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Thursday, March 15, 2007

What are Options Greeks?

Options Greeks are characters derived using strict mathematical formulae for understanding/predicting price changes of individual or group of options. They are know as Greeks because they are represented in Greek letters, Delta (d), Gamma (?), Vega, Theta (?) and Rho (P). Each option Greek uses different formula and provides different information.

  • Delta – measures the change in option price with the increase or decrease of every dollar in the underlying product price.
  • Gamma – measures the rate of change of the delta value with each increase or decrease of every dollar in the underlying product price.
  • Theta – measures the change in option price with the passing of each day. The value increases with days for at-the-money options and decreases with days for out-of-the money option.
  • Vega – measures the change in option price with the increase or decrease of volatility of the underlying asset. The value is often greater for at-the-money options than out-of-the-money options.
  • Rho – measures the change in options price with the increase or decrease in the risk free interest rate.
Today, almost all good options trading systems are integrated with options Greeks but the quality of information they provide depends on the model used for calculate them. (Next : Using of Option Greeks to Trade Options)

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posted by Daniel Pipitone at 11:18 PM  

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