The Greeks are numbers that show how an option’s price is likely to change when something else changes: the stock price, time, or volatility. Your broker calculates them for you. You do not need the math, but you do need to know what each one is telling you.
The four Greeks at a glance
| Greek | Measures change from | Simple meaning |
|---|---|---|
| Delta | Stock price | How much the option moves for a $1 move in the stock |
| Gamma | Stock price (on delta) | How fast delta itself changes |
| Theta | Time | How much value the option loses per day |
| Vega | Volatility | How much the option moves for a 1-point change in implied volatility |
Delta
Calls have a delta between 0 and 1; puts between 0 and −1. A call with a delta of 0.40 should gain about $0.40 per share (about $40 per contract) if the stock rises $1. Many traders also read delta as a rough guide to the chance the option ends in the money, though it is only an approximation.
Gamma
Gamma tells you how much delta will change after a $1 move. It is highest for at-the-money options close to expiry. High gamma means the option’s behaviour can change very quickly, which is exciting for buyers and dangerous for sellers.
Theta
Theta is time decay. An option with a theta of −0.05 loses about $5 per contract per day if nothing else changes. Decay speeds up as expiration gets closer, which is why option buyers fight the clock and sellers benefit from it.
Vega
Vega shows sensitivity to implied volatility. If vega is 0.10 and implied volatility drops 5 points, the option loses about $0.50 per share. This is how traders can be right on direction and still lose money after earnings.
Putting it together Example
You buy a call with delta 0.50, theta −0.04 and vega 0.12. Tomorrow the stock rises $1 (+$0.50), a day passes (−$0.04) and volatility falls 3 points (−$0.36). The option rises only about $0.10, not the $0.50 you might expect.
Conclusion
Delta tells you about direction, theta about time, vega about volatility, and gamma about how quickly things can change. Learn these four and option prices will start to make sense. Start with options basics if the terms are new.
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