Options Trading Question .....?

Question

Im finally getting into the Options market ... I dare say I am ready to play with the big boys .... Anyway as get into the heavy research with it sure betas and alphas are easy, but what about the Deltas? Gammas? Thetas? and Vega's? Can anyone explain these to me? Thanks

Answer 1

You can get brief introductions to the "greeks" at

http://www.888options.com/advanced/volatility_greeks.jsp

but not enough detail to understand how to use them in your trading.

Any good options book should go into more detail on delta, gamma, theta, and vega. It is important to understand the risks these represent before risking any serious money trading options.

I recommend "Option Volatility & Pricing" by Sheldon Natenberg if you want detailed discussions about the greeks, but some people consider that book too complicated. Find a book that has explanations of the greeks in a manner with which you are comfortable.

Answer 2

Delta - the change in the options price vs. the change in the price of the underlying. For example, if the option has a delta of .5, it means that for every 1 point the underlying moves, the price of the option moves by 1/2. A delta of 1 means the options price moves point for point with the underlying.

Theta - the time decay of the option

Vega - the effect of volatility on the option price

Gamma - the rate of change of the options delta

Rho - affect of interest rates on the options price (only for equity options).

If you are going to seriously trade options, then you need to look at options writing. The options traders the consistently make money are options writers/sellers, not buyers. Since 80% - 90% of all options expire worthless, a buyer only as a 10% - 20% chance of making money while the writer has an 80% to 90% chance of making money. Every time I write options, I make money, except for one time in 1998 when I wrote call options on the Swiss Franc. Russia defaulted on it's debt and currencies shot up and I lost money. But, that was an out of the blue event. I consistently make money writing options. BUT, it is a riskier position, so know what you're doing before you get involved in writing them.

Answer 3

Check up www.hoadely.com and check up under options. It saves lot of typing. There they explain everything. If you cannot reach it try www.888options.com and check under greeks.
Anyway let me go in and type in a few sentences for yah.
Delta: is the change in premium to change in underlyins stock price. Chicago Board of Option Exchange though says the denominator should be the change in premium to the futures othe same security.
Lambda: It is the change in delta to change in stock price.
This is like acceleration in physics.
Theta: It is the change in option premium/expiration day.
Vega:It is the change in option premium to volatility.
Rho: it is the change in premium to interest rate.

It is also better to know the charecteristics of these greeks which will give you insights into what they do. Some are bell curves like vega, some spline curves like delta which tells the story of what they do. Vega bell curve tells you how the premium moves as the volatility rise and the volatility is high around the mid expiration time meaning the premium tend to be high then. Delta spline rises faster initially in the out of money state saying the premium rises faster in the out of the money state then flattens out growing meaning the premium rises faster and slows down in the money. So this will give you idea as to how the premium moves.

Answer 4

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Answer 5

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