The Greeks Flashcards
What does the delta of an option measure?
Change in option price - given a small (1%) change in underlying price.
It can be thought as the liklihood of the option being exercised
assumes a linear relationship
What does the gamma of an option measure?
Change in delta - given a change in underlying price.
second order derivative
What does the theta of an option measure?
The change in price an option given a change in days to expiry.
E.g. option price falls by x given a 1 day change in expiry
Expressed as a negative for
Known as time decay
What does the vega of an option measure?
The change in price of an option given a change in the volatility of the underlying.
When is the delta of an option the highest?
When the option is deeply in the money
especially when time to expiry is low
When does a delta of
1) 0% occur
2) 50%
3) 100%
1) deeply OTM short time to expiry
2) at the money
3) deeply in the money
What is delta unsuitable for?
Calculating the change in price given a large change in the underlying
When is gamma highest?
When the option is ATM
especially when time to expiry is low
When does theta increase?
As time to expiry convirges toward 0
Theta is highest with 1 or 2 days to expiry
Unlike Gamma and Theta what is Vega higher for?
Longer dated options
Especially those at the money
