Now that we have covered how to use options to speculate against future stock prices, we need to cover specific topics that will help an investor choose which option contracts to use when speculating. With that said, important topics that will be covered in the next few lessons will introduce investors to “option Greeks.”
The Greeks are a set of formulas that express how change in one of the six option pricing inputs will directly affect the premium value of the option contract. To begin, there are six new terms that need to be introduced:
Delta (∆)
Measures the changes in the option price in relation to a $1 move of the underlying stock price.
Gamma (Γ)
Measures the change in Delta in relation to a $1 move in the underlying stock.
Theta (θ)
Measures the change in the option price as time until expiration approaches (on a daily basis).
Vega (v)
Measures the change in the option price when the Implied Volatility (IV) of the underlying stock price moves 1%.
Rho (ρ)
Measures the change in the option price in relation to a 1% change in the Fed Funds rate.
Psi (Ψ)
Measures the change in the option price in relation to change in the continuous dividend yield of the underlying stock.
The next few lessons will cover individual examples of each Greek.
| < Prev | Next > |
|---|