What is Greeks (Delta, Gamma, Theta, Vega)?
Definition
The Greeks are mathematical values that measure different dimensions of risk in options positions. Delta measures directional sensitivity, gamma measures delta's rate of change, theta measures time decay, and vega measures volatility sensitivity.
Detailed Explanation
Delta measures how much an option's price changes for a $1 move in the underlying. A call with 0.50 delta gains $0.50 when the stock rises $1. Delta ranges from 0 to 1 for calls and -1 to 0 for puts. ATM options have deltas near 0.50.
Gamma measures the rate of change of delta. High gamma means delta changes rapidly with stock movement. ATM options near expiration have the highest gamma, creating accelerating gains (or losses) as the stock moves.
Theta measures daily time decay—how much value the option loses each day. Theta is always negative for long options (they lose value over time) and positive for short options (sellers benefit from time decay). Theta accelerates as expiration approaches.
Vega measures sensitivity to changes in implied volatility. A vega of 0.15 means the option price changes $0.15 for each 1% change in IV. Longer-dated options have higher vega because there is more time for volatility to impact the outcome.
Professional options traders manage their overall Greek exposure across all positions, adjusting to maintain desired risk profiles.
Frequently Asked Questions
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Related Terms
Implied Volatility (IV)
Implied volatility is the market's forecast of the likely magnitude of a stock's price movement, derived from option prices. High IV means options are expensive because the market expects large price swings, while low IV means options are cheap because calm conditions are expected.
Options
Options are financial contracts that give the buyer the right, but not the obligation, to buy (call) or sell (put) an underlying asset at a specified price (strike) before a specified date (expiration). They are used for speculation, hedging, and income generation.
Call Option
A call option gives the buyer the right to purchase the underlying asset at the strike price before expiration. Calls are used when an investor expects the price to rise. The maximum loss for the buyer is the premium paid.
Put Option
A put option gives the buyer the right to sell the underlying asset at the strike price before expiration. Puts are used when an investor expects the price to fall or wants to protect against downside risk in existing holdings.
See It in Action
Disclaimer: The information on this page is provided for educational and informational purposes only and does not constitute investment advice. AI-generated analysis may contain errors or inaccuracies. Always conduct your own research and consult a qualified financial advisor before making investment decisions.
See Greeks (Delta, Gamma, Theta, Vega) in Action
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