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Understanding the Greeks

A description of the variables that describe an options trade.

 

Delta (δ)

Long call is positive. δ+  (makes money as stock goes up)

Long put is negative. δ- (makes money as stock goes down)

Reversed for shorts.

Purpose: barometer for the exposure in a stock.

Definition: “delta of a position sum of the quantity of each option times each option’s delta.”

The delta is an approximation, and so you may not be able to find the prices that match the delta.

Gamma (γ)

Accelerates delta in the direction of which it is going.

Short gamma are dangerous. But if you think a stock price is going to move quickly, buy option with high gamma.

Good for fast changing stocks.

Theta (θ)

Measures the decay of an option’s value.

Long is negative and lose money.

Short is positive and make money as time passes.

Indirectly proportional to gamma.

 

References:

ThinkOrSwim.com

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