The greeks for a long vertical are a little more complicated than the other strategies we’ve covered in this course. This is because this strategy combines two different options, each of which has its own greeks that change due to various factors. When you add them up, it adds another layer of complexity.
First, we need to figure out how to determine the greeks for a trade with multiple positions. To do this, you simply add the greeks of the two positions together.
For example, if you were considering a long call vertical using the option chain below, you might buy the 235 strike and sell the 240 strike. The long call would have a delta of .35, while the short call would have a delta of -.29. Adding these together gives us a total delta of .06.
Note: Keep in mind that when you’re looking at an option chain, the positive/negative signs are usually oriented to the buyer—you need to change the sign if you’re selling a position. That’s what we did with the short call delta.
The good news is that most trading platforms will add the greeks for you. Therefore, analyzing the greeks for a spread strategy doesn’t take any calculation on your part.
Second, we need to consider that the greeks function differently depending on the price of the underlying. To help illustrate this, compare the risk profile of a long vertical at expiration to the risk profile with extrinsic value. In this instance, we’re examining a long call vertical.
Consider that as expiration approaches, the risk profile with extrinsic value merges with the risk profile at expiration. Note where the two risk profiles intersect, approximately halfway between the two strike prices. Between now and expiration, the risk profile to the left of this intersection will move in a different direction than the area to the right of this intersection. Because of this, we’ll need to look at the greeks for this strategy from both sides of this intersection.
So let’s analyze the greeks for a long call vertical. We’ll begin with delta. Delta’s easy for this trade because it does not change regardless of the price of the underlying. A long call vertical is always delta-positive. This means that as the underlying increases in value, the spread’s potential profit and loss will increase.
Gamma, however, is where things get interesting. Let’s begin on the left side of the risk profile—below where the two risk profile lines intersect. Below this intersection, the trade is gamma-positive. This means that delta increases as the trade moves toward the intersection of the risk profiles. The higher the delta, the more impact a change in the underlying price will have on the trade.
However, on the other side of the risk profile, the trade is gamma-negative. Once the underlying stock moves past the intersection of the two risk profiles, gamma switches direction and starts reducing delta. The result is that with each dollar the underlying increases, the impact of delta will be less. Gamma is decelerating delta toward the trade’s max gain.
Now, let’s look at theta. To the left of the intersection, the trade is theta-negative. As each day passes, the spread loses value. For most prices on this half, theta is pushing the risk profile toward max loss. This emphasizes the need for having the price of the underlying above the intersection of the risk profiles—max gain is more achievable above this level.
To the right of the intersection, things are topsy-turvy—the trade is theta-positive. Here, theta pushes the potential profit toward max gain. On this side, your potential profits increase each day you’re in the trade.
Lastly, let’s turn to vega. On the left side of the risk profile, the trade is vega-positive. When implied volatility increases, the risk profile stretches out, becoming less steep. On this side of the risk profile intersection, rising implied volatility helps your potential profit and loss. Your trade’s value increases, and the underlying would need to fall further to approach max loss.
On the other side, the trade is vega-negative. Here, rising implied volatility works against you, lowering your potential profits and making max gain more difficult to achieve from increases in the underlying price.
Now that we’ve covered all the greeks for a long call vertical, let’s now turn to a long put vertical. With this spread, delta is negative. This spread is a bearish strategy and gains value when the price of the underlying decreases.
The rest of the greeks essentially work the same way. However, just as the risk profile of a long put vertical is a mirror image of a long call vertical, the greeks are similarly flipped.
