Option Risk

The ancient Greeks were master storytellers. Homer’s epic poem Iliad describes the famed city of Troy, a beautiful seacoast square which might still be standing had it not fallen for the ruse of the Trojan Horse.

The Trojan Horse, apparently left behind as a gift – a reward – was viewed with much skepticism. According to the poem, many inhabitants cautioned, “Somewhat is sure designed by fraud or force; trust not their presents, nor admit the horse.

Despite the warnings, the magnificent horse was wheeled behind city walls. But inside were hiding some forty warriors who swiftly destroyed the city in the middle of the night. The risk was hidden.

Today, for option traders, the Greeks are still master story tellers but of a much different kind. Unlike the warriors of Iliad, these Greeks are simply letters. But they tell an equally important story – the story of risk hiding in your option positions. These Greeks can drop subtle hints or throw up huge red flags – but you must take the action. To understand the warnings, you must understand the Greeks.

Delta, Gamma, Theta, Vega, Rho. They may all be Greek to you now but they’ll make perfect sense after taking our Greeks class.

The Greeks sound intimidating. They seem complicated. And it is for this reason that many option traders avoid learning about them. They convince themselves that the Greeks are nothing more than theoretical tools for academics and not of any practical use for investors and continue trading without understanding them. That’s the ostrich strategy and burying your head in the sand does not make the risks go away. It just ensures that you won’t see them hiding inside your portfolio.

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