The 6-Week Options Trading Kickstarter: Meet the Greeks!
Steve Smith breaks down delta, theta, vega, gamma, and rho.
Editor's note: To help investors get their feet wet with options trading, Minyanville has launched this "6-Week Options Kickstarter," an educational series aimed at increasing understanding of the basic nuts and bolts of options. In this series, veteran options trader Steve Smith will take you through options fundamentals with an emphasis on real-world applications. Note: Intermediate or advanced-level traders may get more mileage out of Minyanville's 9 Weeks to Better Options Trading series.
In any endeavor, whether in business, law, medicine, sports, or even parenting, a certain amount of jargon becomes the lingua franca among active participants. It helps people express complex concepts in a concise manner. It also often serves the second purpose of making the “professionals” feel more important and knowledgeable than the laypeople.
The options industry is no exception.
Last week, we discussed how options get priced or valued using the five variables of the Black-Scholes model.
This week, we’ll look at “the Greeks,” which are used to define how an option’s price will change relative to certain variables. And we’re going to do it in plain English by using the commonly applied applications as opposed to the strict mathematical definitions.
The five Greeks are: delta, theta, vega, gamma, and rho.
We'll start off by focusing on the three most important ones:
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