Most traders have heard something about the importance of the Greeks, but why use option Greeks? What benefit do they actually give you? They give you a lot more then you think.
Most people believe that the price of an option has a 1 to 1 relationship with a stock. If the stock goes up $1 the option also should go up $1. After all, the price of the option is based upon the price of the stock.
While this seems to make sense it is not true. There are many factors that come into the price of an option that you want to understand in order to make targets for your option. These factors are given to us through the Greeks.
This is a list of the most widely used Greeks.
1. Delta measures the amount an option should move for every 1 point move in the price of the stock. For instance if the delta is $.5 then the option will move approximately $.5 for every 1 point move in the stock.
2. Gamma measures the change in delta. Even though delta measures how much an option will move for every $1 move in the stock the delta also changes on a regular bases. The gamma takes care of this. The gamma tells you how much the delta will move for every $1 move in the stock. If the gamma is $.1 then the delta will move up $.1 for every $1 move in the stock.
3. Theta is a very important Greek. It measures the effect of time decay on an option. Because options have an expiration date they are depreciating assets. The theta measures how much value an option will lose for every day that passes. If the theta is $.05 then the option will lose $.05 of time value for every 1 day that passes.
For more information about the Greek options visit http://www.stocks-simplified.com/option-greeks.html
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