized as some of the other Greeks that we might use on a fairly regular basis, like your Deltas, your Thetas, and your Vegas. That makes sense because with Delta, with Theta, with Vega, and even Gamma, there's a lot more of a

tangible impact on those Greeks, whereas charm is kind of something that's working more in the backdrop; it's kind of something that's working more in the background. But still, understanding its existence and understanding its impact can allow you to better screen through your strategies, to better filter through your strategies, so that you can select strikes, so that you can select strategies, and you can understand the 'gimmies' and the 'goes' of those strategies, so you end up with something that is customized for the risk-return profile that you yourself are trying to achieve based on your risk tolerance,

your return projections, your experience level, etc. So charm can be a very valuable thing in understanding kind of this customization process. All right, so how can we use charm to improve our returns? Well, charm's relationship with returns is going to be very much what we've already outlined. You move further out of the money with your strike selection; the Deltas on those strikes decay more quickly. Because the Deltas on those strikes decay more quickly, the extrinsic value on those options decays more quickly, and as a result, you are left achieving faster relative returns. For example, if

you sell a 10 Delta put, that's going to decay a lot more quickly than a 20 Delta put, ceteris paribus. You sell a 20 Delta strangle, that's going to decay more quickly than a 30 Delta strangle, ceteris paribus. This is a positive thing; this is a good thing; this is a 'gimme,' if you will. But before you go out selling three Delta strangles to maximize your charm because "hey, Jim told me so," let's make sure we understand the risks. Let's make sure we explore the trade-off. Let's make sure we understand the 'gotcha' that's right around

the corner. Okay, so what about charm's relationship with risk? Well, to be honest, it's not as obvious as it might be with some of the other higher-order Greeks like Color and like V, two of the guys that we're going to see in the next two episodes of the Greeks crash course. But still, we do know this: if you go further out of the money in an effort to maximize your charm, you are going to have less risk on a per-contract basis. The problem is this: those lower Delta strikes, those further out-of-the-money options, they're going to

have lower premiums. So what are you very likely going to do? What are you very likely going to consider, at least? Adding more contracts, upping your trade size to give the trade, to give the position more economic significance. In doing so, you will be taking on more risk; you will be taking on more risk than you might not even realize you are taking on, i.e., episode number eight of this crash course when we take a look at Vama. So the most important thing to pull away right now is that there's something there; there's something powerful

that's there with charm, but we don't want to just go hog wild selling these three Delta strangles until we take some time to understand those higher-order Greeks, until we take some time to understand these next-level 'gotchas' that are absolutely there. And just like that, guys, we are done with episode 6; the second half of the Greeks crash course is now fully underway. And when you are ready, I will see you in episode number seven, where we are going to talk about Color. We are going to cover another higher order of Greek: Color. Now, Color is

another one of those Greeks that doesn't really get the press time; it doesn't really get the time in. The spotlight that some of the other Greeks get. But, as we're going to see here today, it is critically important to what we do. Let's follow the same sequence that we have followed for all the Greeks up to this point. Let's talk about what color is, let's talk about how we use color, then let's talk about color and return, and lastly, let's talk about color and risk. So, without further ado, let's dive right into episode number seven:

color. So, what is color? Guys, let's not reinvent the wheel here; let's cover this thing mathematically, then let's cover it intuitively. So, mathematically, color is another derivative of the Black-Scholes option pricing model, but this time it's not a first derivative; it's not even a second derivative. Color is a third derivative. So, we are going to go down to a brand new layer of the onion here today. Specifically, color is a d derivative of the Black-Scholes option pricing model, first with respect to price, second with respect to price, and then third with respect to time. So,

it's price, price, time. Now, you might remember that there's another Greek that we've already covered, i.e., gamma, that is price, then price. So, if you think about color, it's essentially the derivative of gamma with respect to time. Okay, so there is the math. What does that actually mean? Like, how can we actually use that? Well, here we go. Color measures how gamma changes as time passes. So, in a sense, it's very similar to theta or very similar to charm because theta measures how option prices change as time passes, charm measures how delta values change as

