The Greeks
Four measurements that answer: if something changes, how much does this option's price change? Less intimidating than the letters suggest.
An option's price depends on several things at once: the share price, the time remaining, and how much movement people expect. The Greeks measure how sensitive the option is to each of those, one at a time.
They have Greek letters for names, which makes them sound harder than they are. Each is just a rate of change.
Delta — sensitivity to the share price
If the share moves $1, how much does the option move? A delta of 0.5 means roughly 50 cents.
- Calls have a delta between 0 and 1. Puts between 0 and −1.
- Deep in the money, delta approaches 1 — the option tracks the share almost exactly.
- Far out of the money, delta approaches 0 — the share can move and the option barely reacts.
A delta of 0.30 is often treated as “about a 30% chance of finishing in the money”. It is a useful rough guide and it is not what delta measures. Do not build anything important on the approximation.
Gamma — how fast delta itself changes
Delta is not constant. Gamma measures how much delta shifts when the share moves. It is highest for options near the strike and near expiry.
High gamma is why a position can seem calm and then change character within hours — the sensitivity itself is moving.
Theta — the clock
How much value the option loses per day from time passing alone. Negative for buyers, positive for writers, and it grows as expiry approaches.
This is time decay from the previous lesson, given a number.
Vega — sensitivity to expected volatility
How much the price changes if expected future movement rises or falls. Both calls and puts gain value when expected volatility rises.
Buy an option when expectations of movement are high — before an announcement, say — and the expectation collapses afterwards. The share can move your way while the option falls, because the volatility component drained out of the price. This has a nickname: volatility crush.
Reading them together
| Greek | The question it answers |
|---|---|
| Delta | If the share moves $1, how much does this move? |
| Gamma | How quickly is that sensitivity itself changing? |
| Theta | How much do I lose per day just from waiting? |
| Vega | What happens if expectations of movement change? |