If you’re someone dealing in the trading of Options, or considering doing it in the near future, then it is more than likely that you must have come across the term ‘Greeks’ many times during your interactions with other people operating in the trade. However, hearing about these ‘Greeks’ and understanding them are 2 different things altogether, and if you still haven’t got your head around them, then probably it’s high time that you took a good look at purpose and importance of these Greeks in Options trading.
For starters, Option Greeks are actually used to calculate the various aspects that influence the price of an Option you are looking to trade. Mainly, there are 5 Greeks used in the trading of options, including Delta, Gamma, Theta, Vega and Rho. Armed with the knowledge of Greeks, you as an Options trader can definitely make well informed and wise decisions about the Options you must trade, and the right time you must choose to trade them for profit.
So what is it that Greeks can really do for you in the field of Options trading? Let’s look at the 5 Greeks one by one, and how they can help you in making the right decision during the trading of Options:
1.Delta helps you in assessing the possibility that an Option you are thinking about trading will end in the money.
2.Gamma helps you in calculating the change in Delta with the variation in stock prices.
3.Theta gives you an idea about the value your Option might lose every day as it reaches its date of expiry
4.Vega helps in understanding the sensitivity of an Option in the wake of big price variations in the basic value of the stock.
5.Rho replicates the impact of changes in the interest rates on the price of an Option.
Since there are a large number of factors in the market that could have a bearing on the price of an Option in some way or the other, if we assume that all other factors would remain unchanged, we can use various pricing models to calculate the Greeks and make an assessment of the impact of each factor when there is a variation in its value. For instance, if we are aware that an option is moving less than the basic stock value, we can utilize Delta to calculate its movement when the stock moves by $1.