The Greeks (Options)

What are the Greeks?

The Greeks are a set of metrics that measure different dimensions of risk in an options position. They are named after Greek letters and tell you how an option's price will change in response to different factors. Even if you do not trade options, understanding the Greeks helps you understand how options activity affects stock prices.

The four main Greeks

Delta

• Measures how much the option price changes for a $1 move in the stock
• Call delta ranges from 0 to 1. Put delta ranges from 0 to -1
• A delta of 0.50 means the option gains $0.50 for every $1 the stock moves up
• Deep in-the-money options have delta near 1 (they move almost dollar-for-dollar with the stock)

Gamma

• Measures how fast delta changes as the stock moves
• High gamma means delta is accelerating. This is what drives gamma squeezes
• Gamma is highest for at-the-money options near expiration
• When market makers hedge their gamma exposure, it creates buying or selling pressure in the underlying stock. See Gamma Squeeze

Theta

• Measures how much value the option loses each day from time decay
• All options lose value over time (all else being equal). Theta quantifies how much
• Theta accelerates as expiration approaches. An option with 30 days left loses value slowly. An option with 2 days left loses value rapidly
• This is why buying short-dated options is risky: even if the stock moves in your direction, theta can eat your profits

Vega

• Measures how much the option price changes for a 1% change in implied volatility
• High vega means the option is very sensitive to volatility changes
• Before earnings, IV is high and options are expensive (high vega exposure). After earnings, IV crashes and option values drop even if the stock moved in your direction. This is IV crush

You do not need to memorize the math behind the Greeks. Just remember: Delta is your direction bet, Theta is your daily cost of holding, Gamma is your accelerator, and Vega is your volatility bet. If you buy options, Theta and Vega are usually working against you.