The option is the most important financial invention of the last century.
Why the Greeks Matter
Options don't move dollar-for-dollar with stocks. The Greeks tell you how your option price will change based on different factors. Every broker shows these numbers - you just need to know what they mean.
The Four Main Greeks
Delta: Direction Sensitivity
Delta tells you how much your option price changes when the stock moves $1. It's the most important Greek.
| Delta | What It Means | Example |
|---|---|---|
| 0.50 | Stock +$1 → Option +$0.50 | At-the-money call |
| 0.80 | Stock +$1 → Option +$0.80 | Deep in-the-money call |
| 0.20 | Stock +$1 → Option +$0.20 | Out-of-the-money call |
| -0.50 | Stock +$1 → Option -$0.50 | At-the-money put |
Quick rule: Calls have positive Delta (0 to 1). Puts have negative Delta (-1 to 0). Delta also estimates the probability of expiring in-the-money.
Theta: Time Decay
Theta tells you how much value your option loses each day, just from time passing. It's always working against option buyers.
Theta Example:
Your call option has Theta = -0.05
This means you lose $5 per day just from time passing.
(Each option = 100 shares, so -$0.05 × 100 = -$5)
If the stock doesn't move, you'll lose $5 tomorrow, $5 the next day... that adds up fast.
Key insight: Theta decay accelerates in the final 30 days. An option loses more time value per day in its last week than in its first month.
Vega: Volatility Sensitivity
Vega measures how much an option's price changes when volatility increases or decreases by 1%.
| Scenario | Volatility Effect | Impact |
|---|---|---|
| Before earnings | Volatility rises ↑ | Options get more expensive |
| After earnings | Volatility drops ↓ | Options get cheaper (IV crush) |
| Calm market | Low volatility | Cheaper options |
| Market panic | High volatility | Expensive options |
IV Crush warning: Buying options before earnings? You might be right about direction but still lose money when volatility collapses after the announcement.
Gamma: The Speed of Delta
Gamma tells you how fast Delta changes as the stock price moves. High Gamma means your Delta shifts quickly.
Why Gamma Matters:
Near expiration: Gamma is highest for at-the-money options close to expiration. Small stock moves cause big changes in Delta.
Double-edged sword: High Gamma can work for you (profits accelerate) or against you (losses accelerate).
For beginners: Be careful with high-Gamma positions near expiration. Things can change fast.
Quick Reference Chart
| Greek | Measures | Buyers | Sellers |
|---|---|---|---|
| Delta | Stock price move | Want it high | Want it low |
| Theta | Time decay | Works against | Works for |
| Vega | Volatility | Rising vol helps | Falling vol helps |
| Gamma | Delta speed | Can help or hurt | Can help or hurt |