Option Greeks are calculations that traders can use to assess an option contract’s potential value based on price movement in the underlying stock. Understanding the Option Greeks allows traders to accurately assess option contract value and make educated trading decisions.
The main Option Greeks are:
Delta measures the likely change in an option contract’s value based on a $1 move in the underlying stock. For example, if an option contract has a Delta of .45, traders can anticipate the value of the contract to move $45 on a $1 move in the underlying stock.
The closer an option contract is to having intrinsic value, the more delta increases. The best way to think about delta is how much each share within the option contract is valued. A deep ITM option will attain the maximum delta of 1.00, meaning a $1 move in the underlying stock results in a $1 move in the value of the each share within the option contract. This is because the option is believed to be exceptionally valuable due to its increased likelihood of expiring ITM.
The $160 call, which are $1.50 away from being at the money (ATM), have a delta of .44. ATM contracts will typically have a Delta of .50. In general, it's best to pursue contracts that have a delta in the .30 to .50 range. Any higher than that likely means you are paying too much for the contract, and any less indicates there is above average risk in the contract failing to go ITM.
Gamma measures the rate of change in an option contract’s delta based on a $1 move in the underlying stock. Looking back at the AAPL $160 call, we see a gamma of .05. If AAPL were to go up $1, we could anticipate the $160 call’s delta increasing from .44 to .49.
If you look up at the AAPL options chain above, you’ll notice gamma peaks on the contracts closest to being ATM and decreases on the contract strikes that are further ITM & OTM. This is because contracts close to ATM are considered volatile. These contracts could easily make a run deep ITM or far OTM. Most traders, especially day traders, look to purchase contracts slightly OTM and sell the contract once it is ITM. This is because slightly ITM contracts provide the best combination of quality delta, cost, & accelerating gamma.
Theta, also known as time decay, measures how much a contract should lose in value each day if all other factors stay the same.
Theta accelerates as a contract draws closer to expiration. This is because of the value of an options contract’s extrinsic value.
The $160 calls expiring in 2 days have a theta of .97, meaning they would lose $97, or 33% of their value on the day unless the contract goes ITM. The $160 calls expiring in 16 days only have a theta of .16, meaning the contract would lose $16, or 3% of their value on the day if all other factors stay the same.
It’s also worth pointing out the $160 calls expiring in 16 days cost roughly 4.50, while the $160 calls expiring in 2 days cost roughly 2.70. This is because the more time a contract has until expiration, the more time there is for the contract to make a run ITM.
Vega measures the rate of change in an option’s value based on a 1% change in the implied volatility (IV). It is extremely important to keep an eye on vega if you’re looking to trade a contract with high IV. Generally speaking, it is unhealthy to build a habit of trading contracts with high vega and volatility, as you will find yourself overpaying for contracts, not to mention the ability to get severely burned by IV crush.
Check out our article on Implied Volatility to get a better understanding of how it impacts your options trading.
