Option Greeks Explained

Put simply, Delta indicates how much an option’s price is expected to change when the price of the underlying asset itself changes. A Delta of 0.30, for instance, means that the option’s premium is predicted to increase 30 cents for every dollar change in the price of an asset it’s linked to.

Because Delta is so important, traders want to keep an eye on how the Delta itself may respond to stock price changes. This brings us to the next Greek: Gamma.

Delta is a static snapshot. But as the price of the asset changes, so will the Delta of the corresponding option. 

Gamma is used to calculate this sensitivity of Delta to the change in price of the underlying asset.

Theta measures the expected change in an option’s premium as it gets closer to expiration. 

Generally speaking, the closer the option is to expiring, the lower its premium. That’s because there’s less time left to exercise the option at a profit. This is often referred to as “time decay.”

Vega relates to the implied volatility of the underlying stock. It measures how sensitive an option’s premium is to potential stock fluctuations.

Since a high Vega indicates less predictable future outcomes, it will result in the rise in the premium of an option.

If you’d like to better understand the four primary Greeks, we’ve already covered them in more detail.

Rho predicts how the changing interest rates may affect an option’s price. Rho doesn’t always make the list of primary Greeks. That’s because day-to-day interest rate fluctuations typically don’t have a major impact on option prices.

However, if your strategy depends on trading in options that are especially sensitive to interest rates, you’ll definitely want to pay more careful attention to Rho.

Despite the many intricacies outlined above, the main purpose of knowing the Greeks comes down to one thing: making smarter decisions when trading in options. 

More specifically, the Greeks can tell you whether the current premium you’ll pay is likely to be offset by exercising the option at a future date.

In short, mastering the Greeks makes you a better option trader. Together, they can help you decide which options to buy, when, and at what premium.

The more you know about how the Greeks work, the more accurate your future predictions will be and the more profit you can extract from exercising your options.

In principle, all Greeks are really measures of risk that always come with betting on uncertain future outcomes. Dismissing the Greeks when trading in options is essentially equivalent to gambling.

Just as you wouldn’t buy a house without knowing whether its price is reasonable, you shouldn’t purchase options without first having some idea of how their premiums are calculated and how they’re likely to develop.

In the worst case, you stand to lose a lot of money buying options that consistently expire without you ever getting to exercise them.

You could certainly learn the formulas for all of the main Greeks and calculate them on your own.

However, not only is this a time-intensive activity, it’s also completely impractical. As a trader, you’ll likely be dealing with a dozen different, ever-evolving options on any given day. Keeping track of them with pen and paper isn’t exactly the best use of your time.

Luckily, you don’t have to. Most brokers that list options will also provide handy tables with calculations for all of their main Greeks. This makes it easy to compare options side-by-side and make informed decisions.