Option Greeks are the mathematical characteristics which are used within the Black-Scholes model for pricing options premiums. These mathematical characteristics are named after the Greek letters which are used to represent them when used in equations. There are five of these mathematical characteristics, or Option Greeks, all five of which are used to present a stock option's sensitivity in a mathematical way to the four factors which have an effect on its value, including the changes of the underlying stock price, the interest rate, the time decay and volatility.

 

Option Greeks are used to allow option traders the chance to calculate the changes in the value of their option contracts that are in their portfolio in an objective way against the changes in all of the factors which affect stock option values. The ability to calculate these changes mathematically gives these options traders the ability to "hedge" their portfolio, which means that they can construct various positions within it using specific profiles for risk and reward. This option alone makes the understanding of Option Greeks a priceless part of learning to understand options trading.

 

For an options trader who is new to the trade, the most important Greek to know is the delta of your options position, because it gives a pretty good indication of how the value of your option is going to change along with the movements of an underlying stock price when all other variables remain the same. Knowing your time decay or theta Greek will give you a pretty decent indication of how much time value is lost by the option position every single day when all other variables remain the same.

 

Many professionals make use of the Option Greeks in order to measure how they must hedge their portfolios, in addition to allowing them to surgically remove any risk factors that exist within their portfolio. These Option Greeks are also great for enabling a measurement of risk that the portfolio is being exposed to, as well as where the risk actually lies so that it can be eliminated by the trader.

 

There are five option Greeks, the Delta, Gamma, Vega, Theta and Rho. The five Greeks are δ for Delta, γ for Gamma, Vega,  θ for Theta and ρ for Rho. Delta is a measure of an option's sensitivity to various changes in the underlying asset's price. The Gamma is a measure of the delta's sensitivity to various changes in the underlying asset's price. The Vega is a measure of the option's sensitivity to various changes in the underlying asset's volatility. The Theta measures the option's sensitivity to time decay. Finally, the Rho measures the sensitivity of an option to various changes in the risk-free interest rate.

 

If you are looking for a way to gain an edge over other options traders, and to guarantee better success with options trading, one of the best things that you can learn is how the Options Greeks work. These mathematical characteristics are extremely useful when helping traders to eliminate risk from their portfolios in addition to showing them how to hedge the options in their portfolios.