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Delta

Delta

Delta is the option's sensitivity to changes in the underlying stock price. It measures the expected price change of the option given a $1 change in the underlying. Calls have positive deltas and puts have negative deltas.

The delta also gives a measure of the probability that an option will expire in the money. For instance, a delta of .4 is thought to have a 40% chance of expiring in the money. Delta can also help a trader decide which option to buy. At the money options generally have a delta of .5, which is logical as stocks have 50% chance of going higher and a 50% chance of falling. Deep in-the-money options have very high deltas, and can be as high as 1.00, meaning they normally trade dollar for dollar with the stock.

Deep out-of-the-money options have very low deltas, meaning they may not make a profit even with large moves in the underlying stock.

Delta tells us how much an options price will change with a $1 move in the underlying. At-the-money options have a delta of roughly .50 and change roughly $.50 for every $1 change in the underlying stock either up or down.

Theta

Theta

Theta is an option's sensitivity to time. It is a direct measure of time decay. It tells us the dollar decay per day. This amount increases rapidly as the option approaches expiration. Theta is highest in the options expiration month. The more theta you have, the more risk you have given no move in the underlying price.

Option sellers make money from theta by collecting time decay every day.

Vega

Vega

Vega is an option's sensitivity to changes in implied volatility. A rise in implied volatility leads to a rise in option premiums thus increasing the value of long calls and long puts.

Gamma

Gamma

Gamma is the sensitivity of the delta to changes in the price of the underlying. Gamma measures the change in the delta for a $1 change in the underlying. Technically it is the second derivative of the underlying price (or the first derivative of delta), whereas delta is the first derivative of the underlying price.

Rho

Rho

Rho is the sensitivity of the delta to changes in interest rates. Not incredibly important to most options traders in that it simply makes holding all investment more expensive.


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