The Greeks, as they are known, are closely followed by options traders, both on and away from the trading floor, as they provide an indication of factors impacting an option’s price and potential directional movement. Greeks are important metrics to follow because they serve as indicators of the major factors that affect an option’s price. Without a solid understanding of the “Greeks”, one’s ability to understand how options prices will move is limited. If you’re trading options, it’s important to understand the Greeks and what they represent.
Delta represents the change in an option’s theoretical value for every $1 move in the price of the underlying asset, in this case, XSP. The value of an option’s delta ranges from -1 to +1 based on whether the position is long or short or whether it’s a put or a call.
Vega measures volatility, specifically it represents the change in an option’s theoretical value for every one point change in volatility. Volatility is one of the more important factors impacting an option’s price and is therefore more closely followed. (Of note, Vega is not an actual Greek letter.)
Theta reflects the change to an option’s value for every one unit change in time, which, given certain circumstances, is normally in one day increments. (All things equal) With each passing day, an option’s value decays because it is one day closer to expiration and therefore, the time value component of an option’s price is decreased. If a trader is long an option, they have negative theta exposure. Conversely if they are short an option, they have positive theta exposure.
Gamma is known as the second derivative. It represents the change in an option’s delta for every $1 movement in the underlying asset. Gamma is a second order derivative because it moves the option’s delta, which is a derivative of the underlying asset.
Rho measures the change in an option’s price given a one point move in a risk-free interest rate. Rho is generally considered one of the lesser Greeks, particularly in a low (or zero) interest rate environment, because interest rates have a lesser impact on an option’s price than many of the other price-determining components.
To learn more about option’s Greeks, go to the option's volatility calculator which allows users to change various price inputs to see what the effect on an option would be.