Binary options Greeks are the letters of the Greek alphabet that are used to represent the sensitivity, generally of the options price, to a change in one of the inputs.
The binary options Greeks covered are:
|Binary Options Greeks||Below Strike||Above Strike|
|Binary Call Option Delta||+ve||+ve|
|Binary Put Option Delta||-ve||-ve|
|Binary Call Option Gamma||-ve||+ve|
|Binary Put Option Gamma||+ve||-ve|
|Binary Call Option Theta||+ve||-ve|
|Binary Put Option Theta||-ve||+ve|
|Binary Call Option Vega||+ve||-ve|
|Binary Put Option Vega||-ve||+ve|
Other Greeks do exist but have little weight compared to the above four. In 15 years of options market-making in the pits and subsequently in front of (soul-destroying) screens these were the Greeks that concerned me, with Greeks such as Rho having little bearing even when trading STIRs.
The binary options Greeks are fundamental to the dynamic portfolio management of binary options; indeed I might suggest that any idiot can guess at fair value and make a two-sided market around that level, but the subsequent risk management involved having traded sorts the men from the boys. In ‘fast’ markets when, basically, the pit’s rules concerning ‘best execution’ etc. went out of the window, there would always be a number of so-called market-makers who had to call their wife/girlfriend/mother-in-law, basically anyone that gave them an ‘out’ from standing in the pit and getting mugged. This pit ‘furniture’ basically did not know their Greeks sufficiently well enough to put on a convoluted trade and know in their minds exactly how their Greek profiles had changed. This inability to understand their own risk profile is a major damper when trading since it will inevitably impact on their confidence in price-making; for instance, an options trader who does not know what their delta is would be akin to a futures trader not knowing how many futures they are long or short.
On numerous occasions I have been asked what were the most important lessons I imparted when training an options market-maker to trade. The answer to that is that I’ve never taught anyone to trade, I didn’t have time since all my time was spent on teaching them how not to lose my money!