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The Trading Option Greeks Explained

By Caitlyn Williams | Category :: Finance Article

The option price for an underlying stock keeps changing owing to a number of factors such as time, volatility, maturity time, interest rate, and strike price. These factors give a way to determine how this value change occurs, and how they can be controlled and monitored to determine all possible outcomes. Options Greeks is a way to denote these factors with certain Greek letters to give them an identity and a definition of functioning. In other words, Option Greeks can be used to predict the value of an option after a while, and how this knowledge can be used to make money.

A trader can use these Greeks either with one other or separately to reach an optimum outcome. There are 5 primary Greeks that control this outcome in a different way. Knowledge of these Greeks is very important for every stock trader who wants to get the most out of options trading.

The Five Options Greeks

Option Delta

Arguably the most important of all Greeks, Delta represents how sensitive the option price is in regards to even the smallest of change in the value of an underlying stock. Its value usually varies between -1 and 1, wherein -1 to 0 is the range for put option and 0 to 1 is the range for call option. It must be noted that the Delta will approach the 0 value when the stock’s expiration time comes around.

Option Gamma

Gamma’s value depends on the rate of change in Delta value in respect to the change in the value of the underlying stock. Stock traders have to take Gamma value into consideration because Delta value does not stay constant all the time, and so its rate of change can affect the outcome of stock trading significantly. Higher gamma values can be alarming, so one must always look forward to keeping them as low as possible.

Option Vega

This Greek measures the sensitivity of an option price in regards to the underlying volatility change. The value of Vega also keeps changing with respect to the movement of the underlying stock value and starts losing its value with the option getting closer to its expiration date.

Option Theta

Theta is the measurement of option value change in regards to the time left for attaining maturity of the option value. If all other options are constant, this value will drop every day and will approach zero as the expiration date nears.

Option Rho

Rho is used to measure the option sensitivity in regards to the changing risk-free interest rate. This is the most rarely used of all the Option Greeks since it deals in the interest rate that’s usually not of a higher value, which is why it also has the least impact on the stock trading outcome.

By Caitlyn Williams | Dec 7, 2017 | Category > Article >Finance | Comments | Views 145

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