Option Greeks

Option Greeks are a way of understanding the individual elements that help determine option pricing. Each greek represents a different "sensitivity" of the option. Understanding them is important for two reasons: assessing option pricing and option 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 the 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:

GREEK	RISK MEASURED	DEFINITION
Delta	Sensitivity to price change in the underlying security	The amount of the value an option will change for each $1 change in the underlying security
Gamma	Sensitivity of the delta to price change in the underlying security	The amount of change in the delta value of an option for each $1 change in the underling security
Theta	Sensitivity to time	The amount of daily time decay in the price of the option assuming nothing else changes
Vega	Sensitivity to volatility changes	The amount of change to the option for each percentage unit change in the underlying security's volatility
Rho	Sensitivity to interest rates	The amount of change to the option for each percentage unit change in interest rates