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If you're new to Options trading, you may have heard the term "Greeks", but are unsure as to what it means. So — what are the Greeks, and how can they help you become a more successful Options trader?
In short, the Greeks are a set of criteria used by Options traders to understand how the price of an Option reacts to changes in certain variables. There are five main Options Greeks: Delta, Vega, Theta, Gamma and Rho.
Don't be intimidated by these terms: They’re likely less complicated than you think. In this article, we'll walk you through each Greek, explaining how it can help you minimize the risks and enjoy the advantages of Options trading.
Before that, let's get acquainted with Options as a whole.
The first thing to know is that Options are a type of derivatives contract. This means they derive their value from an underlying asset, such as a stock, commodity, index or cryptocurrency.
Options have an agreed-upon price (known as the strike price), at which the buyer gains long or short exposure to the underlying asset. Options always have a predetermined expiration date, at which the contract becomes void.
There are two types of Options contracts: Call Options (calls) and Put Options (puts).
A call Option contract gives the buyer (holder) long exposure above the strike price, and the seller (writer) short exposure above the strike price.
A put Option gives the buyer short exposure below the strike price and the seller long exposure below the strike price.
The Option contract buyer always pays a fee known as the “Option premium” to the seller. The premium's value is determined by the strike price and the number of days-to-expiration (DTE). For the buyer, the premium represents the maximum potential loss. For the seller, the premium is the maximum potential profit.
Option traders describe strike prices in three ways:
At-the-money (ATM): The strike price is the same as the current price of the underlying asset.
Out-of-the-money (OTM): Here, the strike price is in an unfavorable position. For calls, the strike price is above the underlying asset. For puts, an OTM strike is below the underlying.
In-the-money (ITM): Describes a strike price in a favorable position. A call option is ITM when it's below the underlying asset price. A put is ITM when it's above the underlying.
The Greeks are a set of measures used by traders to manage risk and forecast the profit potential of an Option strategy.
When combined, the Greeks can show us how an Option will react to changing market conditions at different points in time. Each of the Greeks affects Option premiums in its own unique way.
Delta is a ratio that calculates how much an Option's price changes when the underlying asset price goes up by $1.00.
Call options
Call options have a positive delta, ranging from 0.00 to 1.00 (they gain value when the underlying rises).
Put options
Puts always have a negative delta ranging from 0.00 to −1.00 (they lose value when the underlying rises).
For example, a call Option with a delta of 0.50 will increase in value by $0.50 when the underlying moves $1.00 higher. Conversely, a put with a delta of −0.50 will lose $0.50 when the underlying goes up by $1.00.
Delta also represents a strike's odds of expiring in-the-money. When an Option has a delta of 0.60, it has a 60% chance of expiring ITM at that point in time.
Delta can also be viewed as the amount of exposure you have to the underlying asset at that exact moment, relative to the size of your Option position.
For instance, let’s assume you buy a $25,000 OTM call Option on BTC (contract size of 1.0 BTC) with a delta of 0.30. At that moment, your call Option will make or lose the same amount of money as if you were holding 30% of the underlying security (1.0 BTC × delta of 0.30 = 0.3 BTC).
If the value of BTC jumps to $25,000, and the delta increases to 0.50, your exposure will then be equal to 50% of the underlying (1.0 BTC × 0.50 = 0.5 BTC).
A few things to keep in mind about delta:
Delta values can never exceed −1.0 or 1.0.
Delta changes at the fastest rate for at-the-money Options, especially those approaching expiration.
Changes in implied volatility influence delta.
We measure delta's rate of change using gamma.
Vega tells us how much we can expect an Option's price to change if implied volatility moves 1.00%.
Implied volatility (IV) is the Options market's way of predicting how much an asset will fluctuate in the future. When the market expects greater movement, implied volatility rises, increasing the cost of Option premiums.
The rules of Vega:
Longer-dated Options are more sensitive to vega than short-dated Options are.
Vega is highest for ATM Options, falling as a strike moves further ITM or OTM.
Long Options have a positive vega, and short Options have a negative vega.
Theta (also known as time decay) measures the rate of change in an Option premium relative to time — specifically, how much value an Option will lose to time decay in the next 24 hours.
When it comes to time decay, here are some things to keep in mind:
Theta is always expressed as a negative number: All Options lose value as time passes.
Long Options have negative theta: Time decay works against you.
Short Options have positive theta: Time decay benefits you.
Time decay is slower for longer-dated Options, speeding up as expiration draws near.
Although all Options suffer from time decay, ATM options lose value faster than ITM and OTM strikes.
Gamma measures the rate of change in delta relative to a $1.00 move in the underlying asset. Think of delta as the speed at which an Option's value changes, and gamma as its accelerator.
Assuming a call Option has a delta of 0.30, we know it should increase in value by $0.30 when the underlying moves $1.00 higher ($1.00 × 0.3 = $0.30). We've also learned that call Option deltas increase when the underlying asset’s value goes up — it's gamma that tells us by how much.
