Master the Art of Options Trading with 6 Option Greeks

It’s time you became a Greek geek! 

• Options are financial derivatives typically used for speculative day trading, portfolio hedging and potential short-term profits - they are often highly leveraged and are not suitable for long-term investments.
• Options give you a choice to buy or sell the underlying asset (e.g. a share) at a stated price, called the strike price, before or on a predetermined date.
• An options contract gives the buyer the right to either buy or sell the underlying asset at the strike price, but not both. Which right is given is dependent on the type of option in the contract.

Option Greeks

When you purchase options online, which we will discuss at the end of this article, you will be exposed to a few extra data points. These data points are known as the Option Greeks, and they provide insights into how the price of a particular option typically moves when factors change. The main ones appear in the infographic above:

Option Delta: this ratio represents the increase in the option’s price when the price of the underlying asset increases by $1. It measures the sensitivity of the option’s price to the market price movement. This ranges from 0 to 1 for Call Options and 0 to -1 for Put Options. This number is not static, and changes (mainly) based on the option's strike price relative to the share price and is itself tradable.

Option Gamma: this represents the increase in the option’s delta when the price of the underlying asset increases by $1. It measures the rate of change of the sensitivity of the option’s price to the market price movement.

Option Theta: also known as "time decay" and represents the decrease in the option’s price when the time to expiration decreases. Put another way, theta is the sensitivity of an option's price vs time to expiration.

Option Vega: this represents the increase in the option’s price when the underlying asset's price volatility increases. This number will typically be positive as greater price fluctuations increase the likelihood of entering or exiting in-the-money positions.

(Volatility is measured by yet another Greek letter, beta, a number describing an asset's volatility relative to the benchmark asset being compared to.)

Option Rho: represents the increase in the option’s price when interest rates increase. Rho is positive for call options and negative for put options.

Option Psi: represents the increase in the option’s price when the underlying asset is a share and the dividend yield changes.

These values constantly change as they consider the current underlying asset price concerning the strike price. Typically, the higher the magnitude of these values, the more volatile the option's price. Higher numbers aren’t necessarily a bad thing, but it does give you a glimpse into how much fluctuation you should expect from this particular share. Should you ever encounter numbers that are confounding, reach out to an expert.

OPTION GREEKS. COMPLETED. ✅

Sources:

1. https://www.ig.com/sg/options-trading/what-are-options-how-do-you-trade-them
2. https://www.investopedia.com/terms/o/option.asp
3. Header photo by Unsplash