The 6-Week Options Trading Kickstarter: Meet the Greeks!
Steve Smith breaks down delta, theta, vega, gamma, and rho.
Vega is the expected change in an option's value for a one-unit move in implied volatility. Again, the strict formula is defined as a 1% move, but for practical purposes it will typically be expressed in dollars per one-point move.
Let's see if we can put these three Greeks together.
Last Thursday, Google (NASDAQ:GOOG) closed at $593 prior to its earnings release. The August $600 call had a value of $16.80 per contract. Its delta was 0.46 and its theta was 0.35.
The implied volatility was 29.5% and the vega was 0.66.
On Friday, following the earnings report, shares rose $17 to trade at $610. Based on the delta and theta, we'd expect the $600 calls to gain around $7.80 and be trading around $24.60 per contract. But at midday, those calls were trading around $20 per contract. The $4.60 discrepancy can be attributed the fact that implied volatility dropped eight points to 21.5%. So with a vega of 0.66, that would translate to $5.28 in lost value (8 x 0.66 = $5.28). The increase in delta from 0.46 to 0.64 helped to offset some of the decline in implied volatility.
Again, using the options calculator is a great way to play out various scenarios.
We'll end with a quick dismissal of the last two Greeks.
The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.
Copyright 2011 Minyanville Media, Inc. All Rights Reserved.