Ever wondered what those stock option “Greeks” mean? Those numbers in decimals next to or below option quote info? Have you even seen the numbers with your broker’s platform? Attached is a cheat sheet of stock option Greeks to help you know the basics and where to find the info.
Basics
+ Delta: The rate of change of the price of the option with respect to its underlying security’s price. The speed at which an option’s price changes.
+ Gamma: The gamma of an option is expressed as a percentage and reflects the change in the delta in response to a one point movement of the underlying stock price. The acceleration, or rate of, delta change.
+ Theta: Measures the exposure of the option price to the passage of time. Also known as time decay, the amount an option losses in price each day.
+ Vega: A measure of the impact of changes on option price in every 1% change in underlying volatility on the option price. Add Vega when volatility goes up and subtract when volatility goes down.
+ Rho: Measures the sensitivity of option value to changes in interest rate. Not used often by option traders.
Quick Defs
Delta: Measures Impact of a Change in the Price of Underlying- the speed of option pps change.
Gamma: Measures the Rate of Change of Delta- the acceleration of option pps change.
Theta: Measures Impact of a Change in Time Remaining- option pps change per day closer to expiration.
Vega: Measures Impact of a Change in Volatility- option pps change per 1 value change in Volatility.
Rho: Measures Impact of a Change in Interest Rates- option pps change per 1 value change in Interest Rates.
Deeper Discussion
Delta
Calls have a value between 0 and 1 while Puts are 0 and -1. This value reflects the increase or decrease of an option to a 1 point ($1) of the underlying stock price. Deep in the money options (ITM) are closer to 1 or -1 while far out of the money (OTM) are closer to 0.
The up and down Delta refers to the actual movement of Delta to a given stock price move.
As the time value evaporates the Delta increases for ITM options and decreases for OTM.
As volatility increases so does the time value. The Delta of ITM options decreases while OTM increases.
Gamma
The Gamma peaks in value near the strike price while decreasing to 0 as the option goes deeper ITM or OTM.
As the time value decreases Gamma increases for at the money (ATM) options while decreasing for ITM or OTM.
Low volatility spurs Gamma to peak in value near the strike price while decreasing to 0 as the option goes deeper ITM or OTM. A high volatility means a Gamma will be stabilizing near all strike prices because time value changes nearer the money are less dramatic.
Theta
Usually a negative value, Theta reflects the amount at which an option’s price will change in value each day.
A longer term option has almost 0 Theta it doesn’t lose value on a daily basis. Time decay is at its greatest near an option’s expiration.
Generally, an option with high volatility will have greater Theta due to there is more value of an option to lose.
Vega
As volatility changes, a trader adds Vega for volatile increases and subtracts as volatility decreases.
The more time remaining until option expiration the larger the Vega. Time value is sensitive to changes in volatility and a longer term option has higher time value in its premium.
Calculation of Greeks (if you’re bored)
Let’s use this $SPY Put $185 strike and 2/12/16 expiration read out from TDAmeritrade as an example.
Since our example is a SPY Put the Delta will be negative. The -.44 delta represents for every dollar that the SPY’s price changes the option value of the Put will change. We have SPY at $184 with Put value of $1.30. If the SPY pps goes to $183 then the Put pps would change to $1.74. If the SPY pps goes to $185 then the Put pps would drop to $.86.
The Gamma shows as .066 and represents the rate of acceleration for the delta. As the SPY pps approaches the $185 strike gamma increases. As time marches on gamma will increase for OTM options.
The Theta shows as -.22 and represents how much the option’s pps will change with each day passing towards the expiration. Options with high Volatility will have higher Theta due to more value could be lost (volatile options have faster pps changes). Theta accelerates as expiration approaches making weekly options very risk.
Vega is .086 and represents the option pps change per 1 change in Volatility. Implied Volatility shows as 27 so if it goes to 28 then the Put pps will go up roughly $.08.
To calculate the option value then requires all the Greeks accounted together. Another quotient to consider is option trader emotions. If news just breaks that the economy is doing even more poorly then stocks will generally fall to trading emotion at break of the news. SPY Puts will gain as stocks the ETF has invested in go down in value from selling.
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