Option traders look to make money by taking advantage of many different market forces; stock price changes, fluctuations in volatility, time to expiration etc. However, traders can also lose money if these factors move against their positions. So, traders need to understand all of these forces and be able to put a value on them to measure the risks/rewards.
Option Greeks are a group of calculations that help estimate the effect certain inputs have on the valuation of options. The Greek values most commonly referred to are Delta, Gamma, Vega and Theta. Other lesser known Greeks are Rho, Charm, Color, Speed and Weezu. Each of these Greeks help traders asses the risk of their option positions in order to place better trades, helping traders to answer questions such as:
Here is a table that provides a brief definition of each option Greek:
|Delta||Rate of change on the option price when the underlying price moves by 1 point.|
|Gamma||Rate of change of the Delta when the underlying price moves by 1 point.|
|Theta||Rate of change on the option price when 1 trading day passes.|
|Vega||Rate of change on the option price when the volatility changes by 1 percentage point.|
|Rho||Rate of change on the option price when interest rates change by 1 percentage point.|
|Charm||Rate of change on the Delta when 1 trading day passes.|
|Color||Rate of change on the Gamma when 1 trading day passes.|
|Speed||Rate of change on the Gamma when the underlying price changes by 1 point.|
|Weezu||Rate of change on the Vega when the volatility changes by 1 percentage point.|
The Option Greeks are outputs from an option pricing model. There is a fair amount of math involved but you don't have to know the formulas to be able to use the Greeks.
Most broker terminals that facilitate options trading will provide support for option Greeks as part of their offering. Interactive Brokers supports many option calculations that you can use in your trading screen. However, if you don't have a broker account or you would like to simulate various option scenarios to test the effect of different input parameters, go ahead and download my option spreadsheet. You can enter and play around with various payoff scenarios and test the effects each has on the outputs.
Here is what all the option Greeks would look like, calculated across 3 different expirations for ITM, ATM and OTM options. I used the Black and Scholes Model with a spot price of 1,000, volatility of 35% and interest rates of 2.7%.
Call Option Example:
Put Option Example: