Option Greeks

In options trading, you may notice the use of option sensitivity measures when describing risks associated with various positions. They are known as "the Greeks" and here, in this article, we shall discuss the four most commonly used ones. They are delta, gamma, theta and vega.

1. Delta - Measures the exposure of option price to movement of underlying stock price
   • What is delta and how to use it
   • Passage of time and its effects on the delta
   • Changes in volatility and its effect on the delta
2. Gamma - Measures the exposure of the option delta to the movement of the underlying stock price
   • What is gamma and how to use it
   • Time and its effects on the gamma
   • The relationship between the volatility and the gamma
3. Theta - Measures the exposure of the option price to the passage of time
   • What is theta and how to use it
   • Theta and time remaining
   • Theta and volatility
4. Vega - Measures the exposure of the option price to changes in volatility of the underlying
   • What is vega and how to use it
   • Effects of time on the vega

Interest rates and combined positions

Rho measures sensitivity to interest rates. For a position with several legs, scale each Greek by its signed quantity and contract multiplier before adding compatible exposures. Greeks on different underlyings cannot simply be treated as a single stock exposure.

Using the estimate

Greeks are local model sensitivities, not guaranteed price changes. They change as the stock, time and implied volatility change. Check whether a quoted value is per share or per contract, which volatility increment is used, and whether theta is measured per day or per year. Selling an option reverses the position’s Greek signs.