If you are new to Options Greeks or stock options trading, the very concepts of these methods can intimidate you. However, once you get used to them, everything that is related to these terms will appear to come naturally to you. The encouraging part is that you can end up making a lot of money when you buy a stock option contract carefully and are vigilant about the changes that may affect its performance or value in the future.
It is essential that you understand the different elements of Options Greeks before you plan to start using them. You must notice that these elements have different functions, yet are beneficial in their own way. These elements are what define the term “Greeks”, and are represented by different symbols.
- Delta: Delta is what measures the price sensitivity of an option. Its value ranges between -1 and 1. Call Options share a positive relationship with the value of the underlying assets. So if the delta value increases by 0.5 for a stock value of $1, the call option value will increase by $0.50. Put option works the other way and share a negative relationship with the value of the underlying assets. So when the stock value of $1 experiences a delta value decrease of 0.6, the put option value increases by $0.60.
- Gamma: Gamma represents the measure of rate of change of Delta value. Thus, just like Delta, the value of Gamma also keeps of changing even with a minute change in the value of underlying assets. Options that are very deep into the money would have gamma values almost next to negligible. On the other hand, when the option nears its strike price, the gamma value surges to its peak value.
- Theta: As one of the important Options Greeks, Theta represents a measurement of the rate at which the option’s time value decays. In other words, Theta is used to measure the rate at which the options value comes down as it approaches the options expiration date. It must be noted here that theta is higher for short term options, while for long term options its value is almost zero. Thus, whenever the expiration time nears, Theta value shoots up significantly.
Vega: Vega is a specific type of Options Greeks that measures the impact of any change in the underlying option price’s volatility. Under this, options tend to have a higher value when the volatility is at a high value. Thus, the rise or drop in the volatility value also increases or reduces the option price respectively.