Greeks in Options Trading

🔹 What are the Greeks?

Greeks are indicators that show how various factors (such as the underlying asset's price, volatility, time, etc.) affect the price of an option. Greeks help understand the risk and reward associated with options.

🔹 1. Delta (Δ)

Delta measures how much the price of an option changes when the price of the underlying asset changes. In other words, delta shows how the option's price moves in relation to changes in the asset's price.

• For call options, delta ranges from 0 to 1.

• For put options, delta ranges from 0 to -1.

Why is Delta Important?

• If a call option has a delta of 0.5, it means that for every 1 USD change in the underlying asset's price, the option’s price will change by 0.5 USD.

• If a put option has a delta of -0.5, it means that for every 1 USD change in the underlying asset's price, the option’s price will change by -0.5 USD.

Delta is also used for hedging (reducing risk), meaning an investor can buy or sell the underlying asset to balance the risks of an option.

🔹 2. Gamma (Γ)

Gamma measures the change in delta as the price of the underlying asset changes. In other words, gamma tells you how delta changes when the price of the asset changes.

• Gamma is always positive for both call and put options.

Why is Gamma Important?

• Options with high gamma are more volatile and have higher risks.

• When gamma is high, delta changes rapidly, making it harder to predict the option's price.

Gamma is especially high for short-term options, i.e., options with a small amount of time until expiration.

🔹 3. Vega (V)

Vega measures how much the price of an option changes when the volatility of the underlying asset changes.

• Vega is always positive because an increase in volatility increases the option's price.

• Options with high vega are more sensitive to changes in volatility.

Why is Vega Important?

• An increase in volatility (i.e., when the underlying asset’s price moves more dramatically) leads to a higher option price.

• If Vega is high, changes in volatility have a bigger impact on the price of the option.

🔹 4. Theta (Θ)

Theta measures how the price of an option changes as time passes. Time tends to reduce the value of an option as expiration approaches, a phenomenon known as Time Decay.

• Call and put options both have negative theta, meaning the option's value decreases over time.

Why is Theta Important?

• Time has an impact on the price of an option: the closer it gets to expiration, the cheaper the option becomes.

• Options with shorter time to expiration (short-term options) experience higher theta because they lose value more quickly.

🔹 Summary: Why Are the Greeks Important?

Greeks help traders and investors better understand the risks and rewards of options. They provide key information for making more informed decisions in options trading.