The Greeks - Delta and Theta

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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).

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

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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🤌

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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.

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

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Summary:

- Delta measures the change in option value due to the change in stock price.

- Theta measures the “decay” of option value over time.

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Not F.A - Disclaimer here