time passes, and color simply measures gamma as the variable in question: how does it change as time passes? And here is the most important part, the most important thing to the whole operation—that is color. The mathematical nature of this Greek shows us the following: as options get closer and closer to expiration, as options march closer and closer to that third Friday in expiration month, here is what we know: gammas get more potent, gammas get stronger. It doesn't matter if they're positive; it doesn't matter if they're negative. Does this ring a bell? It should. If it

doesn't, that's okay; just hang with me for the next few minutes, and it's going to be ringing loud and clear. Okay, so how do we use color? Well, it's very similar to the other higher-order Greek that we just covered in the last episode of the Greeks crash course. When we look at charm, color is not really something that we actively measure inside of our portfolios, at least not consciously. Like, we don't open up our platform wondering how our portfolio's color is doing, you know, looking to measure or monitor a position's color. That's not really how

we use this Greek. Now, interestingly, though, as I kind of snuck in that little "consciously" on y'all a couple of seconds ago, we do use this all the time. We lean on the spirit of this Greek on a pretty regular basis. Now we call it something else; it goes by a different name, but we are using color all along, and we'll come back to this in just a couple of minutes. Okay, so what about color's impact on returns? Well, for us, this is basically going to be a non-event—not like a real non-event. There's a little

bit more to it than that, but it's going to be a non-event nevertheless. And the reason why is this: remember the base of color is gamma. How do we view gamma? How do we trade gamma? It's kind of a trick question; we don't trade gamma at all. Remember back in episode number four when we looked at gamma directly? We talked about gamma scalping; we talked about how some traders like to piggyback off of exploding gamma late in an expiration cycle to nail those directional moves, to really maximize their returns in the times when they're able

to get the directional moves correct. We don't do that. If anything, we do the opposite, right? We reverse gamma scalp. So, when it comes to color's impact on returns, it's the same as gamma's impact on returns. We're not using gamma to maximize returns; we're using gamma to minimize risk. So, we're not going to use color to maximize returns; we're going to use color to minimize risk, which brings us to our final section today. Okay, so what about color's impact on risk? Well, if you haven't figured it out yet, here is what we've been hinting at

for the last couple of minutes: color shows us how gamma changes over time. Color shows us that gamma gets stronger over time. In other words, color is gamma risk. In the end, we might not be actively looking at color, but we use it every single time we adjust a position at 21 days to go, right? We might not be deriving the Black-Scholes option pricing model, you know, once and then twice and then thrice to see what comes out, but we are using color every single time we close a position early so that we don't get

too close to expiration Friday. That, my friends, is all because of color. All right, so you made it to the end of episode seven inside of the Greeks crash course, where you are now a color expert. If you want to share this episode with one of your trader friends, that would help us out a ton. If you want to save this for yourself for future reference, that's probably also a pretty good idea. And when you are ready, I will see you inside of episode eight, where we are going to cover V, and things are going

to start. To come together, a surefire crowd pleaser, the life of every party... Do you guys remember how a couple of episodes back, when we talked about charm, I said, "Hey, y'all might want to wait before you start selling those low Delta strategies to maximize your charm"? Well, the reason why is what you're about to learn with vama. Okay, so what is vama? Well, let's do this the only way that we know how—mathematically and intuitively. So, mathematically, vama is another higher order Greek, but it's going to be a little bit of a downtick from what

we saw in Episode 7 with charm, which was a third derivative. Vama is actually in the same boat as charm or gamma, where it is only a second order derivative. What it measures is the change of Vega when volatility changes. So remember that Vega measures the change of option prices when volatility changes; vama measures the change of Vega itself when implied volatility changes. Okay, so what about the intuitive side of vama? Well, to make things a little bit easier, vama actually shares the same relationship with options that Vega did. Remember, when you're long options, you

are positive Vega; well, when you are long options, you are also positive vama. When you're short options, you are negative Vega; when you're short options, you're a negative vama. But that positive-negativeness to vama really only depends on which side of the market you're on. The most important thing for you to pull away from vama is that it is a positive function. Now, what does that mean in English? It's actually not too difficult to understand. Ceteris paribus, if implied volatility expands, then Vega is going to expand because vama is a positive function. Ceteris paribus, if implied