If the same Option has a gamma value of 0.10, following the $1.00 move up, the delta increases to 0.40 (delta of 0.30 + gamma of 0.10 = 0.40). Subsequently, the next time the underlying moves up $1.00, the premium gains $0.40.
Gamma is highest when an Option is at-the-money. It's here that a small change in the underlying can dictate whether the Option expires ITM or OTM. Gamma values decrease as the strike moves further from the underlying's current price.
Gamma values are higher closer to expiration. Similarly, approaching expiration, a small price move has more potential to affect the outcome of the position.
It's helpful to think of gamma as a measure of uncertainty:
High Gamma = More uncertainty as to whether an Option will expire ITM.
Low Gamma = Less uncertainty surrounding the Option's prospects.
Rho measures sensitivity to changes in the risk-free interest rate (typically that of U.S. Treasury bills).
Option traders consider rho to be one of the “lesser” Greeks, as it has a limited impact on premiums — especially near-dated Options.
When it comes to rho, there are, however, some things to consider if you're planning to trade longer-dated Options:
Call Option premiums typically increase when interest rates rise.
Put Option premiums usually decrease when interest rates rise.
The value gap between puts and calls widens as interest rates move higher.
To get a better sense of how different strike prices and maturities impact the Greeks, let's compare two different scenarios.
Example 1:
Bybit Solana Call Options — Expiration: 30 SEP 2022 — 10 DTE
SOL's current price: $32.00
ITM $28.00 calls
The ITM call has the highest premium and delta. However, it's also the least sensitive to gamma, vega and theta.
ATM $32.00 calls
As expected, the ATM call has a delta close to 0.50. The strike also has the highest gamma, vega and theta values.
OTM $35.00 calls
The OTM call has the lowest premium and delta. You'll also notice that because it's closer to the underlying price than the $28.00 call ($3.00 away instead of $4.00), it's more sensitive to the influences of vega, theta and gamma. Since all three strikes are near-dated, rho doesn’t come into play.
Now, let's examine what happens to the Greeks if we extend the contract's maturity.
Example 2:
Apple Inc. Call Options — Expiration: 16 DEC 2022 — 70 DTE
Apple's current price: $156.50
ITM $140.00 calls
As expected, the ITM call has the highest premium and delta. You'll also notice that because the Option has 70 DTE, it becomes sensitive to rho — in this case, the ITM calls are the most sensitive.
ITM $155.00 calls
As the 155.00 call is closest to the current price, it has the highest gamma, vega and theta.
OTM $165.00 calls
As we move further away from the current price, sensitivity to gamma, theta and vega declines.
Note that regardless of the strike price, the 70 DTE calls are less sensitive to theta than the 10 DTE strikes in example 1 (time decay is slower for longer-dated options).
While it's helpful to know how each of the Greeks works, it’s especially crucial to understand delta and theta before trading Options.
By becoming aware of an option's delta, you'll always know your immediate exposure and the odds of whether your trade will be profitable. Theta is the next concept that all Options traders should strive to master. The key to making the right investment decision is knowing how much value your Option will lose each day as expiration nears.
Remember — all things being equal, an Option loses value as time passes. For this reason, time decay is an Option seller's best friend … and an Option buyer’s greatest enemy.
Although volatility isn’t an immediate member of the Greek family, it’s still a factor to consider. We can think of volatility as a close relative of vega’s.
Volatility can be expressed in two ways:
Historical Volatility
Historical volatility is a measure of how much an asset price fluctuated during a certain period in the past.
Implied Volatility (IV)
While historical volatility tells you how much an asset moved in the past, implied volatility (or IV) reveals how much the Options market expects the asset to move in the future.
The thing to remember about IV is that it's purely theoretical — so it's impossible for anyone, even experts in the field, to predict the future with complete certainty. IV is, however, useful in determining whether Option prices are cheap or expensive.
In stocks investing, the golden rule is to buy low and sell high, and the same is true with Options. By buying Options when IV is low, and selling when it’s high, you significantly increase your chances of success.
Since IV often reverts to its mean over time, successful Options traders usually gauge whether IV is high or low relative to historical volatility before deciding whether to buy or sell Options.
One of the biggest mistakes a rookie trader can make is to dive into Options before gaining a basic understanding of the Greeks.
Without knowing how an Option will react when the underlying moves — or as time passes — it's difficult to make an informed investment decision. That's why, on your Options trading journey, the first step to take is to learn as much as you can about delta and theta.
Once you’ve gotten a solid grasp on those two concepts, you'll be well-equipped to tackle basic Options strategies. To attempt more advanced, higher-risk plays, go one step further to learn about gamma and vega.
The beauty of Options is that they are incredibly flexible, providing more ways to profit than spot or futures contracts.
Whether your goal is to speculate, generate passive income, or even hedge an underlying crypto portfolio, Options have you covered. You can structure Options to suit your risk appetite and level of experience, and learning about Options Greeks is an excellent first step to take. We recommend that you experiment with different strategies on Bybit's demo trading account before trading Options in real time. Happy exploring!