Option GreeksOption Greeks are the individual elements that contribute to an option's pricing. Each greek represents a different "sensitivity" of the option. Understanding them is important for two reasons: assessing option pricing and risk management. Understanding what goes into pricing an option, and learning to assess the given factors determining the pricing of a specific option or combination of options (in the case of spreads), makes it easier for you to have a better idea what will happen to the price of your long and short option positions under a variety of different scenarios. In short, it helps you assess risk. Understanding option greeks can also be helpful to get a better handle on what the market "believes" is the likeliest outcome(s) for a stock for a specific period of time. Professional or sophisticated traders will also analyze the greeks with an eye for opportunities to exploit inefficient pricing. And some traders attempt to set up delta-neutral spreads to minimize the impact of price movements in the underlying stock (the delta) in order to profit exclusively from the time decay, or the theta, of their positions. Below is a basic table detailing the greeks:
For a more thorough exploration of Option Greeks, RedOption.com (affiliated with the online options broker thinkorswim), has an excellent resource page. FYI - This link opens in a new window. Next Page: All About LEAPS Return to Options Trading Education Return to Great Option Trading Strategies Home Page
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