Greeks

Various factors that influence option price are termed as “Greeks”. The Greeks helps a trader to understand how much an option is exposed to implied volatility, time-value decay and changes in the underlying price of the asset, usually stocks, shares and other market listed securities. Investors can estimate the level of risk in trading options by using these risk measures. There are mainly four types of Greeks that are usually used to measure risk:

• Delta
• Vega
• Theta
• Gamma

Delta

Delta is one of the most commonly used Greeks that calculate the change in the theoretical value of an option against the change in value of the underlying stock. If the Delta is positive, then it means the option position will gain value when the price of the stock moves up while on the other hand value of the option will go down if the stock price drops. Negative Delta is rather adversely related with the stock price. According to this, the option position will rise (theoretically) when the stock price falls and vice versa.

Gamma

The Greek sign Gamma estimates the change in Delta of an option against the $1 price movement of the stock. Gamma helps an investor to understand whether the Delta is stable or not. If the Gamma is big, then it means even a minor change in the stock price may lead towards a dramatic change in Delta. Both long calls and long puts will always have positive Gamma while on the other hand short calls and short puts usually come up with negative Gamma.

Theta

Time decay or Theta is an estimation of how much value of an option (theoretically) changes when a day passes and the price of the stock and volatility remains unchanged. In other words, Theta estimates how fast an option will lose its value as it approaches towards expiration. Theta allows a trader to estimate the change in the extrinsic value of an option by the always-constant passage of time. It is important to keep in mind that theta for a call and put at the same strike price and expiration month are different. Long calls as well as long puts always come with negative Theta while on the other hand short calls and short puts always have positive Theta.

Vega

Vega is the only Greek in the group that is not represented through an original Greek letter. Vega estimates that changes in the theatrical value of an option against 1% change in volatility. Long calls along with log puts always come with positive Vega and short calls as well as short puts always have negative Vega.