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? (Delta)
- What is the probability of the option expiring in-the-money/out-of-the-money? (Delta)
- How fast will the option lose value as it approaches expiration? (Theta)
- What effect will a change in the stock's volatility have on the option value? (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.