volatility contracts, then Vega is going to contract because vama is a positive function. Now, does this mean that all vama values are created equally? No, absolutely not, as we are going to see in the next couple of minutes. So, how do we use vama? As you've maybe noticed to this point, you know, with charm and then colar, and now vama, these higher order Greeks—they're not usually front and center on our radars. We don't typically use these guys super actively, but if you dig a little bit deeper, here's what you will find: all of the mechanics,

all of the protocols, all of the things that we do every single day—yes, we built these things from experience; yes, we built these things from empirical research. But all along, there's been mathematics that have been driving the train. There's been mathematics that have been the foundation of what we do, and with vama, we're going to see the exact same thing in the next two and a half minutes. So, how do we use vama to improve our returns? Well, you know what's interesting about these higher order Greeks, at least the way that we view them and

use them? Very often, they either end up helping you on the return side or the risk side—not usually both. Like if we go back to charm, right? That was more of a return metric. If we go back to colar, just in the most recent episode, that was more of a risk metric. We're going to see the same thing here with vama; it's also going to be a risk metric. And the reason why that is the case is because vama, by definition, measures how changes in implied volatility and the speed of those changes are going to

impact us. Now, naturally, there is going to be a return element to vama, like there is going to be a role that vama plays in determining our returns because Vega impacts our returns through implied volatility, which, of course, is one of the ways that we make or lose money as option traders. But we're not super interested or concerned with the return side of vama. And the reason why is this: remember, vama gives us insight into the speed of change of implied volatility. Vama gives us insight into the risks that we have that are associated with

the speed of change in implied volatility. And our game, when it comes to fast movements, when it comes to quick changes in the marketplace, we are more concerned with that on the risk side of the equation, not the return side of the equation. We're not super interested in making money very quickly; that's not our game. Instead, we want to use vama as a risk metric to help shield us from the big outlier losses, to help protect us from these big outlier moves. So, vama, in our eyes, is very much more of a risk metric. So,

that brings us to our final section. Okay, so what about vama and risk? Well, again, as premium sellers, right, it's always going to be these big outlier moves that we need to navigate in order to be successful. And so, vama is going to help us do that. It doesn't really impact us too much on the return side, but it can play a big role on the risk side. And here's how: first off, I think it maybe goes without saying, but just in case, we much prefer lower vama. This is because lower vama values allow us

to better control, mitigate, and contain the speed of those changes in implied volatility. Okay, secondly, vama tends to peak right around the five to ten Delta options. So remember, vama is always a positive function, but there are layers—there are levels—to the magnitude of vama across the different strikes, across the different Deltas. Okay, lastly, because vama peaks for these lower Delta options, this is why we typically don't prefer to sell these lower Delta options, even though the charm is super high. Even... Though the charm can be maximized at the five Delta, or the seven Delta, or

even like the 9 or 10 Delta, we would much prefer to sneak into the 16 or 20 Delta options with much lower Vana and still plenty of charm that we can capture. And just like that, Episode 8 is in the books on Vana. That is it, and when you are ready, I will see you in the penultimate episode, Episode Number Nine, where we are going to cover Vanna. We are going to cover another one of our higher-order Greeks, Vanna. This guy's going to be similar to, you know, your charms, your colors, your VAs, and so

hang tight—buckle up, because things might get a little bumpy for these next few minutes. Okay, so what is Vanna? Well, guys, we're nine episodes in at this point; like you know what's coming next, we're going to do this mathematically and we're going to do this intuitively. So mathematically, Vanna is another higher-order Greek. It is a second-order Greek of the Black-Scholes option pricing model, and what it shows us is how Delta changes when implied volatility changes. How do changes in volatility impact Delta? So in a lot of ways, it's similar to charm, because remember charm showed

us how Delta was impacted over time. Here, Vanna is going to show us how Delta is impacted when volatility changes. So it just gives us another unique perspective of this directional metric that we use all the time, which is Delta. Okay, so what about the intuitive side of the explanation? Well, a lot of times when you break things down mathematically and then intuitively, the intuitive explanation is oftentimes easier to understand than the mathematical explanation. Well, that is not necessarily the case here with Vanna, and here is why: if we view things from the long side

of the option contract only, here is where we want to start. Long calls have positive Vanna; long puts have negative Vanna. Now here's what that means: if implied volatility rises, it's going to send the Deltas on a long call higher (positive Vanna). If implied volatility rises, it's going to send the Deltas on a long put lower (negative Vanna). Now, on the surface, it might look like those are two different things, but they're really the same thing, and here's why. Okay, long calls have positive Vanna; long puts have negative Vanna. Let's start with the long calls.

