Why Greeks Matter
Options don't move in a straight line like stocks. Their price is simultaneously affected by the underlying stock's price, time passing, and changes in volatility. The Greeks measure each of these forces independently.
Understanding them lets you know why your option moved — and predict how it will move next.
Delta — Directional Sensitivity
Delta measures how much an option's price changes for every $1 move in the underlying stock.
- A delta of 0.50 means the option gains $0.50 for every $1 the stock rises
- Call options have positive delta (0 to 1)
- Put options have negative delta (-1 to 0)
A deep in-the-money call with delta 0.90 behaves almost like owning the stock. An out-of-the-money call with delta 0.15 barely reacts to small stock moves.
Delta also approximates the probability of expiring in the money. A 0.30 delta option has roughly a 30% chance of finishing in the money at expiration.
Delta sensitivity chart
Gamma — Rate of Change of Delta
Gamma measures how fast delta changes as the stock moves. It's the derivative of delta.
- High gamma = delta changes quickly with each dollar the stock moves
- Options near expiration and near the money have the highest gamma
- Gamma benefits buyers (delta accelerates as the stock moves your way) and creates risk for sellers
Think of gamma as acceleration. A high-gamma position can swing rapidly from a small gain to a large one — or from a small loss to a large one.
Theta — Time Decay
Theta is the daily rate at which an option loses value as time passes, all else equal. It's always negative for option buyers.
- An option with theta of -0.05 loses $5 per day per contract
- Theta accelerates as expiration approaches — the final 30 days see the steepest decay
- Short-term, out-of-the-money options have the most destructive theta for buyers
Theta decay curve
Theta is your enemy if you're buying options and your ally if you're selling them. This is why many professional traders prefer selling premium in high-IV environments.
Vega — Volatility Sensitivity
Vega measures how much an option's price changes for every 1% change in implied volatility (IV).
- A vega of 0.10 means the option gains $10 per contract if IV rises 1%
- Long options have positive vega — they benefit from rising volatility
- Short options have negative vega — they benefit from falling volatility
Vega and IV relationship
IV crush happens when implied volatility drops sharply after a known event — like earnings. Option prices can fall dramatically even if the stock moved in your direction. This is why buying options directly into earnings reports is often a losing trade despite being correct on direction.
Putting It All Together
When evaluating any options trade, ask these four questions:
- Delta — What's my directional exposure? How much does this move per $1 in the stock?
- Theta — How much am I paying (or collecting) each day just to hold this position?
- Vega — Am I long or short volatility? What happens if IV spikes or collapses?
- Gamma — If the stock makes a big move, how does my delta change?