What are option Greeks?
Options traders often use the “Greeks” to measure the sensitivity of an option’s price to its underlying determining parameters, such as volatility or the price of the underlying asset. With that information, you can make more informed decisions about which options to trade, and when to trade them.
Delta, Gamma, Vega, Theta, and Rho are the key option Greeks. The details are as follows:
Delta gauges the rate of change between the option's price and a $1 change in the underlying asset's price. It is usually calculated as a decimal number from -1 to 1. For call options, Delta has a range from 0 to 1 while the delta of put options has a range from -1 to 0. For example, assume an investor is buying a call option with a delta of 0.50, so if the underlying stock increases by $1, the option's price would theoretically increase by 50 cents.
An option’s gamma measures the rate of change in delta relative to the changes in the price of the underlying asset over time. If the price of the underlying asset increases by $1, the option’s delta will change by the gamma amount. Gamma is useful for determining the stability of the delta, which can be used to determine the likelihood of an option reaching the strike price at expiration. Gamma will be a number anywhere from 0 to 1.
Theta measures the sensitivity of the option price relative to the option’s time to maturity. It represents when the option’s time to maturity decreases by one day, the option’s price will change by the theta amount. For example, with AAPL trading at $150, the Nov 150 call has a price of $9 and a Theta of -0.08. That means that if one day passes and all other factors remain the same, the price of the Nov 150 call should drop to $8.92.
Vega measures the sensitivity of an option price relative to the volatility of the underlying asset. If the volatility of the underlying assets increases by 1%, the option price will change by the vega amount. While delta measures actual price changes, vega is focused on changes in expectations for future volatility, which tells us approximately how much an option price will increase or decrease given an increase or decrease in the level of implied volatility.
Rho measures the sensitivity of the option or options portfolio relative to interest rates. For example, if an option or options portfolio has a rho of 1, then for every 1 percentage-point increase in interest rates, the value of the option (or portfolio) increases by 1%. The rho is considered the least significant among other option Greeks because option prices are generally less sensitive to interest rate changes than to changes in other parameters.