I have a long call; if implied volatility spikes, the Deltas on that long call are also going to move higher because of the positive Vanna. This is because greater implied volatility literally means greater fluctuations in the marketplace. If there are greater fluctuations in the marketplace, there is now a greater likelihood that that long call might expire in the money. Do you remember how back in Episode Number One we talked about Delta and how we can use Delta to gauge the approximate probability of the option expiring in the money? That's really helpful here to help us

understand Vanna's impact. I have a long call with 20 Deltas; if IV spikes, it might move to 30 Deltas. I have a long call with 35 Deltas; if IV spikes, it might move to 45 Deltas. Now, similarly, long puts basically follow the same logic chain. Long puts have negative Vanna, but here's how it works: I have a long put that has -20 Deltas; if implied volatility spikes, the negative Vanna is going to send those Deltas down to -30. Or I have a long put at -35 Deltas; if implied volatility spikes, the negative Vanna is going

to send that Delta down to -45. So mathematically, my Delta has decreased, but magnitudinally, the likelihood that my put expires in the money—that has grown, and that's the most important part of Vanna that we want to understand right now. Now, naturally, you might be asking, "Jim, you're focusing on the long side. What about us as premium sellers? What about the short side?" Well, we'll come back to that in a couple of minutes. Okay, so how do we use Vanna? Well, you guys probably know what I'm going to say here: very similar to the other higher-order

Greeks, like your charms, like your VAs, like your colors, like your speeds that we're going to see in the final episode of the Greeks crash course, this is not something that we actively monitor. Like, we don't have Vanna hedges just waiting at the ready to go off if things get crazy. Our Vanna kind of gets reconciled through all the other things that we do, through all the frontline activities that we deploy, and all the protocols that we follow. So understanding what Vanna is doing behind the scenes is extremely important to understanding what you've signed up

for—all the gimmies and all the gotta's. But in terms of actively monitoring Vanna, it's not really something that we need to do, as you guys are going to see in about, uh, 45 seconds or so. Okay, so what about Vanna and increasing returns? Well, to answer that question, let's now complete the discussion that we started a few minutes ago when we were looking at the long-only side of the option contract. Long calls have positive Vanna, but short puts also have positive Vanna. And the reason why that works out as such is the following: puts naturally

have negative Vanna, but if you step in and sell that put, then you become positive Vanna. The way this works is the same way it works when you multiply two negative numbers together. You multiply two negative numbers together, it brings you back to a positive number. So you take a naturally negative Vanna put, and you sell that put, and you actually end up with positive Vanna. Vana, so now that we know that short puts are long Vana, here's how this impacts returns. Short puts are naturally going to be three things: they're going to be long

Delta, they're going to be short Vega, and now that we understand it, they're going to be long Vana. If you catch a move in your favor—if you catch a bullish move on a short put position—that is very likely going to lead to very, very quick profits. Here's how: you're long Delta. If the stock moves higher, you're going to make some money. You're short Vega, and if the stock moves higher, that very likely also means that volatility is contracting. You're going to make some money. But now we know that you are also long Vana. That long

Vana is going to cause your Deltas to shrink on that short put position, you know, from 20 to 10 or from 30 to 20. But that Delta decrease could help to contribute to sucking out the premium from the option in a similar way to what we saw with charm. So that is a pretty big gimme when it comes to the return side of Vana. But not so fast, because our old pal Gotcha is right around the corner. Okay, so what about Vana and risk reduction? Well, to better understand—or to best understand—this angle of this Greek,

let's make sure that we all understand something: we much prefer short puts as a standalone strategy over short calls as a standalone strategy. The main reason why is quite simple: the market wants to go higher over time. So consistently selling calls, you know, week after week, cycle after cycle, year after year, is just not a great strategy. As a result, we are naturally going to be most of the time net long Vana in our portfolios. Does this have some risk associated with it? Yes, it does. And not so much because of Vana's impact in isolation

