Why use the greek options?

Many traders have heard something about the importance of the Greek options, but most don’t know what they are or how they can help you. What benefit do they give you? Well,they help you inderstand how options move.

The biggest conception about options is that the price of an option has a 1 to 1 relationship with the price of a stock. If the stock goes up $1 the option also should go up $1. After all, the price of the option is based upon the stock.

While this seems to make sense it is simply not true. There are many factors that come into the price of an option that you want to understand in order to make targets for your option. These factors are given to us through the Greeks.

The most widely used Greeks are.

1. Delta which measures the amount an option should move for every 1 point move in the price of the stock. If the delta is $.6 then the option will move approximately $.6 for every $1 move in the stock.

2. Gamma which measures the change in delta. Even though delta measures how much an option will move for every $1 move in the stock the delta also changes on a regular bases. That could make measuring an option target more difficult. The gamma takes care of this. The gamma tells you how much the delta will move for every $1 move in the stock. If the gamma is $.1 then the delta will move up $.1 for every $1 move in the stock.

3. Theta which is a very important Greek. It measures the effect of time decay on an option. Because options have an expiration date they are depreciating assets. The theta measures how much value an option will lose for every day that passes. If the theta is $.06 then the option will lose $.06 of time value for every 1 day that passes.

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