<$ T H R E A D $#>

Option Greeks aka Risk Sensitivities or Hedge Parameters.

This thread will cover the everyday Greeks.

Delta

Domain: Price

-> Delta has one of the biggest impacts on Options Value.

-> Delta identifies how much options premium may change for every $1 move on the underlying equity.

-> Delta can also be used as an estimation of Options likelihood of expiring In the Money. If an option has a Delta of .40, it has an ~approximate~ 40% chance of expiring In the Money.

-> Equally if Delta = .40 - The Options price will move up by $0.40 on the underlying equity’s $1 move.

Example: if you bought a Call option on stock XYZ for $1.00 when the stock was at $100.

When it hits $101 your options price will now be worth $1.40 ($1 + $.40)

-> After the first $1 move on the underlying, Gamma must be added to Delta find the new Delta.

Example: If Gamma = .05 and Delta = 0.40 - The next $1 move up from $101 to $102 brings our price from the previous example to $1.85
($1.40 + $0.40 + $0.05 =$1.85)

Delta now = .45.

This will keep being done as the New Delta must be added to Gamma for each $1 move so one final time for anyone who may be having some difficulty.

The stock now goes to $103.
Gamma = .05 and previous Delta was .45.

The Options price rises to $2.35 ($1.85 + 0.45 + .05).

Gamma

Domain: Price (also pairs with Delta)

-> Gamma identifies Delta’s expected* rate of change.

-> When you think of Gamma, think of it as Delta’s “Right Hand Man”

-> To see how it pairs with Delta, see this tweet:

https://twitter.com/chartshark28/status/1251251552704217093?s=21 https://twitter.com/ChartShark13/status/1251251552704217093

Theta (Time Decay)

Domain: Time

-> Theta estimates how much value is lost on an option at the end of each day.

-> Time decay works against buyers and for sellers.

Example: if Theta is -.02, your $1.00 option will lose .02 at the end of the day closing at $.98.

Vega

Domain: Volatility (Implied Volatility)

-> Vega estimates how much the premium may change with each 1 point move in Implied Volatility.

-> Depending on your strategy, a spike in volatility can be favorable, damaging or have little to no impact at all.

-> The further out an options expiration date is, the higher its Vega will be. Options with longer term expirations react more to changes in volatility.

Example: If a $1.00 option has a Vega of .03 and Implied Volatility (IV) decreases by 1, the option will lose .03 and be $.97.

-> Factors that could cause a spike in Implied Volatility include but are not limited too:

-Earnings
-GeoPolitical Announcements
-Lawsuits
-Changes to Material Events
-Others

Rho

Domain: Interest Rates

-> Rho identifies how much options premium will move if Interest Rates change.

-> Because Interest Rates move slowly and are infrequent on a longer time frame, they have a smaller impact on Options Trading.

Mini Cheat Sheet for understanding what the terms relate too in terms of risk (whatever the second word is - add risk to it):

Delta to Direction

Gamma to Gas Pedal Acceleration

Theta to Time

Vega to Volatility

Rho to Rates (Interest Rates)