The Greeks

If you’re talking options amongst other traders, the Greeks may well be mentioned. These are five variables which describe the pricing sensitivities, and they’re called the Greeks because they’re known by Greek letters. They basically tell you how sensitive the option price is to changes in other numbers. Here’s a brief summary of them –

• Delta – describes how the option premium changes when the underlying price changes. Can be from 0 to 1, and is about 0.5 when the option is at the money, meaning a change in share price will change the option price half as much.
• Gamma – how much change you can expect in Delta for a small change in the stock price. A measure of the sensitivity of Delta.
• Theta – how much the option changes for a change in time to expiration, normally stated as cents per day loss in value, although not constant.
• Kappa, or Vega – the change in the value of the option for a given change in volatility.
• Rho – change in value of an option for a change in interest rates.

This entry is filed under course. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.