Option Greeks

How to find greeks?
How to find greeks?
In 1973, Black and Scholes published a paper called "The Pricing of Options and Corporate Liabilities" in the Journal of Political Economy, that introduced the Black-Scholes option-pricing model to the world.
Soon, additional models and alterations to the Black-Scholes model were developed for options on indexes, dividend-paying stocks, bonds, commodities, and other optionable instruments.
All the option-pricing models commonly in use today have slightly different means but achieve the same end: the option's theoretical value.
For American-exercise equity options, six inputs are entered into any option-pricing model to generate a theoretical value: stock price, strike price, time until expiration, interest rate, dividends, and volatility.


Option greeks in LAVA
You can find greeks in an option chain
Theoretical value—what a concept! A trader plugs six numbers into a pricing model, and it tells him what the option is worth, right?
Well, in practical terms, that's not exactly how it works. An option is worth what the market bears.
The price of an option is determined by the forces of supply and demand working in a free and open market. Herein lies an important concept for option traders: the difference between price and value.
Price can be observed rather easily from any source that offers option quotes (LAVA app, web sites, your broker, quote vendors).
Value is calculated by a pricing model. But, in practice, the theoretical value is really not an output at all. It is already known: the market determines it.
The trader rectifies price and value by setting the theoretical value to fall between the bid and the offer of the option by adjusting the inputs to the model.
Professional traders often refer to the theoretical value as the fair value of the option. (you can check fair value in the Option scanner)
Although the foundation of trading option greeks is mathematical, this book will keep the math to a minimum—which is still quite a bit.
It's about learning to drive the car, not mastering its engineering. The trader has an equation with six inputs equaling one known output. What good is this equation?
An option-pricing model helps a trader understand how market forces affect the value of an option.
Five of the six inputs are dynamic; the only constant is the strike price of the option in question. If the price of the option changes, it's because one or more of the five variable inputs has changed.
These variables are independent of each other, but they can change in harmony, having either a cumulative or net effect on the option's value.
An option trader needs to be concerned with the relationship of these variables (price, time, volatility, interest).

Related topics:

Greeks

Delta

Gamma

Theta

Vega

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