Greeks

Intermediate

The Greeks are a set of measures, named after Greek letters, that show how sensitive an option's price is to changes in factors such as the underlying asset's price, time, volatility and interest rates.

Option prices change for several reasons at once. The Greeks break these down, helping traders understand and manage the risks in their positions.

Delta measures how much an option's price changes when the underlying asset's price changes by one unit. Gamma measures how much delta itself changes as the asset's price moves. Theta measures how much an option's value declines as each day passes, known as time decay. Vega measures how much the option's price changes when implied volatility changes by one percentage point. Rho measures sensitivity to changes in interest rates.

For example, an option with a delta of 0.5, a theta of −0.04 and a vega of 0.10 would be expected to rise by about 0.50 if the share price rises by 1, lose about 0.04 in value each day if nothing else changes, and gain about 0.10 if implied volatility rises by one percentage point.

Professional traders use the Greeks to hedge their positions, for example keeping a portfolio's overall delta close to zero so that it is not exposed to small movements in the underlying asset's price. The Greeks are estimates that change constantly as market conditions change.

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