Definition of Greeks
First of all, let’s make it clear what Greeks is. Greeks is an instrument which is used when investors/traders are trying to understand and determine how the options will react to this or that change in pricing inputs as they may vary. That’s exactly the time when Greeks is needed.
Types of Greeks:
Delta – estimates how much the premium will change given a $1 move in the underlying;
Gamma – a “presenter” of Delta change. Gamma is always somewhere between $0 to 1 whereas Delta can’t be more than $1;
Theta – can be calculated on weekly or daily basis (premium and actual dollar);
Vega – is connected with implied volatility and measures its sensitivity towards the changes;
Rho – measures option’s sensitivity to interest rate changes.
Greeks will never be a guarantee of 100% changes, meaning that they can’t always show accurate premium changes. It is more like a certain guide that leads and gives every investor an estimation of option’s price as soon as changes occur (change of interest rates, dividends, implied volatility etc).
Theoretical values according to Greeks are the following:
- expiration date;
- strike price;
- stock price;
- interest rate;
- anticipated dividends;
- implied volatility;
The above-mentioned factors change constantly (on a day-to-day or weekly basis). Yet, some of them remain without any changes, for instance (strike price, dividends and interest rate).
Also there exist special OIC Calculators that are of a great assistance. But to use them, you should know the implied volatility.
The development of trading system lets every investor to price premium options of a certain product at a particular period of time. And as soon as some changes occur, all the previous information will adjust to demonstrate new theoretical value of the option.