Understanding the Greeks
Delta, Gamma, Theta and Vega are key metrics ("Greeks") that describe option price sensitivity. Mastering them helps you evaluate risk and reward more precisely.
Delta
Delta measures the expected price change of an option for a $1 move in the underlying asset.
- Call options: 0 to +1, Put options: –1 to 0.
- At-the-money (ATM) calls typically ≈ +0.50; ATM puts ≈ –0.50.
- Key takeaway: Higher delta → position behaves more like underlying shares.
Gamma
Gamma measures how much delta changes for a $1 move in the underlying.
- Highest for ATM options; falls for deep ITM/OTM contracts.
- Always positive for both calls and puts.
- Key takeaway: Gamma risk ("delta acceleration") grows as expiration approaches.
Theta
Theta quantifies time decay – the daily option value lost as expiration nears (all else equal).
- Always negative for long options.
- Magnitude grows rapidly in the final 30 days.
- Key takeaway: Short-dated premium sellers benefit from theta; buyers fight it.
Vega
Vega measures sensitivity to a 1-percentage-point change in implied volatility.
- Positive for both calls and puts (long options).
- Greatest for ATM options and longer-dated expirations.
- Key takeaway: Rising IV helps long premium positions, hurts short premium.
Practical Example
Suppose you buy a 45-day ATM call with delta ≈ 0.50, gamma ≈ 0.04, theta ≈ –0.07 and vega ≈ 0.12. A $1 rise in the stock adds roughly $0.50 to the option, but if the stock continues another $1 the delta could rise to ≈ 0.58 (delta + gamma). Meanwhile, each passing day erodes $0.07, and a 1 point IV increase adds $0.12.
Key Takeaways
- Use delta to size directional exposure.
- Monitor gamma near expiration; risk grows quickly.
- Theta works for option sellers and against buyers.
- Volatility changes (vega) can dominate price moves in high-IV environments.