When we trade options, we cannot and should not ignore the important of Options Greek. Options Greek is like dashboard in your car. In car dashboard, there are speedometer, odometer, fuel gauge etc. These indicators enable the driver to control the car and drive smoothly. Ignoring the Options Greek in trading options is like neglecting the car dashboard while driving. It may lead to disaster.
As we understand the important of the Options Greek, the next question that we should ask is how extensive we need to study and learn the Options Greek. Fortunately, we just need to know the usage/concept and we don’t need to know how it get calculated as a good trading platform should auto-calculate for us.
Options Greek consists of Delta, Gamma, Theta, Vega and Rho. A complex formula that consists of all these 5 Options Greek will calculate the Options Premium Price. For those who have heard of using options as an income investing, selling options (When Seller sell the options contract to the Buyer) will enable the Options Seller to collect the options premium as an income.
Delta – For Call Options, a delta of 0.3 means when the stock/underlying move up $1, the options price will move up $0.30. For Put Options, delta will always be -ve because when the stock/underlying move up, the options price will decrease.
Gamma – The velocity of the Delta changes against the stock/underlying price changes. E.g. when you buy a Call Options at Strike price 100 and the stock is trading at $99, we call this options OTM (Out of The Money), the delta is 0.4. When the stock price is moving up from $99 to $100 (Options ATM), the delta increases to 0.5. When the stock price is moving up from $100 to $101 (Options ITM), the delta now increases to 0.7. The changes of the delta from 0.4 to 0.5 when the stock price changes is represented by Gamma. The important point here is that, when the options is going to expire, gamma risk will increase, the margin will therefore increase drastically against the naked options seller (without hedge).
Theta – It represents time value. For OTM options, the time value will continuously dropping and become zero when options expires. Hence, theta works for Options Seller and work against Options Buyer.
Vega – It represents volatility. The more volatile the stock/underlying, the more expensive the options premium. There is a concept called reversion to mean. If the stocks volatility is high now, it may drop back to the norm/average level. In a high volatility environment, it is good to Sell Options (as options premium is expensive), in a low volatility environment, it is good to Buy Options (as options premium is cheaper).
Rho – It measures the options price changes to the changes of interest rate. Basically, we can forget about this Greek and it is the least important Greek.
Do take some time to digest the Options Greek. We just need to know enough to take advantage on this ‘dashboard’. We will explore more in the next post. Cheers!