What this lesson is about
Four Greek letters that answer four different, precise questions about exactly how an option's price will react, to price, to time, and to uncertainty itself.
Part 1 of 2
"The Greeks" might seem daunting, but each one answers a clear question about how an option's price reacts to specific changes. Delta tells you how much the option's price will move for a $1 change in the underlying stock. It typically ranges from 0 to 1.0 for calls (0 to -1.0 for puts). You can think of Delta as a rough estimate of the probability that the option finishes in-the-money. Gamma follows up. How much will Delta change as the stock moves? Gamma peaks for options near their strike price as expiration approaches, meaning Delta can shift fast in those situations.
Quick check
What does Delta measure?
Delta is the most fundamental Greek - a direct measure of price sensitivity to the underlying, roughly ranging from 0 to 1.0 for calls and 0 to -1.0 for puts.
Part 2 of 2
Theta addresses a different issue. How much value does this option lose each day just from time passing, assuming everything else stays the same? This time decay is a constant force against anyone holding a long option position. It also benefits anyone who sold it. It isn’t linear. It speeds up as expiration gets closer. Vega completes the four most commonly cited Greeks. It shows how much the option's price changes if the market's expectation of future volatility shifts, regardless of any actual stock price movement.
Quick check
What does Gamma measure?
Gamma describes how quickly Delta itself will shift as the underlying moves - a kind of "delta of delta," highest for options near the strike price close to expiration.
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