Options Trading Lesson 4: A Basic Guide to the Greeks

Since the Greeks are well, Greek to anyone reading this, I'm only going to introduce them at a basic level in this lesson. I can remember not really grasping them at first, but after some trading experience, and more in depth study they became some very useful tools for me. So without further ado, let us begin!

The names, and definitions are as follows:

• Delta: Measures the rate of change of the option value in relation to the value of the underlying asset. So in other words, it allows us to track how much the price of our option should change if the underlying asset were to go up or down in value. For example, if we own an option with a delta of 0.5, and the underlying stock goes up by $10. Then our option price should go up by $5. Keep in mind that Delta, as well as all of the Greeks are a moving target, and will be constantly changing in relation to the movement of the underlying asset.
• Gamma: Measures the rate of change of Delta in relationship with the underlying asset. So, as mentioned previously; the Greeks are constantly adjusting with the underlying asset. Gamma simply helps you see how much Delta should change in accordance with the movement of the underlying asset.
• Theta: Measures the sensitivity of the option to the value of time (Extrinsic Value). It portrays the expected amount of value decay you can expect per day with the option you bought or sold. It's what option traders refer to when they talk about "Time Decay." Time decay is an option sellers best friend, and an options buyers worst enemy.
• Vega: Measures the options sensitivity to volatility changes in the underlying asset. It helps you gauge how much value the option stands to gain or lose given a fluctuation in the current volatility environment. As you'll see, or may even know now, there are certain trades that are better suited for low volatility environments (Calendar Trades...), and other trades that are better suited for high volatility environments (Strangles, Iron Condors...).
• Rho: Measures the options sensitivity to the interest rate of the underlying. This is the Greek that is often left out, and unused as it does not have as huge an impact on the underlying as the other Greeks do.

Here is an example of what the Greeks look like in the option chain:

Well, that sums up the basics of the Greeks. Hopefully you have gained something from this lesson. There is a lot of information to learn about the Greeks, and more in depth lessons will eventually be added. In the mean time, post any comments or questions, and feel free to browse through the Lesson Archive, and the Trade Review Archive.  Cya Later :)

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