Intro to Trading: Understanding the Options Greeks

greeks options

At some point in your options trading experiences, you’re likely to read or hear about “Greeks.”

You may think that someone is referring to what type of food they want for lunch. However, in options trading it has to do with indicators on options prices. This article will help you get up to speed with options Greeks.

Be forewarned, Greeks for options trading have much to do with those dreaded calculus classes you took in high school or college.

The good news is you won’t have to calculate anything yourself. Your trading platform does all the heavy lifting.

Understanding the Greeks can help you know whether you need them at all. Some diehard options investors swear that they are imperative to use. Most of these pretenders don’t know much about their meaning, however.

If you get nothing else out of this article, learn about the Greek indicator called delta. It’s a good one to start with, and if you understand what it tells you, learning the other indicators will fall into place more easily.

The main indicators used by most options investors are delta, gamma, vega, theta, and rho.

For simplicity, rho will be disregarded. It indicates the price of an option concerning a change in interest rates. Since interest rates don’t change that much, it won’t have too much of an impact.

If interest rates start to pick up steam in time, rho could become a consideration.

The main indicators

Delta is the change in price in an option for every unit of change in the underlying stock. Often, the unit is one dollar. When a stock increases (or decreases) by one dollar, the delta lets traders know how much the option will increase (or decrease).

Thus if the delta is 0.40, then a one-dollar increase in the stock price would lead to a 0.40 increase in a call option value. For put options, it would be a decrease.

In terms of calculus, the delta is the first derivative of the pricing model. The first derivative refers to the velocity of the change. A delta close to 1.00 will increase faster than a delta of 0.40. When dealing with put options, the deltas are negative.

Delta can be used to give an estimate of the probability the option will be in-the-money at expiration. This concept is only a ballpark figure, though.

Gamma is the rate of change of delta. It is the second derivative of the pricing model (that nasty calculus stuff). Active traders may get in and out of positions quickly, and gamma can help them decide the timing of these moves. For long-term options investors this indicator won’t be as useful, if at all.

Theta is the rate of decay. Options contracts are wasting assets, meaning their values will be zero at expiration. Theta is a measure of how quickly the option’s price will lose value for each day that passes.

Theta can be a useful measure to determine whether to close out a position if the expiration date is approaching quickly. For long-term options, however, theta doesn’t have as much predictive power.

Vega is a useful measure for active options traders. It measures how much an option price will change for each one-unit change in implied volatility. Implied volatility is a complicated topic, which can and does fill volumes of textbooks. 

For this discussion, implied volatility is the difference in the price given the historical volatility.

Suppose you calculated the historical volatility using the standard deviation of a stock’s historical prices. Then, you plug that volatility calculation into an option pricing model to give you a theoretical price of the option. If the actual option price is different, the implied volatility explains the difference.

The biggest challenge associated with Greeks is they change constantly. Each increase in price leads to a recalculation of these measures. It is almost impossible to keep track of these indicators without the help of software.

Most options trading platforms provide this information to you as part of the service.

Recommended Articles

Before You Sign, Read the Pros and Cons of Timeshares

Timeshares are upscale vacation and recreational properties that are simultaneously owned by multiple investors. However, there is a catch. Each owner is contractually obligated to only visit and inhabit the

6 Fast-Food Facts That Will Make You Put Down That Burger

Americans are more overweight than ever before. Sedentary lifestyles and poor diet is to blame. The convenience of fast food is also a factor. Morbid obesity increases the potential for

7 Common Impulse Purchases People Regret the Most

The bane of consumerism is that people voluntarily buy things that they don’t need or want for its own sake. By some estimates nearly 80% of American consumers buy some

10 Detoxifying, Filling Foods to Help You Slim Down Without Deprivation

Fad diets are a trend that may never die, as much as most of us want them to. It’s high time we took the focus off skinny and turned to

6 Ways to Get Perfectly Legit Free Government Cash

No such thing as a free lunch. Well, as a rule, yes. But we also know that for every rule, there are exceptions. While on one hand, we must beware

A Healthier You In Just a Month With These 12 New Habits

This is a simple guide to creating a healthier you in just one month! Some of these may be difficult, but the end results of feeling great are well worth

Warren Buffett’s Partner Says the Secret Is ‘Just Avoid Being Stupid’

Avoid meetings and read constantly, advises 95-year-old Charlie Munger If you avoid doing stupid things, it's easy to make money investing, he says. Disciple of value investing godfather Benjamin Graham

Wills, Trusts, and Living Trusts: Which Do You Need?

Regardless of your overall net worth, you should have a plan in place to make sure your financial affairs are in order before passing on. There is nothing more frustrating

6 Hugely Successful Businesses Started On a Shoestring Budget

You really need money to launch a business, but not as much as you’d think. What you need to start a business is a strategic business plan and an idea

How to Grow Your Own Never-Ending Supply of Ginger Indoors

Ginger is the ideal plant to grow inside your home. Growing ginger requires little sunlight and maintenance, which makes it simple and convenient for you! Plus you get an endless supply

4 Ways to Generate Extra Income Today

Feel dissatisfied with what you are earning from your day job? Think you have the potential to earn more? Well, the first thing to remember is that there are no

Should You Buy That Hot IPO? The Data Says Proceed with Caution

IPOs are hot, until they're not. Many trade lower after going public. It's important to understand how, and if, a company can become profitable. Who benefits from an IPO? In