Stock Options: Get to Know the Greeks

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Stock Options: Get to Know the Greeks

Back in November, I wrote a blog about the basics of Options, explaining the main concepts of how they work as well as the roles of the writer, the buyer, and the different type of options. If you need some brushing up on your options basics, don’t be afraid to check out that blog.

After you brush up on your basic option’s knowledge, we’ll focus on “The Greeks” and what they are to options trading.

Q: What are the Greeks?

A: The four famous Greeks are Vega, Theta, Delta, and Gamma and are used in options trading to describe risks associated with various options positions.

Every option has four main measurements of risk:
The Greeks.

Vega is an Arabic word and is the brightest star in the constellation Lyra and one of the five brightest stars in the night sky. I honestly don’t know why Vega is one of the four Greeks of options trading, but it goes to show you that the stock market is illogical. Theta, Delta, and Gamma are letters of the Greek alphabet. A trader may want to take the four Greeks into account before entering into an options position.
(Big thanks to Investopedia for the info).

VegaTheltaDeltaGamma
Measures impact of change in volatilityMeasures an impact of change in time remainingMeasures the impact of change in the underlying priceMeasures the rate of change of the delta for each one point increase in the underlying asset

 

When you see the term, “The Greeks” out in the stock trading world, you will now know they’re not talking about four dark-haired guys, but instead, risk measures related to Options Trading.

If you currently trade options, use The Greeks wisely. If you’re like me, I’ll be trading options when I get a clearer understanding. Knowing the Greeks will help us get there.

Many happy returns,
Rachel

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    • http://smallDogInvestor.com allen

      hi rachel, you list the greeks in a misleading order of importance. the most important one is delta. delta is roughly equivalent to the probability that the option will be in the money at expiration. delta is highly actionable – if you are a seller you want to sell low delta options, if you are a buyer you want to buy high delta options. the other greeks are less actionable for anyone who is not an advance option trader. you might be interested in tastytrade.com’s video segment called “where do i start” in which tom sosnof walks his daughter, case, through the basics of option trading.
      love your enthusiasm
      -allen

  • Aaron

    Love the Greeks, however I would tell people to be very careful with this. Just knowing a definition of 4 out of what I think are 18 Greeks is more dangerous than helpful. Before you can understand how these work you need a good understanding of the Black-Scholes pricing model. And before dividing into that the Binomial option pricing model is a better place to start to fully understand. However all of this requires a good understanding of math up to entry level calculus.

  • http://www.financingstocks.com Kim Hamawari

    Never heard about Greek before, but when I am trading in options I only used four basic options strategies and combined it to anticipate risk.