Option Greeks

Introduction to the "Greeks"
When it comes to trading options successfully, it is vital that you understand the multiple types of risk that comes into play.

To make them easier to discuss in detail, they have been broken down into different variables, each of which is labeled with a letter of the ancient Greek alphabet.

Trading without taking the time to learn this valuable way to avoid as much risk as possible is akin to driving in a foreign country without first learning the rules of the road, or even the language.

Regardless if you are placing a put or a call, or even just planning your strategy, it is crucial that you look at your various risks and rewards in terms of three key areas. First, the amount of change the price is likely to experience, second the amount of volatility currently at play, and finally, the amount of time the option has left until it expires. If you are holding a call, you will all need to consider if the price is moving in the wrong direction, if the volatility is decreasing or if there isn't enough time left on the option in question.

On the contrary, sellers face the risk of prices moving in the wrong direction and an increase in volatility but never when it comes to the time value.

When options are combined or traded, you will then want to determine the Greeks related to new result, often referred to as the net Greeks. This will allow you to determine the new difference between risk and reward and act appropriately.

Understanding what the Greeks can tell you will allow you to better tailor your strategy based on your desired level of risk. You can think of them as guideposts to keep you on the right track when it comes to seeking out the right options for you.

In order to determine how the Greeks are going to apply to any of the options trades you make, the first thing you will need to keep in mind that every strategy is likely to have a positive or negative value for each of the Greeks.

As an example, if the Vega is positive, then the position will see gains if the volatility rises. Likewise, a negative Delta position will result in a decrease if or when the underlying asset decreases.

Keeping an eye on the Greeks and noting how they change is a key to options trading success in both the short and the long term. In order to find the Greeks for your chosen option successfully, the first step is to always remember that the results you see are going to be theoretical as no one, and certainly not the Greeks, are able to predict the future.

What you are seeing is just the results of a mathematical formula with several different variables plugged in as needed. These include the bid you are putting on the option, the asking price, the last price, the volume and occasionally the interest.

Delta
Vega
Gamma
Theta
How to find greeks?
Download LAVA and find the "Greeks".
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