How Traders Speak Greek
By - Dan Raju, CEO at Tradier on
Apr 20, 2021 at 11:19:54 AM
There’s a lot to learn when you’re new to options trading. Is it all Greek to you? Savvy beginners do their research before putting real money on the line, but the Greeks are a surprise to many new traders. At their core, the Greeks are simply tools to measure the risk involved in taking a particular options position. Let’s cut through the uncertainty and learn how delta, theta, vega, and gamma can help you make informed decisions and wise trades.
What Are the Greeks?
Traders use Greeks as risk measures when evaluating options. The names may sound complicated since they use Greek letters to represent changes and rates. However, each Greek simply contains information about change, probability, decay, and volatility. These concerns should inform any options strategy, so it’s important to understand each measure.
Delta stands for change, specifically how much an option is likely to change assuming a one-point move in the underlying factors. You may see delta described as an “equivalent share of stock,” or as a measure of how likely an option is to finish in the money.
Theta deals with decay. This Greek describes how much an option will decay on a daily basis. If theta is applied to an entire position, it measures how much that position will lose or gain daily. A negative theta value shows that options are “wasted assets,” declining regularly even though underlying conditions remain stable.
Vega is an option’s price sensitivity as it relates to volatility, which is the speed and amount of price change. Vega measures how much an option price changes as a result of 1% changes in the underlying volatility.
Gamma is a second-derivative measure, which means that it is determined based on an option’s delta value. Gamma shows the rate of fluctuation between the underlying price and the option’s changing rates. It shows the amount that the delta would move, assuming a $1 change in the underlying security.
How Can I Use Greeks to Trade?
The Greeks are determined for each trading position using an options pricing model. The variables that inform each measure are constantly changing, so traders should analyze their Greeks frequently to stay informed.
It’s easy to monitor your risks when you use a computerized solution for calculating Greeks. TradeHawk, Tradier’s trading platform, offers a robust array of Greeks to help you strategize. You can explore full Greeks for every option, including position Greeks, individual options, and spread Greeks. Make the most of TradeHawk’s Greeks and discover more tools for your trading journey.