Your Morning Routine, Setting Up Daily Profit and Loss

OptionFinder

• Want to manage your risk better when trading ?

Find Trades Today

Open a virtual trading account to practice what you pick up in each module

If you just traded shares, your daily P/L is pretty easy – just take the number of shares in your position, multiply by how much the price moved yesterday and you’re done. Let’s say yesterday you started the day long 1000 shares of IBM. The stock moved up 60 cents yesterday, so your one day P/L was $600 – good for you. But what if those 1000 IBM deltas were a combination of shares and options? Now it’s a little more complicated.

We still start the same way: multiply our IBM delta by the move in the spot price:

Delta P/L = 1000 x 0.60 = $600

But options outperform their deltas, unlike shares. This outperformance comes from gamma. So let’s suppose your gamma yesterday was 300. This means that your delta would have changed from 1000 at the beginning of the days to 1000 + 0.60 x 300 = 1180 by the end of the day. So on average your delta was 1090. The “extra” 90 deltas would have given you an extra profit of $54:

300 x 0.60 x ½ x 0.60 =$ 54

But we’re not quite done. You have a long gamma position, mostly likely because you are long more options than you are short. This means you are likely short theta – time decay. Theta is measured in an amount per day. So let’s suppose your theta is $25 per day. Your final one day P/L then is:

600 + 54 – 25 = 629

Most of your profit came from delta because you were long and the share price moved up. But your long gamma boosted the profit by $54 while the option decay cost you $25. For this one day, your option position did better than break even – the gain from gamma was greater than the loss from theta.

Your daily P/l should be part of your morning routine – just like regular exercise!

Click here to download a copy of the OCC’s Characteristics and Risks of Standardized Options.