The option Greeks
To make it as an option buyer you must have at least some grasp on the Greeks. Many of the option trades who do not last very long do not understand these. These are not complicated concepts if you look at each individual Greek separately. 1. The Delta is used to measure the sensitivity of an option when compared to the stock. In other words it tells you how much your option will move for every one point move in the stock. If you have a delta of 50 that means your option will move $.5 for every move in the security. Because the Delta is measured for every $1 increase in price calls will have a positive delta and puts will have a negative delta. 2. The Gamma measures the rate of change in the delta. For instance if the Gamma is 1.1 then for every favorable $1 move in the stock the Delta will move up 1.1 vice versa. So if the delta is 50 and the stock moves up $1 the delta should now be 51.1. 3. The Theta measures the affect of time decay on an option. It measures how much value an option will lose for every 1 day that the option gets closer to expiration. If you have a theta of 3 then for every day that passes the option loses $.03. Theta is much bigger for shorter time periods. An option 20 days away from expiration will have a theta many times the size of a theta on an option 3 months out. 4. The Vega measures how much an option will change for every 1 percentage point change in implied volatility. If volatility goes up so will the price of the option. If it goes down the option will be negatively affected. 5. The Rho measures how much the option will move for every 1% change in the interest rate. This stock Greek is not used as much. Interest rates are relatively stable s the chances of it affecting your option is low. The option Greeks are powerful tools but one should remember that the numbers you get with these options are sticky theoretical and should not be taken as exact.
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