Vertical Option Spreads: A Study of the 1.8 Standard Deviation Inflection Point, + Website

CHAPTER 6

A Brief Visit with the Greeks

Nary a single book on options fails to discuss the Greeks. These are not the Greeks of European ancestry; rather, they are the Greek letters representing the various components of the Black-Scholes model used for pricing options. Most options traders need to fully understand the inputs into the pricing model in order to minimize risks, identify under-/overpriced options, and anticipate future price movements. Notice I said “most.” The investment strategy employed by the authors of this book all but ignores the Greeks. We know they exist, and we know that they impact us, so we have built them into our strategy covered in Chapter 10, but their impact is not key to our success. What follows is a very brief introduction to the Greeks. This section is not meant to be a full resource leading to a complete understanding of the Greeks. Many excellent books have been written on the Greeks and are recommended to the reader. This chapter introduces the reader to the Greeks and discusses how they apply to the authors' strategy for trading weekly options.

■ Delta

Delta measures the sensitivity of an option's value to a change in the price of the underlying asset. If you are looking at an option with a delta of .5, then if the price of the underlying stock moves by $1, the value of your option will move by $0.50. The closer your option strike price is to the market price of the underlying stock, the higher the delta value. Since our strategy involves ...