When investors want to profit from a stock’s price movements while risking less money than buying shares outright, they often turn to options. By using options, traders can profit whether stock prices go up, down, or sideways. Options can even work as insurance against losses in other investments.
But unlike stocks, whose prices go up or down based on supply or demand, options have several internal factors affecting their price: Time is constantly eroding their value—and the clock itself moves faster. Market volatility can abruptly raise or lower their price. And, changes in the price of the underlying stock can cause dramatic swings in an option’s worth.
To help measure and manage these various risks, traders rely on mathematical gauges called the Greeks. Named after the Greek letters delta, gamma, theta, and vega, these act like dashboard warning lights, helping traders understand how different market conditions affect their options positions.
Key Takeaways:-
Delta shows how much an option’s price will change relative to a $1 move in the underlying stock, ranging from -1.0 to +1.0.
Gamma measures how quickly delta changes as the underlying stock price moves, helping traders understand the risks in rapid price swings.
Theta calculates how much value an option loses each day as it approaches expiration, with the change accelerating as the expiry date approaches.
Vega indicates how sensitive an option’s price is to changes in expected market volatility, with longer-dated options generally being more sensitive.