InvestorQ : What exactly do we mean by Option Greeks and how are they useful for investors and traders?
Dhwani Mehta made post

What exactly do we mean by Option Greeks and how are they useful for investors and traders?

Answer
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Arya Nanda answered.
1 year ago


Option Greeks measure sensitivity of the option price to various parameters that impact the value of an option. Such sensitivity can either be on the positive side or on the negative side. Broadly there are five Option Greeks that are popularly used and their explanations are as under:

Delta: This is perhaps the most popular among the various Greeks that are used by options traders. Delta measures the amount or the extent to which the theoretical price of the option will change if the market moves up / down by 1 point. Delta is calculated separately for call and put options of the same strike.

Gamma: This is a second level derivative and is also among the Greeks that are used by options traders quite extensively. Gamma measures the amount or the extent to which the DELTA of the option will change if the market moves up / down by 1 point. Gamma is also calculated separately for call and put options of the same strike.

Theta: This is one of the most popular Greeks for the option sellers, those whose profits are limited to premiums but losses are unlimited. Theta is also called a measure of time decay or simply it is referred to as time decay. Theta measures the amount that the option price will change with each passing day. Theta only refers to the decay of the time value and that is why Theta of call and options are negative.

Vega: When you trade in options, you don’t just trade for price movement but also for volatility movement. That is because even assuming that the stock price remains static but if the volatility in the market goes up then the value of the call and put options go up. This sensitivity of option price to the change in volatility is measured by Vega. Therefore, Vega is the amount that the theoretical price will change if the volatility of the asset moves up/down by 1 percentage point.

Rho: This Greek is not as frequently used as other popular Greeks like Delta, Theta and Vega. Rho represents the amount that the theoretical price will change if interest rates move up/down by 1 percentage point.