For a single option contract, the Greeks give you a quick snapshot of how the contract will perform in the current environment.
Option prices are based on several factors including how far away the strike price is from the current underlying price, how long until the option expires, how much the market expects the underlying to move, the timing of expected dividends, and what risk free interest rates currently are. Most of these factors are known quantities- for example, you can easily figure out how many days until an option expires. However, the value of each factor changes constantly and is greatly influenced by the one factor that can’t be directly calculated, the market’s expectation of movement, or the implied volatility.
The good news is that some very smart mathematicians figured out how to quantify implied volatility based on the price of an option. Better yet, there are standard measures for every factor that impacts the price of an option. Most of these measures are represented by a letter of the Greek alphabet, and as a group are known as the Greeks. Many people think these are complicated and of limited use, but I disagree strongly. The Greeks make analyzing an option’s price a much easier task when you are trying to make decisions on selling, buying, holding, or adjusting a position. And they aren’t that complicated. The calculations of each of these are complex, but any broker website calculates them realtime, up to the second, so all you do is see the value of each Greek.
Why are they called Greeks? Because many of the values are named after letters of the Greek alphabet. Mathematicians and scientists like to do that. An interesting exception is Vega, which is not a Greek letter, but is best known as a nearby star. Several other parameters are associated with the Greeks and I’m including them in the list as well, even though their names are Greek sounding.
In these web pages, we’ll examine each primary Greek in detail, and talk about a few other related concepts that also help in analyzing options. I generally only use a handful of the greeks on a daily basis, but it helps to understand the broad group as there are times when some of the lesser Greeks are needed.
Click on pages for the following Greek topics:
And it all comes together with Greek Math
