The Greeks

Question 1

Explain Delta

Answer 1

Delta represents the change in the option price when the underlying asset price increases by $1.

ie. the sensitivity of the option price to changes in the underlying price

Question 2

What Deltas do call options and put options have ?

Answer 2

Call options have a positive delta (an increase in stock price increases the price of the option)

Put options have negative delta (a increase in stock price decreases the price of a put option)

Question 3

What is the Gamma of an option ?

Answer 3

Gamma measures the rate of change of the delta (derivative of the sensitivity of the option price to the underlying price)

Gamma is always positive for both calls and puts.

Question 4

What is Theta?

Answer 4

Theta is a measure of the time decay of an options price.

ie. The dollar amount the option will LOSE each day due to the passage of time.

Question 5

If an option is At The Money, what will the Theta be?

If it is In The Money or Out The Money, what then?

Answer 5

For At The Money options, the Theta increase as it nears expiration (the amount the options loses due to time decay increases)

For ITM or OTM options the Theta decreases as it nears expiration (the amount the options loses. due to time decay decreases)

Question 6

What is Vega?

Answer 6

Vega measures the sensitivity of the price of an option to changes in volatility.

Question 7

What does an increase in volatility do to the Vega? decrease?

Answer 7

An increase in volatility will increase the prices of all the options on an asset, and a decrease in volatility causes all the options to decrease in value.