The Options Greeks lesson is designed to familiarize traders with a set of risk factors used to monitor a portfolio’s profile (known as “The Greeks”)
Here explain to using an interactive options calculator, what influences days to expiration, interest rates, and the proximity between the option strike price and the price of the underlying have on the price of an option over time. Each risk measure is represented by a letter of the Greek alphabet. The Greeks are dependent upon the inputs for an option’s pricing model.
- Call Delta, represents the theoretical change in an option’s price for a $1 change in the price of the underlying asset. Delta can be thought of as the probability than an option will finish “in the money.” As the price of the underlying asset increases beyond the strike Price, Delta will increase and approach 1, meaning that there is a greater change to the price of the option relative to the change in price of the underlying asset.
- Put Delta, will range from -1 to 0. As the price of the underlying asset decreases below the strike price and gets further in the money, the Delta will decrease and approach -1, meaning that there is a greater change to the price of the option relative to the change in price of the underlying asset
Underlying Price, Strike Price, Interest Rate, Volatility and Days to Expiration inputs will have an impact on the Delta.
- Gamma Understanding the Gamma in a portfolio is critical for a trader that is trying to continuously hedge a portfolio. The Delta represents the change at any given point on the curved line, and the Gamma describes the change in the delta or curvature in the line.
- Theta describes the relationship between time and the price of an option. The closer an option is to expiration, the less time value (extrinsic value) remains. Theta measures the approximate decline in an option’s premium due to the passage of time. In other words, it measures that rate at which an option’s extrinsic value is declining.
- Vega represents the change in an option’s price due to a change in its implied volatility.
- Rho represents an option’s price sensitivity to interest rates. The greater the underlying asset price and remaining days to expiration, the greater the Rho.
(IBKR, 2023, INTRODUCTION TO OPTIONS – THE GREEKS, https://ibkrcampus.com/trading-lessons/introduction-to-options-the-greeks/ )