Stock Option Greeks

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The speaker does an overview of option greeks which he describes as sensitivities of an option price in terms of changes in stock price, implied volatility, interest rate, and term.  He goes on to discuss the basic greeks:  delta, gamma, vega, rho, and thThe speaker does an overview of option greeks which he describes as sensitivities of an option price in terms of changes in stock price, implied volatility, interest rate, and term.  He goes on to discuss the basic greeks:  delta, gamma, vega, rho, and theta.

Delta will quantify the change in option price with respect to a change in the price of the underlying security.  Therefore, the greater the delta, the greater the sensitivity of the option.  Delta will increase as time to expiration comes closer and also when the stock moves further into the money. 

Gamma is the first derivative to delta; therefore, it measure the rate of change of the delta.  The delta is changing most rapidly when the underlying security is near the strike price.  Since delta changes the least when the stock is very far below or above the strike price of the option, gamma will move towards 0 when the stock moves further away from the strike price.

Vega represents the change in the price of the option in respect to the change in volatility.  Vega increase as the term of the option increases.  Additionally, vega will peak near the strike price of the option as the option is most vulnerable to price shock as volatility increases at those levels.

Rho measures the change in the option price with respect to interest rates.  Rho typically is least affected by changes in option price. 

Theta measures the change in the option price with respect to time.  As time passes, the option has less time value and decays.  The time value, or theta will decay the fastest as it approaches expiration.

Tim Ord
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Tim Ord is a technical analyst and expert in the theories of chart analysis using price, volume, and a host of proprietary indicators as a guide...

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