New options traders ask, “what are option Greeks?” Option Greeks are different factors affecting options contract prices. Option Greeks include:
- Delta (Δ) tells us how much an option price will move for every $1 gain in stock
- Gamma (Γ) tells us how much the delta can increase every time the stock moves
- Theta (Θ) is time decay. It will tell us how much our option price loses every day
- Vega tells us how much an option price will change due to moves in volatility
- Rho (Ρ) tells us how much options will change with interest rates
Let’s start with delta.
Delta tells us how much an option price will increase based on a $1 change in the stock.
For example, as of July 26, Apple’s (AAPL) August 20, 2021 148 call option carries a delta of 0.53. That tells us that for every $1 the underlying AAPL stocks moves higher, our option price will appreciate by $0.53.
Alternatively, let’s say we wanted to buy the AAPL August 20, 2021 148 put option, believing the stock would drop below the 148 strike price. At the moment, those puts trade with a delta of -0.4534. That tells us that for every $1 the AAPL stock falls, our put option would move higher by just over $0.45. It may sound confusing at first, but with practice, it does get easier.
Next up is gamma, which tells us the rate delta will change based on a $1 move in the stock.
Let’s look again at the AAPL August 20, 2021 148 calls. At the moment, those calls have a gamma of 0.0480. That tells us that for every $1 move higher in the AAPL stock, the delta value will increase by 0.0480. This will also increase as the Apple stock gains value.
So, let’s say the Apple stock runs from $148 to $149. Should that happen, the delta will increase by 0.0480, which is the gamma value.
Theta is an “Essential Greek.”
Theta tells us how much an option price will lose in value per day, leading up to expiration. The AAPL August 20, 2021 148 calls, for example, have a current theta of -0.0641. That tells us that for every day we hold the option—at the moment—our call will lose slightly more than $0.06 per day. Theta will also increase as we near the expiration date of August 20, 2021 for this AAPL call.
Vega and Rho are important, too.
The key Greeks to pay attention to are Delta, Gamma, and Theta. Vega tells us how much an option will move up or down based on changes in volatility. Rho will tell us how much an option will move up or down based on changes in interest rates.
— Ian Cooper
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Source: Investors Alley