per se, it's actually more of a compounding effect that Vana can have alongside the other Greeks, the other higher-order Greeks. So to illustrate this, let's suppose that my go-to strategy was selling five Delta puts and holding them to expiration. Let's work through the charm impact, the Vama impact, the color impact, and now the Vana impact of that position. First off, your charm at five Deltas—we already know it's going to be super strong, right? It's going to be great. Stock goes higher, stock even goes nowhere—that's going to be terrific. That's going to be a great outcome

for you; we don't have to worry about that. Okay, the problem is your Vama at five Deltas—it's going to be peaked, right? It's also going to be looking pretty robust; it's also going to be pretty strong. So you're already short Vega. If volatility starts to expand, that's going to hurt. But because of the super strong, super potent Vama, that short Vega is going to grow, and it's going to grow, and it's going to grow. So further expansions in implied volatility are going to hurt more, they're going to hurt more, and they're going to hurt more

from that peaked-out Vama. Now, caller, you're holding this guy to expiration. What does that mean? You're going to have to absorb color's impact on gamma, which we learned is going to naturally cause gamma to grow and gamma to strengthen as you get closer to expiration. What does that mean? More moves in the stock against you are going to cause your gamma to grow; they're going to cause your Delta to grow; they're going to cause more losses; they're going to cause more pain. All right, and lastly, if it's not bad enough, now we have Vana. Vana

was great when the stock moved higher; it was great when implied volatility was contracting; our Deltas were shrinking, and everything was fine. But now, all of a sudden, implied volatility might be growing, the stock is falling, and implied volatility is very likely expanding. So now what's going to happen? Our Deltas are going to follow suit; our Deltas are going to expand, which, again, means the move is going against us. So this can mean more pain; this can mean more losses. So hopefully now you can see how Vana can kind of be this contributing factor to,

you know, more pain, more hurt, and bigger losses in the event that you are not correct. Okay, so naturally, you might be out there thinking, "Jim, that does not sound good, man! Like, how do I stay away from that? What can I do to avoid that situation?" Well, it's actually pretty easily avoidable. All you have to do is two things: Number one, stay away from those low Delta options. We've already talked about this in other episodes; we've already talked about this in other contexts, and here it is again: those guys are not your friend. Number

two, strategically diversify. Short puts are great strategies, and short puts will be one of the strategies that you use quite a bit, but they're not the only strategy. So strategically diversify into strangles, into straddles, into ratio spreads, even some defined-risk strategies like vertical spreads, like iron condors, like calendar spreads. Doing these two things alone will help you significantly mitigate the negative effects of Vana to the point where you don't even have to actively monitor your Vana. And just like that, man, I can't believe it, but we are done. That was by far and away the

hardest episode of the Greeks Crash Course that I had to record. I did a couple of those clips about 39 times, that you guys thankfully will not have to see. But you made it through episode number nine of the Greeks Crash Course. Vana is... In the books, and when you are ready, I will see you in the final episode of the Greeks crash course, where we are going to bring this whole thing home and tie it off with a bow and talk about speed. And this is it! We made it—the grand finale! Here in episode

number 10, we are going to cover speed, and thankfully, this is going to be a little downhill from what we experienced back in episode number nine, where we covered Vanna. That was by far and away the most difficult, most challenging episode for me to put together in the entire Greeks crash course. To be honest with y'all, there is only about a 60 Delta that I even explained correctly. So thankfully, we have a little bit of a cooldown set here with episode number 10 in the Greeks crash course—speed. So what we're going to do is cover

this the same way that we've been covering all of the Greeks to this point. We're going to talk about what it is, how we use it, returns, and risks. So without further ado, let's dive headfirst into episode number 10 of the Greeks crash course—speed. So, what is speed? Well, for now, the 10th consecutive time inside of the Greeks crash course, let's explain this two different ways: mathematically and intuitively. Mathematically, speed is another higher-order Greek, and it actually shares the same relationship with color in that it is another third derivative of the Black-Scholes option pricing model.

