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Essential Option Strategies by J. Kinahan

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Appendix A

The Greeks

Understanding the Greeks makes us smarter options traders. By Greeks, I don't mean Zeus, Plato, or Aristotle, but rather delta, gamma, theta, vega, and rho. While these concepts are somewhat complex in the beginning, you don't need a degree in quantum physics to understand the concepts or to use them in real-world trading.

Indeed, while computing the Greeks requires the use of options pricing models, many websites and brokerage platforms offer the information for free, but a few traders actually compute the numbers themselves. It is much easier to pull up an options chain with the numbers already computed.

If you have already traded puts and calls, you know that options prices change as the price of the underlying moves higher or lower. But have you ever purchased a call option only to see it lose value despite a move higher in the underlying? That might happen when other factors, such as time decay (theta) or volatility (vega), chip away at the options premiums. The Greeks can help us understand why this happens and what factors are having the greatest influence on options premiums.

In fact, it's a common mistake to assume that the change in the price of the stock, index, or other underlying instrument is the only factor that determines the value of the options contract. Although it is the one that changes most often, there are other important determinants of options prices as well. The Greeks are variables that isolate how factors such as time and volatility ...

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