The option Greeks are important things to know if you wish to trade in options. Options are priced based on interest, time and risk. All of these factors serve to determine what price a trader is willing to pay for the right to purchase a stock option. If you think about it, it actually makes sense. If there is a greater risk associated with the stock, then you would expect to have to pay more for the option. If there is a long or short time before the expiration date, then you would have different pricing options. A long time before expiration allows the stock price to make significant changes either up or down.

There are five different Greek symbols representing the different option pricing factors. These Greek symbols are the Delta which is a representation of the option’s sensitivity to changes in the stock price. The Gamma is a measure of the delta’s sensitivity to changes in the price of the stock. Vega measures the volatility of the stock. Theta measures the sensitivity to time decay. The last Greek is Rho which measures the sensitivity to changes in the risk free interest rates.

The option Greeks allow option traders to calculate potential changes in the option’s pricing. This knowledge allows them to hedge their portfolio or to construct positions with specific strategies. Having a knowledge of how these Greeks work will allow the trader to make projections of what direction the option’s pricing will take. They can then make a better determination to go long or short in their trading strategy.

The option Greeks also allow the trader to be able to remove specific risk factors from their portfolio. They are also a measurement of how much risk the portfolio is exposed to, and where that risk lies. Having a proper understanding of the Greeks is essential to achieving success with your option trading.

The Delta of a call will range from 0 to 1.00 and the delta of a put will range from -0 to -1.00. A positive delta indicates that the value of the option will rise if the stock price rises. A negative delta indicates that the value of the option will fall if the price of the stock rises and rise if the price falls. The closer an option’s delta is to 1.00 or -1.00, the more the option price will respond with changes in the stock price.

Gamma is actually an estimate of how stable your delta is. A large gamma means that the delta can start to change dramatically for even a small movement in the stock price. A graph of the gamma will look like a hill with the top being close to ATM (at the money) and going lower as the options are ITM (in the money) or OTM (out of the money).

Theta is an estimate of how much the theoretical value of the option will decrease as each day passes. This is if there is no movement in the stock price or volatility. Theta measures how much the value of the option reduces as time passes. Theta is also highest at ATM and lowest for OTM and ITM. You can think of theta as the power to have the price of the option move if the stock prices moves big. However, the longer the stock price does not move big, the more theta will hurt your position.

Each of the Greeks depend on the other Greeks remaining stable and unchanged. If there is also movement in the other Greeks, then there an multiplied effect on the option price. Studying more about the Greeks and how they impact the stock option pricing is important for the serious stock option trader.

All of the content published on this website is to be used for informational purposes only and without warranty of any kind. The materials and information in this website are not, and should not be construed as an offer to buy or sell any of the securities named in these materials. Trading of securities may not be suitable for all users of this information.