It measures how gamma changes when the underlying stock price changes. So at this point, you are three layers deep: price, price, and then price; price once—that's Delta; price twice—that's gamma; price thrice—that is speed. Okay, so there is the mathematical foundation. What about the intuitive side of speed? Well, speed is going to give us yet another way to quantify our gamma risk exposure. Remember, color taught us that gamma strengthens—gamma grows as we get closer to expiration. Well, with speed, what we're going to see is this: at-the-money options that have the greatest gamma also have the highest

speed, while in-the-money and out-of-the-money options with lower gammas also have lower, less impactful speeds. So, on order entry, by focusing on out-of-the-money options, as premium sellers that prefer out-of-the-money options, we are able to mitigate some of the deleterious effects of speed right out of the gates. So how do we use speed? Well, guys, different characters, same story, right? Different plotline, exact same ending. We don't actively monitor our speed. We saw this with charm, we saw this with vanna, we saw this with color; we saw with Vanna, and we're now going to see it here with

speed. The reason why we don't—as in, we are not sitting at our desks cranking out third derivatives—is because we don't have to. The mechanics that we already have in place cover our speed risk. The protocols that we already follow allow us to mute the negative effects of this Greek, so we don't have to actively monitor our speed. However, it is worthwhile to press forward, even if only for a couple of minutes, to at least understand and appreciate the mathematical support that is driving all of the different things that we do. Okay, so what about returns

and speed? Well, as we've already seen, with these higher-order Greeks, it's usually an either/or situation, right? They usually either help us on the return side or they help us on the risk side. Like we saw, charm and even vanna were more return metrics, and then we saw color and vama; those were more risk metrics. So which side of the fence is speed going to land on? Well, for us, it really makes a lot more sense to put this in the risk category. Here is the reason why: if we were interested in long premium strategies and

long gamma strategies, if that were our strategy of choice, then yes, it would make sense for us to pay closer attention to speed as a return-driving metric and try to use speed to maximize our returns. But we don't do that. We don't buy premium; we don't buy gamma for a number of reasons, right? But the least of which is the negative theta that comes along with those positions. Hey, quick little shout out to, I believe it was episode three in the original crash course, where we talked about positive theta and negative theta. So definitely give

that a look if you haven't checked it out already. But we much prefer short premium and short gamma strategies. So what that means is this: γ as we use it, that's a risk mitigation metric. So speed is also going to follow suit and become a risk mitigation metric, which is a great segue into our final section today. All right, so what about speed and risk reduction? Well, the good news is this: the things that you're already doing are putting you in a position where your gammas are not really going to be that significant. You're focusing

on out-of-the-money options; you're diligently managing your positions at 21 days to go. These things together are already going to mute the effect of your gammas, at least at order entry. Inevitably, though, there are going to be times when stocks move against you; there are going to be times when you have losing positions, right? Spoiler alert: your out-of-the-money options are going to move in the... Money from time to time. When this happens, your gamma is going to grow. When this happens, your speed is going to increase. So, what do you do? You adjust. When your strike

is tested, we talk about this all the time. I talked about this all the time in my Strategy Management Crash Course. What do you do when your strike is tested? Well, you roll the untested side of a strangle. Maybe you add a short call to a standalone short put, or maybe you simply add duration to the trade. All of these things are going to come together to serve one unifying purpose: they're going to water down your exposure to the Greeks, including speed. So, what this does is the following: everything slows down. Everything slows down, so

you can decide what to do next. If you do that, if you do these things, then you will naturally take care of your speed risks, and you didn’t have to take a single derivative. And just like that, guys, we are done! The entire Greeks crash course has now come to a close. I just want to say from the bottom of my heart that if you made it through all of these episodes—hey, if you even just skipped to episode 10 and this is the only one you've seen—I don't care! I'm really, really, really humbled that you've

chosen to invest your time in our content, in my content. It just means the absolute world to me. So, if you want to share this whole playlist with a trader friend, that would be amazing. If you want to save it for yourself for future reference, that would also be amazing. And when you guys are ready, I will see you in the next crash course, which should be coming your way in about three or four months. So, we’ll see you there!