Greeks are actually the risk measures associated with different positions in the trading of Options. The common ones are Delta, Gamma, Theta and Vega. With variations in the prices or instability in the value of the underlying stock, you need to assess how the option pricing is going to be affected by it. Importance of Greeks can be understood by the fact that their use in Options actually helps us in understanding the impact of various factors including prices, expiry period and market instabilities that do have an impact on the pricing of Options.
Delta helps in measuring the impact on an option’s price to a variation in the prices of the underlying stock. To put it more simply, Delta is that Greek which gives an idea about how much a stock option will go up or down in value with a $1 up or down variation in the value of the underlying stock. It also explains the amount of profit you stand to make, when the value of the underlying stock goes up.
Gamma helps in measuring the exposure of the option Greek delta with variations in value of the underlying stock prices. Quite similar to Delta which relates to the rate of change of an Option’s price with respect to the underlying stock’s price; Gamma is actually the rate of change of Delta with respect to the value of the underlying stock’s price. Hence, you could also call Gamma the second order derivative Greek as well.
Theta helps in measuring the exposure of the price of the Option with the passage of time as it slowly nears its date of expiry. It actually helps in calculating the rate at which options price will be going down with change in its time value. By understanding Theta, you can really make a trading strategy for an Option, and plan out how long you would need to hold to an Option, so that it still profits you at the time of selling it.
Vega actually helps in measuring the exposure of Option’s price to variations in the volatility of the underlying asset. Usually, Options tend to be more expensive in conditions of higher market volatility. So, if the market volatility goes up, the price of Option might spike up or go down depending upon the volatility factor.
Options Greeks are a great indicator of the movement of option prices in the future, and can really help you in having a good trading strategy in place for profitable outcome.