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Simplifying the Greeks and Understanding Options: GUIDE

0DTE: Zero Days Till Expiration. Options that expire on the same day they are traded.

Weeklies: Options contracts that expire on a weekly basis.

LEAPS: Long-term Equity Anticipation Securities; options expiring in one year or more.



How the Greeks Affect Options Traders:

The Greeks are a set of four main metrics that measure the sensitivity of an option's price to changes in various factors, such as the underlying stock price, implied volatility, and time. These metrics help traders gauge various types of ATM, ITM and OTM options contracts.


Recapping the Basics- ATM, ITM & OTM:

At the money (ATM) means that the strike price of the option is equal to the current market price of the underlying stock. (ie) You buy a $100 call option on a $100 stock, the option is at the money.

In the money (ITM) means that the strike price of the option is below the current market price of the underlying stock. (ie) You buy a $100 call option on a $110 stock, the option is in the money.

Out of the money (OTM) means that the strike price of the option is above the current market price of the underlying stock. (ie) You buy a $100 call option on a $90 stock, the option is out of the money.

While OTM is the most lucrative in my opinion, the high rewards come with even higher risks.

As you can see there are different types and timings of options contracts available on an options chain but before we can jump into The Greeks, one must first understand implied volatility.



Understanding Implied Volatility (IV):

IV is a measure of the market's expectation of future volatility of an underlying stock price. IV is your friend and it's one of the most important factors that determines the price of an option.


How IV Affects Options:

Options with a high IV are more expensive. This is because the market expects that the underlying stock price will move more significantly in the future.


Buying and Selling Options with Respect to IV:

Buy options with low IV, especially for short-term or 0DTE contracts, to reduce the risk of losing money due to time decay. Sell out-of-the-money options with high IV and short expiration dates to profit from their likely time decay. Be aware of the delta of your options, especially if you are selling weekly or 0DTE options. This will help you manage your risk in case the underlying stock price moves against you.



Delta Δ

Delta is the most important Greek because it measures the sensitivity of the option's price to changes in the underlying stock price, or how much the option price will change for a given change in the stock price.

Calls have a positive delta. Calls with a delta of 1.0 are equivalent to owning the underlying stock. Puts have a negative delta. Puts with a delta of -1.0 are equivalent to being short the underlying stock.

In-the-money options have a delta of close to 1.0 Out-of-the-money options have a delta of close to 0.0.

The delta of a call or put will approach 1.0 as it gets closer to being in-the-money. The delta of a call or put will approach 0.0 as it gets closer to being out-of-the-money.

Delta is also a percentage risk gauge for an option. Multiply it by 100 to get a general percent chance of profit.

Delta is higher for options with shorter expiration dates, such as weeklies and 0DTEs; meaning the price of these options will change more for a given change in the underlying stock price. Delta is higher for options that are closer to the money. (ie) The price of these options will change more for a given change in the underlying stock price. Delta is lower for options with longer expiration dates, such as monthly and quarterly options; meaning the price of these options will change less for a given change in the underlying stock price. Delta is lower for options that are further out of the money. (ie) The price of these options will change less for a given change in the underlying stock price.

Option buyers prefer options with a high delta, which means that their option will gain more value if the stock price moves in their favor. Option sellers prefer options with a low delta, which means that they will lose less money if the stock price moves against them.


For example, if you buy a call option on a $100 stock with a delta of 0.5, the option premium is expected to increase 50 cents if the underlying stock price goes from $100 to $101.


Gamma Γ

Gamma is the derivative of delta, or the instantaneous rate of change of delta with respect to the underlying stock price. Gamma is to delta as acceleration is to velocity in physics. In other words, gamma measures how quickly delta changes as the stock price changes.

Option buyers generally prefer options with a low gamma, which means that the delta of their option will not change as much if the stock price moves in their favor or against them.

Option sellers generally prefer options with a high gamma, as this can allow them to capture more profits.

Gamma is positive for both calls and puts, meaning that the delta of a call or put will increase as the underlying stock price increases.

Gamma is highest for ATM options and decreases as the option gets closer to being ITM or OTM.

Gamma is also higher for options with shorter expiration dates and options closer to the money.

Gamma squeezes occur when there is a sudden increase in demand for calls on a stock. This causes market makers to buy shares in order to hedge their short call options positions. Weeklies and 0DTE options contracts are far more susceptible to gamma squeezes, which can cause the price of the option to move rapidly in either direction. Gamma squeezes can be very profitable for traders who are long the stock but they can also be very risky, as the stock price can fall just as quickly as it rose.


Theta Θ

If it weren't for gamma's close correlation with delta- theta would be an easy #2 in terms of importance.

Theta is to time and more specifically to rate of decay. Theta increases as your expiration date approaches.

Theta is a measure of the sensitivity of an option's price to the passage of time, indicating how much the option will decrease in value each day that it does not move closer in the money.

Theta is negative for both calls and puts as the value of any option will always decay over time and it doesn't matter whether it’s a call or a put. However, theta-decay is accelerated alongside OTM-ness and theta decay goes into overdrive as expiration approaches and your contracts are still left deep OTM.

Theta decay is bad for option buyers and good for option sellers because it causes the value of the option’s contracts to face an inherent decrease in value over time.

Theta is measured on a scale of 0 to 1. A theta closer to 1 means that the option is more likely to lose its value before expiration. For example, an option with a theta of 0.90 is more likely to lose its value than an option with a theta of 0.50, whether or not it’s ITM or OTM.

Option buyers generally prefer options with a low theta, as this means that their option will lose value more slowly. Option sellers generally prefer options with a high theta, as this means that they can profit from the time decay of their options.

Weeklies and 0DTE contracts are extremely susceptible to theta decay, therefore, you want to close out any losing positions quickly- especially if theta decay is high.

(ie) if you buy calls 50% OTM that expire next week- theta decay will be more apparent here compared to the same option expiring in six months.

Vega ν

Vega is the measure of how much an option's price will change if the IV changes.

Option buyers prefer options with a higher vega, as their option value increases with IV. Option sellers prefer options with a lower vega, as this limits their losses in the event of a sudden increase in IV.


Increase in IV = good for buyers, bad for sellers Decrease in IV = bad for buyers, good for sellers


Buy options with low IV, long expiration dates, and/or are ITM. Option buyers: Look for options with a high delta, a low gamma, a low theta, and a high vega. Sell options with high IV, short expiration dates, and/or are OTM to profit from vega decay. Option sellers: Look for options with a low delta, a high gamma, a high theta, and a low vega.


Always monitor the vega of your options, especially if you are buying and selling weeklies or 0DTE

Rho ρ

Rho measures the sensitivity of an option's price to changes in interest rates. Rho has its use-case but is generally considered one of the less-notable options Greek



Additional Notes: Delta, gamma, and vega are all positive for both calls and puts meaning The price of a call/put will increase if the underlying stock price increases, IV increases, or gamma increases. Theta is negative for both calls and puts. This means that the price of a call or put will decrease over time. The Greek’s sensitivity levels intensify on OTM options and options with shorter expiration dates as they are more sensitive to changes in the underlying stock price, implied volatility, and time.




Copyright: The Bullish Shark Company; 2023. *Not Financial Advice*

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