Understanding Options Greeks
The Greeks are mathematical measures that help traders understand how different factors affect their options positions. Mastering these concepts is essential for successful options trading.
Delta (Δ)
What is Delta?
Delta measures how much an option's price changes in response to a £1 change in the underlying asset's price.
Call Options
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Range: 0 to 1
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ITM calls: closer to 1
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OTM calls: closer to 0
Put Options
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Range: -1 to 0
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ITM puts: closer to -1
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OTM puts: closer to 0
Gamma (Γ)
What is Gamma?
Gamma measures how much Delta changes in response to a £1 change in the underlying asset's price. It's highest for at-the-money options and decreases as options move in or out of the money.
Key Points:
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Highest for ATM options
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Decreases as expiration approaches
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Important for delta hedging
Theta (Θ)
What is Theta?
Theta measures how much an option's price decreases as time passes. It represents the time decay of an option's value.
Time Decay
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Accelerates near expiration
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Higher for ATM options
Trading Implications
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Sellers benefit from time decay
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Buyers need price movement
Vega (ν)
What is Vega?
Vega measures how much an option's price changes in response to a 1% change in implied volatility. It's highest for longer-dated options and at-the-money options.
Key Points:
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Higher for longer-dated options
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Highest for ATM options
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Decreases as expiration approaches
Using Greeks in Trading
Portfolio Management
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Balance positive and negative Greeks
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Monitor overall exposure
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Adjust positions as needed
Risk Management
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Use Greeks to set position sizes
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Monitor time decay impact
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Consider volatility exposure
Note: The Greeks are theoretical values and may not perfectly predict actual price changes. They should be used as guidelines rather than absolute predictions.