Option Greeks Made Easy – Delta, Gamma, Theta, & Vega Ep 199

August 30th, 2018

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Hey, this is Sasha and welcome to another episode of "Let's talk stocks."

In this episode, we're going to take a look at option Greeks and going to look at Delta, Gamma, Theta and Vega.

We're going to make it easy that way if you're learning to trade options and you're confused a little bit about the Greeks -- what they're for, how they're used. That's what this video is going to explain. I want to simplify it to the basics and the big picture behind it.

As you take a look at this and look at option Greeks, you got to understand the whole big picture behind them.

They're technically an indicator for you.

If you look at this indicator here that we have on screen, this is a volume indicator. What it does right if you move the volume bar up, it's going to be louder. If you move it down, it's going to be softer.

If you look at a car gauge -- this is the same concept of what Delta, Gamma, Theta and Vega do for you.

Looking at this car gauge, you can see we have our speedometer there that tells us how fast we're going. If you look over here at the fuel gauge, it tells us how much fuel we have left in the car.

It gives us an indication of if we're getting close to when we need to refill our car's gas tank.

This is really what Delta, Gamma, Theta and Vega do is their indicators.

If you're sitting on your trading platform and panel, it's going to tell you what's going on with this issue, what's going on with that issue, where are the risks here in a car because a car uses speed and it needs gas.

These are the things that you need to know when you're in a car and driving forward.

When it comes to option trading, you need to know and understand Delta, Gamma, Theta and Vega.

Delta, Gamma, Theta, and Vega

These are your indicators.

If we look at Delta

Delta is a change for every one dollar move in the stock.

How much money are you going to make or lose? That's what Delta tells you.

For every one dollar move, it's always one dollar move, how much money are you going to make or lose?

If you look at Gamma

It's how fast the Delta changes.

Gamma is related to your Delta -- how fast is that Delta going to change?

Look at your Theta

You Theta is your loss or gain regarding your time.

How much are you losing or gaining on a day-to-day basis? Which is your time problem that you have with options?

and then Vega

Vega is your loss or gains due to volatility.

They are based on volatility because options are priced in volatility.

Think of this as how full or low your battery is. It's a whole different indicator. It could be your rpms.

It's just another indicator, that's all it does. And because options are priced within volatility, that's what Vega tells you.

Greeks are your risk

Delta tells you your price risk.

Gamma is the change of your price risk.

Theta is your time risk.

Vega is your volatility risk.

I want to share with you what this looks like

If we look at Apple here's a single contract the October 2018 --220 calls and I've just chosen this because it's kind of close to the strike price.

But let's look at our overall Delta, Gamma, Theta and Vega --- these are our risks.

Delta is your price risk gamma is related to that price risk. Theta is your time risk. Vega is your volatility risk.

Let's look at what this tells us.

Delta -- starting this is the most basic one that most people know.

Delta is 45.63 that means for every one dollar move in that stock. I make or lose 45.63.

So, look at it right now. We are starting with a loss of 250. If I move this, this price slice, so, if this price slice moves, you can see the profit and loss also moves and adjust.

Let's say we move this to a positive one dollar. You can see I'm up about $42, which is our Delta now. That Delta continues to increase due to the Gamma, but we'll get to that in a second.

Again, if I go ahead and let's say add another dollar, let's say we go up to $2 -- my Delta is now 48 so take $45/$48 and add another 48 so right around you know $96/$98, depending on the rate of change.

But it's going to add another $48 to my current profit loss.

You can see we're right around $92/$93, as the stock price continues to wiggle.

Let's add another dollar.

If we go to plus $3, we're going to add 50 Delta, 51 Delta. 146 is what we get.

We're up about a 146.

Now, if we go the other way, remember, we're positive Delta here. So let's reset this back to zero if we go the other way. We lose $45 because we have a positive Delta.

If we go negative one, you can see we're down about $47 if we go down to well subtract another $43 from this. You should be right around, let's see here you're going to get about $90 of a loss so you can see how Delta works.

Now with Delta, keep in mind, you notice it wasn't perfect that's because of this Gamma. The Gamma is the rate of change to the Delta.

All that means is that curvature -- how fast accelerated that curve is right.

That's all that does, and the issue here is that once you get a very steep Gamma while Delta switch on you very quickly.

For now, with a $2 here and there it doesn't make that much of a difference, even as you start continuing to accelerate, you could see your Gamma is only at about a 2.

It's more of an issue when it comes closer to expiration, but as you can see here with a 2, it's not as big of a deal.

If I bumped up, let's say to 20 contracts, now all of a sudden you can see if I move this up a dollar. My Delta is 968 but the next time that Delta is going to be about a thousand.

Take a look there you go about a thousand dollar Delta because the Gamma is 51.

As you start trading larger, you can see the numbers become much more significant and a little bit more violent.

Let's take a look at our Theta risk

Theta risk is the time risk.

All that does is tell us how much fuel we have left in the gas tank right with time.

Every day we lose about $5.60 so as we move the time forward. Let's reset it back.

You can see right now we're starting with a $5 loss right away, bid-ask spread.

If I go one day, you can see we're down about $8.13 because of the $5.63 loss.

Again, if I go another day, we'll add $5 to what we have right now. You can see down $13/$14 add another day. We're down about $22 add another day you're down about $27.

You can see that every day. You're losing $5.70, and this continues to accelerate with time. As you can see, as they continue to increase the date or move it forward, that Theta continues to climb to about seven then 8 and so on. They'll continue to accelerate, and your losses will continue to add up with time.

That's what Theta tells you.

Vega is the volatility risk because options are based on pricing or the pricing of options is based on also volatility risk.

If you look at the volatility which is a little difficult to get, you got to hit a gear icon. Some trading platforms are a bit more challenging to find these things. Let's say I move one percentage point in volatility right there.

You can see if I go one well we go up about 30 because this position is a positive volatility position. It's positive 33.

Think about it, one percentage point adds 33 to our negative $2/$3/$ five loss, and you get about a $28 positive on that position.

Keep in mind, when volatility increases usually price goes down. All of these things are working together right. You have price risk. You have Theta risk, and you have Vega risk.

It's like your car is overheating -- that's one problem you have, but you're also low on gas -- that's a different problem and going a little slow.

They're all different issues. They all work together, but they're separate components right.

You need to keep your car cool but you also need gas in the gas tank, and you need some speed to get to your destination.

If it increases, it will help you, but you're going to have a pricing problem because volatility usually rises when the price goes down.

They work hand-in-hand that overall these are your indicators. This is what you're watching.

Let's go into the volatility the other way.

Let's say you lose one volatility points here, and you'll be down about $30 for $35 because you're positive Vega which means you lose one think of it like a Delta. It works in a way similar to a Delta. You lose one, now all of a sudden, you go ahead, and you lose about that $34.

If you go down to volatility points, you should be down about $68 by then.

If price moves up with that, you could be breaking even or up to $30, but in general, this is how these things work.

I hope this makes a little more sense when it comes to the option Greeks. Think of them like indicators Delta and Gamma are your price risk; Theta is your time risk. Vega is your volatility risk.

It just depends, if you're positive or negative on these and that's how those gauges work.

Author: Sasha Evdakov

Sasha is the creator of the Tradersfly and Rise2Learn. He focuses on high-level education speaking at events, writing books, and publishing video courses on business development, internet marketing, finance, and personal growth.

I'm Sasha, an educational entrepreneur and a stock trader. In addition to running my own online businesses, I also enjoy trading stocks and helping the individual investor understand the stock market. Let me share with you some techniques & concepts that I used over the last 10+ years to give you that edge in the market. Learn More

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