Making Sense of Option Greeks
Recently moomoo launched an options trading commission waiver card worth USD70 (need to claim the card and perform at least 1 trade in the US market per month to qualify) so there has been increased interest in options trading among my moomoo friends. @SSS AhHuatKopi
I’m a novice when it comes to options. While I understand the basic concepts of options trading, I am still trying to figure out the option Greeks.
This is what I have discerned so far from the materials I have read. I think I still need a lot of paper trading to understand them and consult more experienced friends like @费北敬 @doctorpot1
Delta: This measures how a change in the price of the underlying asset affects the price of an option. It also indicates the likelihood that an option will become in-the-money (ITM) at expiration. The range of Delta is from -1 to 1. A Delta of 0.5 means that when the price of the underlying asset increases by $1, the price of the option will increase by 50cents and there is a 50% chance that the option will be ITM at expiration. At-the-money (ATM) call options have a Delta close to 0.5 while ATM put options have a Delta close to -0.5. Similarly, deep ITM call options have a Delta close to 1 while deep ITM put options have a Delta close to -1. Out-of-the-money (OTM) options have a Delta close to 0.
Gamma: This measures the rate of change of Delta in response to a change in the price of the underlying asset. Using the analogy of a graph, Delta is like the gradient of the graph while Gamma is the rate of change of the gradient. If an option has a Delta of 0.4 and a Gamma of 0.1, this means for every $1 change in the price of the underlying asset, the Delta will increase by 0.1 i.e. from 0.4 to 0.5. Gamma is the largest when an option is ATM and smallest when an option is deep ITM/OTM.
Theta: This measures time decay or the rate of loss in the value of an option as time passes. As the expiry date draws near, the value of an option decreases (there is less time left to profit from the option) until it becomes zero at expiration date.
Source: Schwab Center For Financial Research
Vega: This estimates how sensitive an option price is to a 1% change in the implied volatility of the underlying asset. Call options have a positive vega as the buyer gains when the premium increases while put options have a negative vega as the seller gains when the premium decreases. Vega is the largest for ATM options and lowest for deep ITM/OTM options. A higher than normal Vega is a signal to sell while a lower than normal Vega is a signal to buy.
Source: Merrill Options Education Hub
Rho: This measures the effect of a one percentage point change in interest rate on the price of an option. When interest rate rises, call options increases in value (Rho is positive) while put options do the opposite (Rho is negative).
Disclaimer: The above is just sharing of my personal opinion. It is not financial advice. Please consult your financial advisor before taking on any investment.
Disclaimer: Community is offered by Moomoo Technologies Inc. and is for educational purposes only.
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William Robinson1 : I don't do options, yet. But that is good information, thank you.
I remember reading that the easiest way to get started was Selling Puts. what is your opinion on that?
La Diabla ChuChu : Finally!!!
DadacaiOP William Robinson1: Selling options comes with an obligation whereas buying options grants a right (but not an obligation). For beginners to options, buying is probably easier than selling or even better, try paper trading without risking real money. Those who sell a put will be obligated to buy the shares if the stock price falls below the strike price at the expiration so it is more for people who are fine with buying the shares. If there is no desire to own the shares and it looks like the put may be assigned/exercised, the position can be closed before it expires by buying the same quantity of put with the same strike price and expiration date from the market.