Options Greeks allow traders to gauge the sensitivity of an option’s price to measurable factors. They are essential for identifying the risks and rewards of

Options Greeks include Delta, Gamma, Theta, Vega, and Rho. Each one measures different factors that affect the price of an option.

Beginner options traders can easily get confused, and learning the Greeks is a bit overwhelming at first. The easiest way to understand them is to break each term down and study them individually.

## What Are the Benefits of Options Greeks?

Having a good understanding of the Greeks will make you a better options trader. You’ll be able to make educated decisions on which options to trade, how to trade them, and when to trade them. Options Greeks will help you to:

- Determine the chances of an option expiring in the money (Delta).
- Gauge how much the Delta will change when the price of the stock changes (Gamma).
- Estimate the amount of value an option will lose each day as it gets closer to expiration (Theta).
- Know how sensitive an option contract is to price swings in the underlying asset (Vega).

## Delta (Δ)

Delta measures how much the price of an option is expected to change per every $1 change in the underlying asset. For example, an options contract with a Delta of 0.15 means the price of the option will theoretically move $0.15 for every $1 move in the underlying stock.

### Call Options

- Have a positive Delta ranging from 0.0 to 1.00.
- Delta increases as the option
moves deeper in the money. - Delta decreases as the option moves further out of the money.
- In-the-money options the Delta gets closer to 1.00 as it nears expiration.
- Out-of-the-money options the Delta gets closer to 0.0 as it nears expiration.

### Put Options

- Have a negative Delta ranging from 0.0 to -1.00.
- Delta decreases as the option gets deeper in the money.
- Delta increases as the option gets further out of the money.
- In-the-money options the Delta gets closer to -1.00 as it nears expiration.
- Out-of-the-money options the Delta gets closer to 0.0 as it nears expiration.

Delta can be thought of as the probability an option will expire in the money. A Delta of .50 means the option theoretically has a 50% chance of expiring in the money. An option that expires in-the-money doesn’t guarantee your trade will be profitable. That will depend on the price you paid to buy or sell the option.

An option Delta can help you estimate how much underlying stock to buy or sell. This is referred to as “Delta Hedging.” To hedge, a trader will create a Delta-Neutral position or a position that has zero Delta.

For example, you buy 5 options contracts with a Delta of 0.30. A positive Delta means you are long Delta. You will need to sell deltas to make your position Delta-Neutral. To find out how much, you simply multiply the Delta by the number of options by the multiplier. 0.30 x 5 x 100 = 150. You’ll need to sell 150 to have zero Delta or a Delta-Neutral position.

## Gamma (Γ)

Gamma tells you how sensitive the Delta of an option is to changes in the price of the underlying asset. It measures the change in Delta for every $1 price movement. Traders use Gamma to determine how much the option’s Delta should change if the price of the underlying stock goes up or down. Gamma decreases as an option gets deeper in-the-money and Delta advances to 1.00.

## Theta (Θ)

Theta, also known as time decay, indicates the rate of change between the option value and time. It will tell you how much the price of an option will decrease as it approaches expiration. Theta is always negative because the option will lose time value as each day passes.

For example, you purchase a call option for $5, its Theta is -0.05, the option will lose -$0.05 every day. After two days the options price will be $4.90 because it has lost time value.

## Vega (v)

Vega represents the amount the option price will change based on a one-point change in implied volatility (IV). High IV means the stock is likely to have large swings. If the underlying asset has high implied volatility, the premium of its options contracts will be high

## Rho (p)

Rho estimates how much the option price will change per one-point change in interest rates. Traders use Rho to determine how much an option price will increase or decrease if the interest rate of U.S. Treasury-bills rises or falls. Higher interest rates will increase the value of call options and decrease the value of put options. Puts have a negative Rho and calls have a positive Rho.

Rho is typically a very small factor for the price of an option. It is also not used at all by many options traders.

## Final Thoughts

Options Greeks should be used in conjunction together to determine the risks and rewards of a trade. While it is not necessary to use options Greeks to successfully trade options, it will take out a lot of the guesswork.

Understanding the Greeks lets a trader determine the best approach for their trading strategy. Options Greeks give the trader a road map and make it easier to be consistently profitable.