The Option Greeks: What you should know
Options Greeks: What you should know
The Greeks
Delta – An option’s delta is the rate of change of the price of the option with respect to its underlying security’s price. The delta of an option ranges in value from 0.0 – 1.00 for calls (0 to -1.00 for puts) and reflects the increase or decrease in the price of the option in response to a 1-point movement of the underlying asset price.
Used to measure the change in value of a contract from a $1 change. Also is used to measure the probability of an Option Contract Expiring “ITM” (In-The-Money). For Example, a Delta of 0.40 can be seen as a 40% chance to Expire ITM.
Gamma – An option’s Gamma is a measure of the rate of change of its delta. The gamma of an option is expressed as a percentage and reflects the change in the delta in response to a 1-point movement of the underlying stock price.
Measures the change in Delta from a 1$ movement in the underlying asset (stock, ETF, things like that). If the underlying moves an additional 1$ Then Delta would equal the Total of Delta + Gamma. After the First Dollar move, any additional moves in the same direction increases the value of Delta by the amount of Gamma.
For Example, XYZ 100 12/31/20 Call for $1.00 and has a delta of .50 and a gamma of .05.
The price of XYZ moves 1 dollar upwards so the new price of the contract becomes 1.50.
The Price of XYZ moves 1 dollar upwards again so now we add both Delta AND Gamma to find the new value. (1.00 + 0.50 = 1.50) 1.50 + (.50 + .05) = 2.05 Value now.
Theta – An option’s theta is a measurement of the option’s time decay. The theta measures the rate at which the options lose their value, specifically the time value, as the expiration date draws nearer. Generally expressed as a negative number, the theta of an option reflects the amount by which the option’s value will decrease every day.
For example, if your option contract is currently valued at 1.00 and you have a theta of -0.10, you will lose 0.10 worth of value off your contract every day. This number will change drastically throughout the day as will the other Greeks.
Vega – An option’s Vega is a measure of the impact of changes in the underlying volatility on the option price. Specifically, the Vega of an option expresses the change in the price of the option for every 1% change in the underlying volatility.
Estimates the change in premium for each 1% change in the Implied Volatility (IV). There will be higher Vega on Contracts with more time. An increase in Vega increases the cost of the contract and vice versa.
Rho – Rho measures the change in Interest rates but is rarely used since Interest rates do not move much.
It is important to remember that these numbers associated with each Greek will likely change constantly throughout the life of the contract. There are other variables to consider like Implied Volatility, Volume, Open Interest, Days to Expiration (dte), the P/c Ratio, upcoming catalysts, and much more.
This is a very basic run down of the Greeks. You will not learn everything about options overnight. Enjoy!
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The Greeks
Delta – An option’s delta is the rate of change of the price of the option with respect to its underlying security’s price. The delta of an option ranges in value from 0.0 – 1.00 for calls (0 to -1.00 for puts) and reflects the increase or decrease in the price of the option in response to a 1-point movement of the underlying asset price.
Used to measure the change in value of a contract from a $1 change. Also is used to measure the probability of an Option Contract Expiring “ITM” (In-The-Money). For Example, a Delta of 0.40 can be seen as a 40% chance to Expire ITM.
Gamma – An option’s Gamma is a measure of the rate of change of its delta. The gamma of an option is expressed as a percentage and reflects the change in the delta in response to a 1-point movement of the underlying stock price.
Measures the change in Delta from a 1$ movement in the underlying asset (stock, ETF, things like that). If the underlying moves an additional 1$ Then Delta would equal the Total of Delta + Gamma. After the First Dollar move, any additional moves in the same direction increases the value of Delta by the amount of Gamma.
For Example, XYZ 100 12/31/20 Call for $1.00 and has a delta of .50 and a gamma of .05.
The price of XYZ moves 1 dollar upwards so the new price of the contract becomes 1.50.
The Price of XYZ moves 1 dollar upwards again so now we add both Delta AND Gamma to find the new value. (1.00 + 0.50 = 1.50) 1.50 + (.50 + .05) = 2.05 Value now.
Theta – An option’s theta is a measurement of the option’s time decay. The theta measures the rate at which the options lose their value, specifically the time value, as the expiration date draws nearer. Generally expressed as a negative number, the theta of an option reflects the amount by which the option’s value will decrease every day.
For example, if your option contract is currently valued at 1.00 and you have a theta of -0.10, you will lose 0.10 worth of value off your contract every day. This number will change drastically throughout the day as will the other Greeks.
Vega – An option’s Vega is a measure of the impact of changes in the underlying volatility on the option price. Specifically, the Vega of an option expresses the change in the price of the option for every 1% change in the underlying volatility.
Estimates the change in premium for each 1% change in the Implied Volatility (IV). There will be higher Vega on Contracts with more time. An increase in Vega increases the cost of the contract and vice versa.
Rho – Rho measures the change in Interest rates but is rarely used since Interest rates do not move much.
It is important to remember that these numbers associated with each Greek will likely change constantly throughout the life of the contract. There are other variables to consider like Implied Volatility, Volume, Open Interest, Days to Expiration (dte), the P/c Ratio, upcoming catalysts, and much more.
This is a very basic run down of the Greeks. You will not learn everything about options overnight. Enjoy!
$Tesla (TSLA.US)$ $Apple (AAPL.US)$ $XpresSpa (XSPA.US)$ $Ideanomics (IDEX.US)$ $SPDR S&P 500 ETF (SPY.US)$ $SNDL Inc (SNDL.US)$ $Alibaba (BABA.US)$ $American Airlines (AAL.US)$ $Jaguar Health (JAGX.US)$ $MARA Holdings (MARA.US)$ $Riot Platforms (RIOT.US)$ $Fisker (FSR.US)$ $Nxt-ID (NXTD.US)$
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OFFICER TRUTH OP : @Treydon Guithoughts?
knowledgeispowerful : everything you said is exactly correct cuz I said it better myself most people don't know how to even read the Greeks and how important it is for the trait that you take it will tell you just by looking at it whether that is a profitable trade or whether it's not rule of thumb is you always want your Delta to be at least double your theta value without getting too complicated with it but once you understand how important these values are you understand why certain traits that you've taken have failed or succeeded knowing the growth rate of an option versus the decay value is everything when determining which trade to take
OFFICER TRUTH OP knowledgeispowerful : Completely correct! Solid!
treydongui OFFICER TRUTH OP : well after reading it two or three times I get each concept but I definitely need to find a way to practice using it you know what I mean. that way I can focus on each specific Greek and understand it individually and then kind of put them all together. or is there a better way to practice this to shorten the learning curve?
treydongui : I had to get some sleep sorry so late
treydongui : I was already somewhat familiar with the gamma and the delta. I was waiting to understand the Greeks before I started using options so I'm glad you posted this thank you
treydongui knowledgeispowerful : hey fella. how you been? PS you're intro is popping dude. I've been waiting to tell you that. is that original or did I hear that somewhere before like 10 years ago or something
knowledgeispowerful treydongui : just remember that if you're going to take a short-term trade you want to go a little bit further out in order to offset the decay value anything under 30 days is going to decay rapidly on a downtrend cuz you got the time decay every day impacts your trade as well as the decay value of downtrend roll a dumb I usually don't go any less than 30 to 45 days before expiration
treydongui : all in all this is definitely useful info many of us here need. I'm going to focus a good bit of time and to understanding this completely. thanks for taking the time to post buddy. you're awesome
treydongui knowledgeispowerful : that's good advice I take it the rate of decay increases as you get closer. as compared to when you say above 30 days it's not as drastic?
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