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So You Want to Be a Quant #1: The Mysterious Third-Order Greeks
Develop and refine your edge in the options market by learning about the higher-order derivatives.
Hello, future quant, this is the first blog in a series dedicated to helping you become a quantitative finance whiz. For today’s lesson, we’ll be going over three of the Third-Order greeks behind option pricing. If this sounds intimidating, trust me it isn’t. By the end of this blog, you’ll have gained a clearer understanding of these greeks which will help quantify your edge as an options trader. Let’s dive in!
Gamma is king.
Speed — Speed is the rate of change of an option's gamma with respect to the underlying. In case you don’t know exactly what gamma is, it is the rate of change of an options delta( option $ per $1 move in underlying price).
The Trade: If the underlying stock price is below the strike, you pick up gamma as the stock rises, while if the stock price is above the strike, you shed gamma as the stock increases. The Speed effect is most apparent in short-term expiration cycles. Knowing how speed moves your options price can help you know when it is time to close out your long/short position.
