Thursday, January 7, 2010

Option Greeks Part 1 - Definitions

Dream asked me to blog about the option greeks so I will give it a go based on what I have learned so far...


Delta: The measure of the change of an option’s value with respect to a 1 point move in
its underlying (stock, future, commodity, etc.). Calls have a positive delta while puts have
a negative delta.


Gamma: The measure of the change of an option’s delta with respect to a 1 point move
in its underlying (stock, future, commodity, etc.). After the first 1 point move in an
underlying, the probability of the option being ITM at expiration has changed, and
therefore so has its delta. Gamma measures that change in delta.


Vega: The measure of the change of an option’s price with respect to a 1-point move in
its implied volatility.


Theta: The amount of change of an option’s price with respect to a 1-day change in time.


Rho: The amount of change of an option’s price with respect to a 1-point change in
interest rates.


- randomjaywalking

3 comments:

Roland said...

Nice little start on this.

Greeks are the foremost indicators to whetehr your option picks are successful or not!

dream said...

Jay, can you help us understand the practical aspect of option greeks? How do you apply them in option trading?

Roland made a good point that option greeks are the foremost indicators of the success of your option picks. Can you give some examples on that please?

Thank you.

Patty said...

Very useful and informative. More more! Thanks Jay!