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Intro to the Greeks

Intro to the Greeks
Written by
Max Andrews
Max Andrews
Published on
January 26, 2024
Read time
3
 min read

The Greeks - Delta and Theta

As you may know, we are continuing our option series (not sure how long it will last, certainly has lasted longer than me in Vegas).

Today we are looking at the Greeks. I only want to start with two of the Greeks - Delta and Theta.

Delta ∆ “compares the change in price of the underlying security to the change in price of the option”

“You lost me 😕” - nah, stay with me. So we know that options give you the right to buy or sell a stock at a certain price (“strike price”). Well, if the stock price is going up and up and you have the right to buy at a locked in price, that makes your option contract more valuable. Say you looked at one of your Amazon call options on Robinhood and the Delta is 0.4 this means - for every $1 that Amazon goes up, your option contract goes up 40 cents. Opposite is also true for a put. If your Amazon put’s Delta is -0.4, then you lose 40 cents for each dollar Amazon goes up.

Boom - that’s Delta (well, the gist of it). Good shit🤌

Theta ϴ “measures the value of the option relative to how much time is left”

So we know there is an expiration date on option contracts. Imagine you make a $20 bet with your buddy that a football team won’t score at all during the game. If the team hasn’t scored at all and there is 1 minute left, that bet becomes really valuable to you and worthless to him. This is because there is less of a chance for something to happen with only 1 minute left. The same is true with options, as you move closer to the expiration date, the value decreases because of the lower likelihood of something happening before it expires. 🤔 *Theta is also called “Time Decay”

A Theta ϴ of -0.06 (negative for the buyer of an option) means the option loses 6 cents every day. This value can change, and as you can imagine, it starts really chunking as it gets towards expiring.

But hey, that’s the scoop of Theta. Not so bad.

Summary:

- Delta measures the change in option value due to the change in stock price.
- Theta measures the “decay” of option value over time.

Not F.A - Disclaimer here

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