Keene on the Market: Trade to Win Using Unusual Options Activity, Volatility, and Earnings

CHAPTER 9

The Greeks

The Greeks are mathematical and statistical functions of price change, speed, acceleration velocity, sensitivity to time, sensitivity to time decay, and volatility of options contracts. The concepts and the math behind options and options trading can get quite complex, but I'm going to explain the core concepts of the Greeks as simply as possible. Remember, options pricing and options trading in general can be very complicated and tricky; learning to keep things simple and correctly applying the relevant core concepts will go a long way in your daily trading.

■ Delta

Delta is a measurement of the speed by which an option's price changes relative to the change in price of the underlying stock. Therefore, a delta of 1 (sometimes referred to as 100) means the option position is moving 1 point for every point the stock moves. In other words, an option with a delta of 1 (or 100) has an options price movement/underlying price movement ratio of 1:1. A delta of –1 means the option position is moving –1 point for every point the underlying stock moves. In this case, an options contract with a delta of –1 would have an options price movement/underlying price movement ratio of –1:1.

For example, if AAPL is trading at $600 and the $650 calls are trading $10 and they have a delta of $.25, or 25, in theory, every dollar that the stock increases, the calls should increase by $.25. Without going into the other Greeks yet, if AAPL moves from $600 to $605, then the $625 calls ...