How to Understand Option Greeks?

When it comes to trading in Options, you must have come across some Greek alphabets being used in the terminology when explaining the potential risks connected with the different positions of options in the price index. These alphabets used in the terminology are “the options Greeks”, and they are known as Delta, Gamma, Theta and Vega. Let’s look at each one of them separately and see how these ‘Greeks’ can help in better assessment of risk when it comes to investing in options and trading them for profit.

The option Greek ‘Delta’:

Delta measures the impact on option prices caused by the fluctuation of basic stock prices. And it also happens to be the most important of all the Greeks explained here. Since Delta actually relates to the sensitivity of Option prices, it is most of the times written in percentage or decimal number. Its value generally hovers between 0 and 1 for Call options and between minus 1 and 0 for Put options. For Put options, option price and basic price actually move in opposite directions, so the Put option Delta always has a negative value, while the Call option Delta always on the positive side.

The option Greek ‘Gamma’:

Option Greek Gamma on the other hand measures the impact on option Delta in the wake of fluctuations in the underlying prices. Trades really need to keep a track of this option because practically it is impossible for Delta to remain constant with the changes in the underlying prices of the stock. Keeping a track of Gamma actually helps traders in estimating their risk factors while they are going for trading of Options.

The option Greek ‘Theta’:

Theta is used to calculate the variation in the value of the Option with change in time and maturity of the option. If all other parameters related to the Option remain unchanged, the option value is bound to depreciate constantly with each passing day since the time value of the Option also goes down and down as it finally reaches its expiration date.

The option Greek ‘Vega’:

Vega is used to calculate the sensitivity of the Option price with respect to variations in the underlying volatility. It stands for the fluctuation in the price of an Option to a 1 percent fluctuation in the underlying volatility. A constant about Vega is that its value invariably goes down as the Option inches closer to its date of expiry.