Delta content selected
How does the price of my options contract change if the price of the underlying stock or fund changes?
Delta is the theoretical estimate of how much an option's value may change given a $1 move UP or DOWN in the underlying security. The Delta values range from -1 to +1, with 0 representing an option where the premium barely moves relative to price changes in the underlying stock.
For illustrative purposes only.
Delta helps us measure the sensitivity of an option to its underlying stock price.
For illustrative purposes only.
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The amount by which an option is in‑the‑money.
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A call option is in the money if the strike price is less than the market price of the underlying security. A put option is in‑the‑money if the strike price is greater than the market price of the underlying security.
Theta content selected
How does the price of my option decay over time?
Theta represents, in theory, how much an option's premium may decay each day with all other factors remaining the same.
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The amount of the option premium that is attributable to the amount of time remaining until the expiration of the option contract.
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An option is near the money when the strike price is relatively close to the market price.
For illustrative purposes only.
For illustrative purposes only.
Buyer Beware:
Since options are decaying in value, time favors the seller. The buyer needs extreme price movement to tip the scales.
The Short Answer
Theta is an important Greek to understand — options are a decaying asset, and Theta measures that decay. Buying an option means time is working against you, slowly eating away the value of your option. Higher Theta is indicative of a higher rate of decay.
Gamma content selected
How does the rate of change of an option's Delta affect my options contract?
Gamma represents the rate of change between an option's Delta and the underlying asset's price. Higher Gamma values indicate that Delta could change dramatically with even very small price changes in the underlying stock or fund.
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An option is at the money if the strike price of the option is equal to the market price of the underlying security.
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A call option is out of the money if the strike price is greater than the market price of the underlying security. A put option is out of the money if the strike price is less than the market price of the underlying security.
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A call option is in the money if the strike price is less than the market price of the underlying security. A put option is in‑the‑money if the strike price is greater than the market price of the underlying security.
For illustrative purposes only.
The Short Answer
Gamma can be used to measure the stability or the instability of Delta. A higher Gamma is an indication of a greater potential change in Delta which equates to an instability of Delta. Essentially, when utilizing Delta for the probability of being in‑the‑money at expiration, Gamma can help determine the stability of the probability Delta provides.
Vega content selected
How much does a change in implied volatility affect my options price?
Vega measures the amount of increase or decrease in an option premium based on a 1% change in implied volatility. Implied volatility is defined as the market's forecast of a likely movement in the underlying security.
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An option is at the money if the strike price of the option is equal to the market price of the underlying security.
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A call option is out of the money if the strike price is greater than the market price of the underlying security. A put option is out of the money if the strike price is less than the market price of the underlying security.
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A call option is in the money if the strike price is less than the market price of the underlying security. A put option is in‑the‑money if the strike price is greater than the market price of the underlying security.
For illustrative purposes only.
Vega and implied volatility can change without any movement from the underlying security.
The Short Answer
Options tend to be more expensive when implied volatility is higher because of the increased range of potential movement. Thus, whenever implied volatility goes up, the price of the option goes up.
Rho content selected
How do interest rates affect the value of my options contract?
Rho is a measure of an option's sensitivity to changes in the risk-free rate of interest (the interest paid on US Treasury Bills) and is expressed as the amount of money an option will lose or gain with a 1% change in interest rates.
Rho is positive for long calls (right to buy) and increases with the price of the stock. Rho is negative for long puts (right to sell) and approaches zero as the stock price increases. Rho is positive for short puts (obligation to buy), and negative for short calls (obligation to sell).
For illustrative purposes only.
The Short Answer
Interest rate risk has the greatest effect on longer dated options and is present mainly when holding cash in an interest bearing account is more advantageous. Mainly a concern for LEAPS® options (options with greater than 9 months until expiration).