How Options Greeks Work and Effect They Have On Your Option Value

As a stock trader, you will always want to make the best of your investment. For that, you need to make informed decisions, and for that you need to have access to analytical data. In terms of options trading, this data is something that you cannot access that easily. As a matter of fact, there is no definite way of determining how much the value of your stock will change with respect to time. You need to make this prediction yourself, using whatever possible tools you believe can do the job for you.

In terms of making the prediction for the future of a stock, you can easily come across a number of tools. You must remember that while these tools can do the analytical work for you, it will all be theoretical, and may or may not have the practical value for you. Options Greeks form one of those tools that’s used extensively around the world to assess a stock’s current position, and where it will take you down the line. These can be the most accurate tool you may have at your disposal, but you must remember that these will be all theoretical only.

How Options Greeks Work

There are 4 primary Options Greeks that determine the performance of an underlying asset. These Greeks evaluate the different aspects like time decay value, change in value, rate or change in value, and how these values increase or decrease with respect to time. Here’s how you can use Options Greeks to manage your stock at hand:

  • Assess the likelihood an option you have at your disposal is going to expiry in its monetary value (Represented by Delta)

  • Evaluate how the Delta value performs with respect to change in the value of stock price (Gamma)

  • Determine how much your stock value decreases with each passing day as it approaches its expiry date (Theta)

  • Check for the sensitivity of an option towards major price swings for the stock of underlying asset

Besides these, there is also another Options Greeks that isn’t used that often, yet it’s there for use when you need it. Termed as Rho, this Greek simulates the effect of change in the interest rate on the value of the option.

At the same time, you must make sure to never rush into merely making a decision based on your evaluation as soon as you have a winner tool. You must give your findings some time to pan out so that determine if going with a decision you have already made is going to benefit you in the long run or not.



You may also like...

Leave a Reply

Your email address will not be published. Required fields are marked *