← IntermediateLesson 1 · 4:15
What do the Greeks actually measure?
Summary
You can read the four Greeks as four pictures of one curve: delta is its slope, gamma is how fast that slope bends, theta is what one day costs and vega is what one point of volatility does. You can use them to say how an option should react to the stock, the clock and volatility before you pay for it.
Key terms
- delta
- How much an option's price moves for a $1 move in the stock, and a rough guide to the chance it finishes in the money.
- gamma
- How fast delta changes as the stock moves; it grows sharply near expiry around the strike.
- theta
- How much an option loses in one day with nothing else changing.
- vega
- How much an option's price moves when implied volatility changes by one point.
- in the money
- An option that is worth something if used now: a call with the stock above the strike, or a put with the stock below it.
- pricing model
- A formula that estimates an option's price; its numbers are estimates, not market prices.
Check yourself
Answer each question to see why the right answer is right.
1. What does delta measure on the curve of an option's result today?
2. The $100 XYZ call has a delta of 52. XYZ rises $1. Roughly what happens to one contract?
3. The model puts the chance of the $110 call finishing in the money at 13%, and its delta is 14. What does this tell you?
4. Hold XYZ at $100. With 30 days left, one day costs the $100 call about $6. With 10 days left, a day costs about $10. Which Greek is this, and what does it show?
5. XYZ stays at $100, but volatility rises from 30% to 31%. Roughly what happens to one $100 call contract?
Finished the video and the quiz? .