GREEKS

• variables that are used to assess risk in the options

• Greek variable is a result of an imperfect assumption or relationship of the
option with another underlying variable. Traders use different Greek values,
such as delta, theta, and others, to assess options risk and manage option
portfolios.
GREEKS
• The Greeks are symbols assigned to the various risk characteristics
that an options position entails
• The most common Greeks used include the delta, gamma, theta, and
vega, which are the first partial derivatives of the options pricing
model
• Greeks are used by options traders and portfolio managers to
understand how their options investments will behave as prices move,
and to hedge their positions accordingly.
GREEKS
• Many dimensions of risk (greeks) must be managed so that all risks
are acceptable.
• Greeks (delta, vega, theta, gamma, and rho) are calculated each as a
first partial derivative of the options pricing model (for instance, the
Black-Scholes model).
• This model takes into account different factors, such as volatility, to
price options. However, the Black-Scholes Model is a European model
and operates based on the assumption that the option will not be
exercised before the expiration date.
GREEKS
DELTA
• Delta (D) is the rate of change of the option price with respect to the underlying:
=f/S
• Delta measures option price sensitivity to changes in the price of the underlying asset.
• Option Delta is perhaps one of the most vital measurement methods of all, as it can
investigate the level of sensitivity that an option’s price will move, if there is a change
in the underlying stock price.
• Delta (Δ) represents the sensitivity of an option’s price to changes in the value of the
underlying security
• Delta measures the sensitivity of an option's value to a change in the price of the
underlying asset. It indicates how much the value of an option will change with a one
dollar change in the price of the underlying stock.
DELTA
• Delta measures how much the price of the option will change as a result
of a $1 change in the price of the asset
• The Delta of an option varies over the life of that option, depending on
the underlying stock price and the amount of time left until expiration.
• Delta usually appears as a decimal number. Put options have a negative
relationship with Delta due to a negative relationship with the underlying
security
• Premiums are expected to go down as the price of the security goes up.
Therefore, the Delta will range from zero to negative one for put options.
DELTA
• Delta also represents an approximation of the probability that an
option will be in-the-money at the time it expires
• An option with a Delta of .50 is at the money, meaning it’s neutral.
Anything lower probably won’t be in-the-money, while anything
higher probably will be in-the-money. Keep in mind this is an
approximation and does not guarantee that these results will hold
true.
• Because Delta is so important, traders want to keep an eye on how
the Delta itself may respond to stock price changes.
DELTA
• The importance of the information that the Greek Delta can provide is
indispensable. This is especially the case where, in the real world,
investors rarely hold options until maturity.
• Knowing how much profit that can be reaped or the potential losses
that will be incurred from a single movement in price will be one
factor an investor uses to determine whether they should still hold
the option or sell it.
GAMMA
• Gamma (Γ) represents the rate of change of Delta relative to the
change of the price of the underlying security
• It measures how much Delta changes if the value of the security
increases or decreases by $1. Investors use Gamma to help forecast
changes in an option’s Delta and determine how stable Delta is.
Gamma will be a number anywhere from 0 to 1.00.
• Positive gamma means that as a stock rises the option’s price will
more sensitive to further stock changes. Negative gamma means the
opposite: stock price rises cause stocks to be less sensitive
GAMMA
• Gamma is higher for options that are at-the-money and closer to
expiration. The higher Gamma is, the more unstable Delta is as the
price of the underlying stock changes. Let’s look again at our example
of the option with the Delta of .50. We’ve already said the Gamma
is .10. That’s pretty stable, and it’s unlikely Delta will change
drastically. But if that same option had a Gamma of .90, it would be
pretty likely that Delta would change dramatically as the price of the
underlying stock changes
GAMMA
• Gamma is often seen as an enemy. But this is usually only relevant to
those trades, admittedly the most popular, that relay on time decay to
profit.
• Some trades, however, take the opposite course: they take advantage
of the accelerating price sensitivity from gamma to make money from
expected changes in stock prices.
THETA
• Theta is a measure of the time decay of an options, or option spread. As
we have seen elsewhere in the courses, options are a decaying asset:
they reduce in value over time.

• All things being equal an option is worth more the longer it has to go
until expiry; an option with 60 days of time left to expiry will be worth
more than one with only 30 days.
• Options tend to lose value as the expiration date nears, so Theta is
usually a negative number. As the expiration date nears, Theta is likely to
increase because the time left to earn a profit from the option decreases.
• Time decay is good for the seller of an option because as time passes, the
chances increase of the option expiring with no action taken. Likewise, it’s
bad for the buyer of an option because as time passes, the chances
decrease of them making money from their option
• Theta is the basis of many of the standard options trades we use in this
course. Strategies which involve selling options – or at least there are
‘more’ sales than purchases – have positive theta (ie they rise in value
over time).
• Theta is the effect of time on options pricing. However it too changes with
time. In general theta increases as expiration nears. Another way of
saying this is that the time decay accelerates closer to acceleration.
VEGA
• Vega’s a measure of an option’s sensitivity to changes to implied
volatility (IV). As we’ve seen earlier, implied volatility is the market’s
estimate of the volatility (measured by standard deviation) in the future
• Vega (v) represents an option’s sensitivity to volatility. It measures the
rate of change of an option’s value relative to the security’s volatility.
More specifically, it measures how much the price of an option changes
based on a 1% change in the volatility of the underlying security.
• A decrease in Vega usually represents a decrease in the value of both
put options and call options. An increase in Vega usually represents an
increase in the value of both put options and call options.
VEGA
• Vega is an essential measurement because volatility is one of the
more important factors affecting option values. So all else being
equal, it makes sense to purchase an option that is less sensitive to
volatility, or with a higher Vega.
• In general bought options, either calls or puts, increase in value as IV
increases. This makes sense: an option seller would want to be
compensated more for the increased future risk, as priced by the
market, of the option moving in the money.
• Stocks expected to be more volatile, and hence have higher IVs, have
higher options prices, everything else being equal.
VEGA
• Many options strategies rely on picking the way volatility moves. For
example should be believe that we are to have a market correction
we would, of course, be interested in the effect of stock price falls on
our options positions.
• IV tends to be mean reverting and so any short term deviation could
produce a correcting change in the near future.
RHO
• Rho (p) represents how sensitive the price of an option is relative to 
interest rates. It measures the rate of change in an option’s value
based on a 1% change in the interest rate (based on the risk-free
interest rate, or the rate of U.S. Treasury bills
• Rho is a measure of an option's sensitivity to changes in the risk free
interest rate. Rho is the least used and least important greek. Unless
the option has very long life, the changes in interest rates affect the
premium only modestly.
RHO
• Long calls and short puts have positive rho, that is, the option price will
increase with an increase in interest rates and it will decrease with a
decrease in interest rates.
• Short calls and long puts have negative rho, that is, the option price will
increase with a decrease in interest rates and it will decrease with a increase
in interest rates.
• For both call and put options, the more the time remaining for expiry, the
higher is the impact of interest rates. Unless the option has very long life,
the changes in interest rates affect the premium only modestly.
• Deep out-of-the-money options have low rho compared to at-the-money
and deep in-the-money options.
RHO
• Rho increases as time to expiration increases. Long-dated options are
far more sensitive to changes in interest rates than short-dated
options.
• Though rho is a primary input in the Black-Scholes model, a change in
interest rates generally has a minor overall impact on the pricing of
options. Because of this, rho is usually considered to be the least
important of all the option Greeks.