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Option Greeks aka Risk Sensitivities or Hedge Parameters.
This thread will cover the everyday Greeks.
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.
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)
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.
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).
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/chartshar... https://twitter.com/ChartShark13/status/1251251552704217093">https://twitter.com/ChartShar...
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/chartshar... https://twitter.com/ChartShark13/status/1251251552704217093">https://twitter.com/ChartShar...
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.
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.
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.
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
-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.
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)
Delta to Direction
Gamma to Gas Pedal Acceleration
Theta to Time
Vega to Volatility
Rho to Rates (Interest Rates)
