Option Greeks
Option Greeks are a set of mathematical calculations used to measure the sensitivity of an option’s price to various factors. These factors include the underlying asset’s price, volatility, time to expiration, and interest rates. The Greeks are Delta, Gamma, Theta, Vega, and Rho. Each Greek measures a different risk associated with holding an option, and can be used to help traders make better decisions when trading options.
History of Option Greeks
The concept of Option Greeks was first introduced in the 1970s by Fischer Black and Myron Scholes. They developed a model for pricing options that incorporated the effects of the underlying asset’s price, volatility, time to expiration, and interest rates. This model was later refined by John Cox, Stephen Ross, and Mark Rubinstein, and is now known as the Black-Scholes-Merton Model. The Greeks were developed to measure the sensitivity of an option’s price to these factors, and to help traders make better decisions when trading options.
Comparison of Option Greeks
| Greek | Description |
|---|---|
| Delta | Measures the sensitivity of an option’s price to changes in the underlying asset’s price. |
| Gamma | Measures the rate of change of an option’s delta with respect to changes in the underlying asset’s price. |
| Theta | Measures the sensitivity of an option’s price to changes in time to expiration. |
| Vega | Measures the sensitivity of an option’s price to changes in volatility. |
| Rho | Measures the sensitivity of an option’s price to changes in interest rates. |
Summary
Option Greeks are a set of mathematical calculations used to measure the sensitivity of an option’s price to various factors. These factors include the underlying asset’s price, volatility, time to expiration, and interest rates. The Greeks are Delta, Gamma, Theta, Vega, and Rho. Each Greek measures a different risk associated with holding an option, and can be used to help traders make better decisions when trading options. For more information on Option Greeks, visit websites such as Investopedia, The Options Industry Council, and The Options Playbook.
See Also
- Black-Scholes-Merton Model
- Implied Volatility
- Time Value
- Option Premium
- Option Spreads
- Option Strategies
- Option Chain
- Option Volatility
- Option Pricing Model
- Options Trading
