Option Greeks
Delta, Gamma, Vega, and Theta.
What are these beasts and what do they have to do with option trading?
These terms refer to calculations made using an option pricing model (Black and Scholes for example) and tell an option trader how the price of an option will change (theoretically at least) given certain market variables.
You don't really need to worry too much about the mathematics behind these calculations. The main thing is that you understand the concepts - you can use the option pricing spreadsheet on this site for free, which calculates these theoretical values.
Option Greeks will help you estimate your risk when trading options. Understanding the Greeks will enable you to answer certain questions about an option contract's expected price behaviour, such as;
- How will the value of the option change as the stock price changes? (Option Delta)
- What is the probability of the option expiring in-the-money/out-of-the-money? (Option Delta)
- How fast will the option lose value as it approaches expiration? (Option Theta)
- What effect will a change in the stock's volatility have on the option value? (Option Vega)
There is fair amount of theory behind option pricing and a discussion of the formulas used is beyond the scope of this website. However, if you would like to know more about the mathematical concepts of option pricing, I can highly recommend Option Volatility and Pricing by Sheldon Natenberg. If you haven't already heard of this book, it is considered The Bible of option trading and you can get it at Amazon of course.
Comments (6)
Peter
August 8th, 2010 at 6:51am
Thanks Ritu!
Ritu
August 8th, 2010 at 5:40am
Your's is the most exhaustive yet simple website in terms of information provided in layman terms.....
Trader Travis
January 22nd, 2010 at 11:49pm
Your site is very nice and you have done an excellent job of explaining the greeks without confusing folks. New traders need to read your way of explaining it before they are guided down the wrong path.
Trader Travis
http://www.learn-stock-options-trading.com/
Mani Ghedia
June 23rd, 2009 at 11:25pm
I agree the greeks are super important. Option Volatility and Pricing is a fantastic book - worth reading. Excellent website nonetheless! Cheers
Admin
February 8th, 2009 at 3:38am
Thanks for the positive feedback and great suggestion! I will look to add greek explanations for all of the strategies soon.
pchaser87
February 7th, 2009 at 11:08am
This is an excellent site, but I think you could expand a bit on the greeks. They are very important in options trading and you could easily go into more deatail (with practical examples?) without making it sound very complicated. Great work other than that!
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