9/18/2015

OptionsPricing:TheGreeks

Options Pricing: The Greeks

By Jean Folger

Many option traders rely on the "Greeks

"Greeks"" to evaluate option positions. The Greeks are a collection of statistical values that measure the ri
in an options contract in relation to certain underlying variables. Popular Greeks include Delta
Delta,, Vega
Vega,, Gamma and Theta
Theta..

Delta - Sensitivity to Underlying's Price

Delta, the most popular options Greek, measures an option's price sensitivity relative to changes in the price of the underlying, and is the
points that an option's price is expected to move for each one point change in the underlying. Delta is important because it provides an in
how the option's value will change with respect to price fluctuations in the underlying instrument, assuming all other variables remain th

Delta is typically shown as a numerical value between 0.0 and 1.0 for call options and 0.0 and -1.0 for put options.
options. In other words, option
always be positive for calls and negative for puts. It should be noted that delta values can also be represented as whole numbers between
for call options and 0.0 to -100 for put options, rather than using decimals. Call options that are out-of-the-money will have delta values a
0.0; in-the-money call options will have delta values that are close to 1.0.

Vega - Sensitivity to Underlying's Volatility

Vega measures an option's sensitivity to changes in the volatility of the underlying. Vega represents the amount that an option's price cha
response to a 1% change in volatility of the underlying market. The more time that there is until expiration, the more impact increased vo
have on the option's price.

Because increased volatility implies that the underlying instrument is more likely to experien
values, a rise in volatility will correspondingly increase the value of an option and, conversely, a decrease in volatility will negatively affe
of the option.

Gamma Sensitivity to Delta

Gamma measures the sensitivity of delta in response to price changes in the underlying instrument. Gamma indicates how delta will chan
to each one point price change in the underlying. Since delta values change at different rates, gamma is used to measure and analyze delta
used to determine how stable an option's delta is; higher gamma values indicate that delta could change dramatically in response to even
movements in the underlying's price.

Gamma increases as options become at-the-money and decrease as options become in- and out-of-the-money. Gamma values are general
the further away from the date of expiration; options with longer expirations are less sensitive to delta changes. As expiration approache
values are typically larger as delta changes have more impact.

Theta Sensitivity to Time Decay

Theta measures the time decay of an option - the theoretical dollar amount that an option loses every day as time passes, assuming the pr
volatility of the underlying remain the same. Theta increases when options are at-the-money
at-the-money;; theta decreases when options are in- and
money.. Long calls and long puts will usually have negative theta; short calls and short puts will have positive theta. By comparison, an ins
money
whose value is not eroded by time, such as a stock, would have zero theta.

Trading and analysis platforms, as well as online calculators, can provide options traders with current Greek values for any options contr
12, for example, shows the Delta, Gamma, Theta, Vega and Rho values for both call and put options. These values will change as other va
as strike price, change.

Figure 12: The Greeks

http://www.investopedia.com/university/optionspricing/greeks.asp?view=print

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