Option Greeks are some of the components that make up options trading. Many seasoned traders rely on option Greeks to evaluate whether or not they should make the trade. However, many new traders weren’t aware of the Greeks’ options and how to use them. Some traders know but don’t know how to implement the option Greeks in their trades. What are the Greeks? Per Investopedia, statistical values measure the risk involved in an options contract about certain underlying variables. There are four Greeks that we’ll discuss.
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What Are the 5 Option Greeks?
Here are the 5 Option for Greeks:
Options give you the right but not the obligation to buy or sell a stock at an agreed-upon price. Each option contract controls 100 shares, but you probably already know all that, right? That’s why you want to learn about trading options with Greeks and how to make money. Ok. We got you.
As a result, it’s cheaper to place an options trade than buying 100 shares of a stock outright. However, options are riskier because of other factors like option Greeks that affect the profit and loss of stock.
Although the capital needed to place a trade isn’t as much, your ability to lose the entire trade is much higher. As a result, this article delves into using option Greeks to your advantage.
When you’re trading stocks vs options, stocks are pretty cut and dry. You open a position. When you’ve reached your profit potential, you close it. There’s no time limit, so you can hold forever to correct a bad trade.
Expiration
When it comes to options, it’s pretty different. All options expire. It would be best to choose how long you want to hold your contracts and where you want to buy. The great thing about options is that they don’t cost as much as stocks.
As a result, you can trade large-cap stocks and control a good amount of shares without putting up a lot of money. It’s a great way to grow your brokerage account.
It’ll be positive for call options and negative for put options. Depending on your strategy, you can use Delta to determine the probability of the contract being in the money at expiration.
You often want to be in the money at expiration because the more in the money you are, the higher your profit potential is. When you go to a place and options trade, you often want a higher delta.
The higher the Delta, the higher the risk and reward. While there is high risk, you can offset that by practicing proper risk management and trading patterns. You want traction, so where you buy your option determines how well your contract moves.
Remember that the higher the Delta, the more expensive the option. The reason is that you have a higher probability of expiring in the money. Hence a higher profit potential. In the money gives you more of a cushion too.
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Vega
Vega makes up another of the option Greeks. This Option Greek maps out the sensitivity of volatility. It doesn’t matter if you’re trading stocks or options; volatility will always be important.
Vega measures the rate of change in implied volatility. Implied volatility is the expected volatility of an option. In other words, Vega shows you how much an option’s price will change for every 1% implied volatility move.
You can use Vega to see how different strategies would work when they look the same based on the Delta. Hence, options Greeks go hand in hand. You can’t have one without the other.
A higher Gamma means more volatility. That’s something you have to be able to stomach. Especially for longer-term options trades. Which means direction matters.
Hence, playing with candlesticks, patterns, and trends will help immensely. Check out our services to learn more about trading options.
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Theta
Theta deals with time decay. Options are wasting assets because they expire. Time is constantly moving forward. As a result, your options decay. Think of it like an hourglass.
The more time passes, the more the seller of the option profits. So, the seller would be at the bottom of the hourglass, whereas the buyer would be at the top. As a result, profit drips to the seller daily.
80% of options expire worthless. That means many times, the seller is the winner.
Option Greeks Example
This is an example of Options Greeks on an options chain of $AAPL. You’ll notice the four main Greeks: delta, gamma, theta, and vega. The 5th one is Rho, but not as popular. Other important factors on an options chain are strike price, implied volatility, and intrinsic and extrinsic value. Options charts are also popular to look at.
On this options chain, $AAPL is trading at $157.34. So, at the money strike, the price would be $157.50. The in the money strike price is $155. And out of the money strike is $160.
Final Thoughts: Option Greeks
Option Greeks should be used together to determine the risk of a trade. The amount of risk you want to take on is all about your strategy. There’s no right or wrong strategy. However, not using the tools provided to you hurts you.
If you need more help, take our options trading course.
Frequently Asked Questions
- Greeks: measures the risk involved in an options contract about certain underlying variables
- Delta: measures the rate of change in price when the stock moves up a point
- Vega: maps out the sensitivity of volatility
- Gamma: measures sensitivity to Delta
- Theta, aka time decay, is the amount of daily a contract decays due to time.
Delta option Greeks are the most popular of the Greeks because it's the easiest to understand. It measures the rate of change in price. In other words, Delta tells us how much an option would increase when the stock moves up a point.
Gamma option Greeks are the most ambiguous of the option Greeks. In essence, it measures sensitivity to Delta. Delta increases and decreases with price movement, so Gamma stays constant to measure that change. The higher the Gamma, the more risky the trade. The lower the Gamma, the less risky. The risk you want to incur is up to you. Many times, the riskier the trade, when paid right, is a lot more rewarding.
