Option GreeksSo far I have mentioned that options prices fluctuate in value. The theoretical mathematics describing these fluctuations are named after Greek letters, hence the term Option Greeks. Would you like to know how the value of an option can change relative to the underlying security? And haw fast does this change in price take place? This is the subject material of Option Greeks. Strictly speaking you can construct a safe options-selling program without knowing this, but you will run across these terms in your continued study. I’m going to provide you with a simple overview of “The Greeks” to enhance your options education. As you learn these concepts think about how to use them to become a more successful option seller. There are five Option Greeks you will learn about: Delta, Gamma, Vega, Rho, and Theta.
Delta measures the change of an option’s price relative to the change in price of the underlying security. The value of delta ranges from 0 to 100 for calls and from -100 to 0 for puts. (Puts have a negative delta value because their price falls as the underling’s price rises). Calls with Deltas that are approaching 100 (and corresponding puts with Deltas approaching -100) move in close lockstep with the underlying. Deep-in-the money options have high Delta values. Conversely, options with Delta values nearer to zero move much less relative to price moves in the underlying security. Far out-of-the money options have Deltas nearer to zero. The basic take away for option sellers wanting to generate income safely by having the options die worthless is this: favor selling options with Delta values nearer to zero. In plain English this means selling out-of-the money options whose strike prices are unlikely to be hit during the options lifespan. Gamma measures the rate of change of Delta. Gamma is highest when the Delta is near the money. Gamma is smallest when Delta is far out-of-the money or deep in-the-money. For safe option sellers who favor out-of-the-money options far from current strike prices, these options will have low gammas. Theta measures the rate of decline of time premium. In other words, it measures the decay of the value of an option with the passage of time. For safe options sellers, the main message is to harness Theta by selling options with little time remaining. Vega is a measure of how option prices change with volatility. The main point is that option prices are very sensitive to volatility in the underling’s price. Sophisticated option sellers try to sell options at times of high volatility, because the option’s value is higher then, and they can collect more premium. Finally, Rho is a measure of the sensitivity of an option's price to changes in interest rates. The values for the Greeks for any listed option are easily found in many places. Remember, the values change all the time (because price and volatility change all the time). Some of the best places to find these values are with your online brokerage or at
CBOE website.
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