# Higher Order Greeks and Various Options Strategies

### Surface Greeks v. Higher Order Greeks

Some surface (first order) Greeks: Delta, Theta, Vega

Some higher order Greeks: Vomma, Vanna, Veta, Charm, Lambda, Gamma, Ultima

Although you are not aware of it, you are configuring your higher order Greeks when you trade options, and their final output is presented to you buy delta, theta and vega, The SURFACE GREEKS.

### Importance of Option Greeks, Surface and Higher Order

Surface Greeks are the output of the higher order Greeks.

Surface Greeks show you where you are right now.

Higher order Greeks are the foundation of your options portfolio.

Higher order Greeks dictate where you are and where you are going.

Higher order Greeks dictate how your portfolio will react to market changes.

Higher order Greeks play a very important role in your options trading.

Higher order Greeks are used by expert option traders to manage their risk thoroughly.

99% of all traders, including nearly all educators, do not know how these Greeks relate to trading options.

Trading options without understanding higher order Greeks can lead to confusion and losses.

Understanding higher order Greeks will increase your returns and safety more than you can imagine.

### Options Strategies In This Lesson

Broken Wing Butterfly

Unbalanced Condor

Iron Condor

Credit Spread

Calendar Spread

Naked Put

Put Ratio

### Broken Wing Butterfly

Higher Order Greeks

– Gamma

+ Vomma

+ Vanna

– Charm

– Veta

First, we’ll look at a broken wing butterfly. In this example, the trade is built near the money and a negative Delta. This trade is designed neutral to bearish.

– Gamma: the negative Gamma creates directional risk for this trade as the underlying moves around.

+ Vomma: The positive vomma dynamically shifts the Vega of this trade in the proper direction as volatility shifts.

+ Vanna: the positive vanna of this trade means the Vega will change against the trade as the underlying moves around.

– Charm: the negative Charm of this trade means the trade will become more bearish each day.

– Veta: this means the Vega position will become more negative each day.

As you can see, your higher order Greeks dictate how your trade will shape through time, through volatility changes and price changes as well.

### Unbalanced Condor

Higher Order Greeks

– Gamma

+ Vomma

+ Vanna

– Charm

+ Veta

Here, we’ll look at a PUT Unbalanced Condor. In this example, the trade is built to the left of the money and with a flat delta. This trade is designed neutral with some upside protection.

– Gamma: the negative Gamma creates directional risk for this trade as the underlying moves around.

+ Vomma: The positive vomma dynamically shifts the Vega of this trade in the proper direction as volatility shifts.

+ Vanna: the positive vanna of this trade means the Vega will change against the trade as the underlying moves around.

– Charm: the negative Charm of this trade means the trade will become more bearish each day, which helps protect the down side.

+ Veta: this means the Vega position will become more positive each day, helping the down side risk.

### Iron Condor

Higher Order Greeks

– Gamma

+ Vomma

– Vanna

+ Charm

+ Veta

Here, we’ll look at an Iron Condor. In this example, the trade is at the money with a flat delta. This trade is designed neutral with high risk to the left and right.

Things to note about the Iron Condor: This trade has a very strong – Gamma. That is what you see with the risk illustrated with the white line. This represents the Delta and Gamma risk of the trade.

Also note, the Charm of this trade works against the trader. Each day, if you are to the left or the right, the white line gets steeper, making the trade riskier as it approaches expiration.

### Credit Spread (Bull Put)

Higher Order Greeks

– Gamma

+ Vomma

+ Vanna

– Charm

+ Veta

Here, we’ll look at the Bull Put Spread. In this example, the trade begins with a positive Delta, making it bullish. Over time the delta flattens out from the negative Charm.

Note on this trade the Charm helps the position over time, but the + Vanna and – Gamma hurt the trade. (both the Delta and Vega shift against the trade when the underlying price moves down)

### Calendar

Higher Order Greeks

– Gamma

Flat Vomma

+ Vanna

– Charm

+ Veta

Next, let’s take a look at the Calendar spread. This trade has a +Vega position and as IV changes, it remains positive do to the flat Vomma of the trade. Calendars can be useful when IV is low and expected to rise. Time spreads can be done using the same strike or different strikes, which will allow you to modify your Vomma, Vanna, etc. This is one example of creating a flat Vomma position with positive Vega.

### Naked Put

Higher Order Greeks

– Gamma

– Vomma (Warning)

+ Vanna (Warning)

– Charm

+ Veta

This is the Naked Put, a very popular strategy. People love this trade for it’s strong Theta and low commissions. However, most people do not understand the Vomma and Vanna of this trade. This trade looks similar to the bull put spread, but it’s very different do to it’s higher order Greeks.

The naked Put starts off with a strong – Vega, but as the market falls, this –Vega can double, and fast, due to the –Vomma and + Vanna architecture. This is what makes it so different from the Bull Put Spread.

For example, your naked put might start off with a -1000 and shift to -2000 as the market moves down. This will accelerate your losses as implied volatility increases.

Make sure you don’t fall into this trap, especially before a serious market decline. Also note, the Covered Call is a similar risk profile.

### Put Ratio Options Strategy

Higher Order Greeks

– Gamma

– Vomma (Warning)

+ Vanna (Warning)

– Charm

+ Veta

Another trade that involves naked puts is the Ratio Spread. We’ve seen people teaching this strategy to the public, so we feel it’s important to point out the risks involved that these educators are not aware of. Similar to the naked Put, the Put Ratio also has –Vomma and +Vanna. As you already learned, this means the –Vega position becomes increasingly worse as the underlying moves down. People think this is a neutral to bearish trade, but it’s not. This trade is neutral to bullish. Any moves over 1% to the downside cause tremendous losses to this trade.

However, in this case, they are much worse. When the market declines and volatility increases, the –Vega of this trade can increase fast than it does with a naked put alone.

### The Above Put Ratio When Implied Volatility Increases

Losses occur as market falls and IV increases do to –Vomma and +Vanna.

### Summary

Higher order Greeks are everything to an options trader.

They tell us what will happen with respect to changes in the underlying, over time, and with volatility shifts.

Vomma tells us how the trade’s Vega will change with respect to IV changes.

Trades can be created with –Vomma, +Vomma and Neutral Vomma.

Vanna tells us how Vega will change with respect to changes in the underlying price.

Charm tells us how Delta changes each day.

Veta tells us how Vega changes each day.

Lambda, not discussed today, tells us the percentage change of options relative percent change of underlying, also very important.

Ultimate is another good one. This tells us how Vomma will change with respect to implied volatility changes.

Speed is a good one too. This is how your gamma will change with respect to underlying changes.

As you can see, there are a lot more Greeks than the mundane Delta, Vega, Theta and Gamma. The industry in general has very little knowledge of these higher order Greeks, but as you can see from this lesson, they are very important and furthermore, you can manipulate them to work to your advantage. If you trade blinded to these Greeks, you’ll never be able to really manage your portfolio of options how you hope to.

Yes, I know it seems like work and education always is. However, if you truly love options, then we can make this education relatively painless for you. We’ve been teaching our clients how to implement and modify higher order Greeks since 2010. We are the leaders in the industry on this topic. In fact, we’ve integrated higher order Greeks into our software too, so you’ll be able to see them update as you try different trade configurations.

In our opinion this is the only way to trade options. If you really want to have control of your portfolio of options, then you have to learn sophisticated ways to configure your trades, and if you manage money for others, it’s your responsibility to learn how to do this for your clients.

We hope this lesson has opened your eyes to higher order Greeks and how fascinating they truly are.