The Complete Guide to Option Strategies: Advanced and Basic Strategies on Stocks, ETFs, Indexes, and Stock Indexes

CHAPTER 4

Tools of the Trade—Greeks

When trading options, you need to understand what causes option values to change. If you had a crystal ball to determine this, you would be able to manage and predict your positions. The Greeks are essentially the crystal ball for option trading because they provide information about option values based on certain assumptions.

The Greeks are a tool that can enable you to estimate future option values based on a small change in the stock price, time, volatility, and other factors. This chapter covers the Greeks. While learning the Greeks, you will also be learning the specialized option terminology of option traders and be introduced to the way traders think about option strategies. Although the Greeks will not answer all of your questions, they can be a great starting point for learning terminology and how to assess simple and complex option positions at any point in time.

OVERVIEW: GREEK BASICS

How an option price will change in the future can be difficult to predict because there are several factors that can be changing at the same time. Fortunately, option-pricing software is available to isolate and measure the effect of these variables on the future price of an option. Five letters from the Greek alphabet are used (actually, vega is not Greek, but please play along here) to measure each of these factors and are collectively called the “Greeks.”

The Greeks enable you to use computer software to help estimate future values and manage ...