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Greeks

Greeks are parameters commonly used by options traders and portfolio managers in order to assess and understand the sensitivity of an options position to changes in the underlying price movements. Greeks are essentially the derivatives of the options pricing model – they are symbols assigned to the various risk characteristics that an options position entails.

The most common Greeks in the world of options investment represent the first four partial derivatives of the options pricing model, these are delta, gamma, theta and vega. Each of these individual Greeks expresses a different characteristic of the options position.

Delta measures how much an option price is likely to change with a corresponding change in the price of the underlying asset. Specifically, Delta measures the amount the option price will move when the underlying asset price moves by $1.

Gamma measures the rate at which Delta changes in relation to the underlying asset price. In other words, it measures the rate of change of Delta with one dollar move in the underlying asset. It is therefore important to monitor Gamma when measuring changes in Delta in order to properly understand how the option position will move.

Theta measures the effect of the passage of time on an option’s price. Specifically, it captures the time decay of the option, or the rate at which the option loses value each day. Theta is important for determining the rate of return for certain option strategies.

Vega measures the volatility effect of an option’s price. Specifically, it captures the degree to which an option price will move based on changes in the implied volatility of the underlying asset. Vega allows traders to measure the degree of risk they are taking on with a given option position.

In the world of options investment, Greeks are essential tools to properly evaluate, understand and hedge various options positions. They can help portfolio managers and options traders to properly assess the risk and reward of their investments, and also provide invaluable insight into the expected returns of certain options strategies. As such, Greeks are invaluable resources for making better trading decisions.

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