Why are Option Greeks so important? This is one question that anyone who’s new to trading would always wonder. However, with time, everyone realizes that Options Greeks are an important part of the options market. They form the fundamental components of an option’s price, and drive the ways in which its price increases or decreases over time. Thus, if you want to get the best out of your options trading, it is vital that you learn about Options Greeks and how you can make the best use of them.
How Option Greeks Drive Prices of an Option
There are four elements of Options Greeks that have varying effects on the value and performance of an option. These elements are:
Delta: In simple words, Delta represents the price change of an underlying asset. The value and performance of this element can vary based upon whether you are dealing with a call option (buying options before they expire) or a put option (selling options before they expire). For the call option, the range of delta would come between 0 and 1. For put option, its range would vary between -1 and 0.
Gamma: The value of Gamma depends upon the value of Delta. This type of Options Greeks represents the rate at which the value of Delta changes. So if there is a high change in the rate of Delta with respect to time, the value of Gamma will be higher too, and vice versa. Another way of determining its value is that when a dealing is made for long-term something, the value of a Gamma is low, while for a short-term option that is approaching its expiration date, the value of Gamma will be much higher.
Theta: Theta defines the time element of Options Greeks that loses its value every day until the option reaches its expiry date. The value of Theta is always mentioned as negative due to the ever-reducing value component. This value increases with time and as the expiration date of an option approaches.
Vega: Vega denotes the value of the amount that the option moves based on the implied volatility of an underlying stock. So when the volatility increases the value of Vega goes up, and vice versa.
There are tremendous opportunities Options Trading present to a dealer. From your part, you must ensure that the Options Greeks are always put to use while doing options trading in order to gain maximum benefits.
