Chapter 3Options and the Greeks

In this chapter I give you a basic overview of what is known as the Greeks and set the basic foundations that you’ll need for the strategy chapters ahead.

The Greeks are sensitivities to options risk characteristics, the names taken from actual Greek letters. To understand why options have sensitivities to various factors, let’s go back to the original definition of an option:

• The right, not the obligation

• To buy or sell an asset

• At a fixed price

• Before a predetermined date

Remember the seven factors that affect an option’s premium:

1. Type of option (call or put)

2. The underlying stock price

3. The option strike price

4. The option expiration date

5. The stock price’s volatility

6. The risk free rate ...

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