Understanding Option Greeks

The Key to Smarter Options Trading

If you’ve ever dipped your toes into options trading, you might have heard about “the Greeks.” But what are these mysterious Greeks, and why do they matter so much? Simply put, Option Greeks are a set of metrics that help traders understand how different factors affect the price of an option. Think of them as your dashboard indicators for options trading, revealing how price changes, time, volatility, and other factors influence your option’s value.

The Five Main Greeks

• Delta (Δ)
  Delta tells you how much an option’s price is expected to move if the underlying stock moves by $1. For calls, delta ranges from 0 to 1 (positive), and for puts, it ranges from 0 to -1 (negative).
  Example: If you own a call option with a delta of 0.50, and the stock price goes up by $1, your option price should rise by about $0.50. Delta also approximates the probability an option will expire in-the-money. A delta of 0.50 means about a 50% chance.

• Gamma (Γ)
  Gamma measures the rate of change of delta as the stock price moves — in other words, how quickly delta changes as the underlying price changes.
  Example: If your option has a gamma of 0.10, and the stock price rises $1, your delta will increase by 0.10. This helps traders understand how their option’s sensitivity will accelerate or decelerate with price moves.

• Theta (Θ)
  Theta represents time decay — how much value your option loses each day as it approaches expiration. Because options are wasting assets, time works against you if you’re a buyer.
  Example: If an option has a theta of -0.05, it means the option’s price will lose about $0.05 in value every day, all else being equal.