Understanding the Greeks
Deep dive into Delta, Gamma, Theta, and Vega and how they affect your trades
What Are the Greeks?
The Greeks are mathematical calculations that measure different risk factors affecting an option's price. They help you understand how your option's value will change when various market conditions shift.
Why Greeks Matter
Understanding Greeks is like having a GPS for options trading - they tell you exactly how your position will react to market movements, time decay, and volatility changes.
Delta (Δ) - Price Sensitivity
What Delta Measures
- • How much option price changes per $1 stock move
- • Ranges from 0 to 1 for calls, 0 to -1 for puts
- • Also represents probability of expiring in-the-money
- • Higher delta = more sensitive to stock price
Example: Apple Call Option
Delta: 0.70
If Apple moves up $1: Option gains $0.70
If Apple moves down $1: Option loses $0.70
Probability ITM: ~70%
Delta Quick Reference
Deep ITM Calls: Delta ~0.80-1.00
ATM Calls: Delta ~0.50
OTM Calls: Delta ~0.00-0.30
Deep ITM Puts: Delta ~-0.80 to -1.00
ATM Puts: Delta ~-0.50
OTM Puts: Delta ~0.00 to -0.30
Gamma (Γ) - Delta's Acceleration
What Gamma Measures
- • How much Delta changes per $1 stock move
- • Always positive for both calls and puts
- • Highest for at-the-money options
- • Increases as expiration approaches
Example: Tesla Put Option
Current Delta: -0.40
Gamma: 0.05
If Tesla drops $1:
• Option gains $0.40 (from Delta)
• New Delta becomes -0.45
Gamma Risk
High gamma can work for or against you. As a stock moves in your favor, gamma accelerates your gains. But it also accelerates losses when the stock moves against you.
Theta (Θ) - Time Decay
What Theta Measures
- • How much option value decreases per day
- • Always negative for long options
- • Accelerates as expiration approaches
- • Highest for at-the-money options
Example: SPY Call Option
Theta: -$0.15
Meaning: Option loses $15 per day
Over weekend: Loses $45 (3 days)
Time to expiry: 15 days
Time Decay Acceleration
Theta accelerates dramatically in the final 30 days before expiration, especially for at-the-money options.
60+ days: Slow, steady decay
30-60 days: Moderate acceleration
0-30 days: Rapid acceleration
Vega (ν) - Volatility Sensitivity
What Vega Measures
- • Price change per 1% volatility change
- • Always positive for long options
- • Highest for at-the-money options
- • Decreases as expiration approaches
Example: NVDA Call Option
Vega: 0.25
Current IV: 40%
If IV rises to 45%: Option gains $25
If IV drops to 35%: Option loses $125
Volatility Events
Earnings, FDA approvals, and major announcements often cause volatility spikes or crashes.
Before earnings: IV typically rises (volatility crush risk)
After earnings: IV often drops sharply
Market stress: IV generally increases across all stocks
Greeks in Action: Trading Strategy
Bullish Strategy Example
Goal: Profit from AMZN rising
Greeks to favor:
- • High positive Delta (0.60+)
- • Moderate Gamma for acceleration
- • Low Theta (longer-dated options)
- • Watch Vega if volatility might drop
Neutral Strategy Example
Goal: Profit from time decay
Greeks to favor:
- • Low Delta (near zero)
- • Positive Theta (collect time decay)
- • Negative Vega (benefit from IV drop)
- • Manage Gamma risk
Lesson Complete!
Outstanding! You now understand how the Greeks affect option pricing. This knowledge will help you choose better strikes, expirations, and manage risk more effectively.