Option Greeks: A Beginner’s Guide to Delta, Gamma, Theta, and Vega
The price of an Option contract is influenced by various factors, which can hurt or help a trader. A measure of these influencing factors is referred to as Option Greeks - a set of four risks named after Greek letters Delta, Gamma, Theta, and Vega. Each of these Option Greeks measure certain factors associated with an options contract and they collectively provide a valuable insight to an options trader.
Delta
It measures the impact of a change in the underlying security’s price and its value ranges between 100 to 0 for put options and between 0 to 100 for calls.
Gamma
It measures the rate of change of Delta, which is constantly fluctuating. While Delta’s fluctuation is in conjunction with the price of the underlying security, Gamma is used in accordance to measure the rate of fluctuation so traders can get an idea of how volatile the Delta is before investing.
Theta
It is always a negative value which measures the effect of a change in the remaining time , or time decay, in an options contract’s value. The time decay accelerates as the expiry date draws closer.
Vega
It measures the effect of a change in volatility and its purpose is to reveal — within the level of implied volatility — how much the price of an option will decrease or increase.
Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. It is based on several secondary sources on the internet and is subject to changes. Please consult an expert before making related decisions.